Japan Tankan Disappointing For Manufacturers; Canada’s GDP Surprises

• China PMI: it could’ve been worse Markets breathed a sigh of relief this morning as the China manufacturing PMIs for September showed that things weren’t any worse than expected. The official manufacturing PMI for the month came in at 49.8, a bit higher than expected (expected: 49.7, same as in August), while the final Caixin manufacturing PMI for the month was revised up slightly to 47.2 from the initial 47.0 (previous: 47.3). The indices therefore show continued deterioration, given that they are both below 50, but there’s some relief that at least the speed of deterioration is not accelerating. There’s also some hope that yesterday’s relaxation of minimum down payment requirements for some cities in China may help to support the Chinese construction industry, which is probably the most important single sector in the world.

• The indications of stabilization encouraged investors and risky assets were doing well this morning. All Asian stock markets were higher, as were AUD and NZD.

• Note: Markit announced that it was discontinuing the flash estimate of the Caixin/Markit China PMI every month. The official indicator will still be announced on the first business day of the following month, along with the other global PMIs.

• Japan tankan disappointing for manufacturers The Bank of Japan’s quarterly Tankan business confidence survey for Q3 showed that confidence among large manufacturers was even worse than expected. The diffusion index (DI) for large manufacturers fell more than expected, and expectations for Q4 are that it is likely to be even lower. Large non manufacturers on the other hand showed an improvement in their attitude, although they too expected things to be worse in Q4. Given the key role that manufacturers still play in the Japanese economy, the results show the need to keep the yen weak to support exports. The figure is JPY negative, although my guess is that today’s movement has more to do with the China PMI, which pushed stocks up and dragged USD/JPY higher too, than with the tankan.

• Canada’s GDP surprises on the upside Canada’s GDP in July rose 0.3% mom, beating expectations of 0.2% growth. The rise was driven by sharply higher “non conventional oil extraction” as production recovered from seven straight monthly declines. That suggests Q3 GDP as a whole is likely to rebound, ending two consecutive quarters of contraction. With the economy rebounding, the Bank of Canada is less likely to lower interest rates further and the market is now pricing in only a small chance of any easing in the next year. CAD could gain further as investors trim their extremely short positions in the currency, but with oil prices likely to weaken further (in my view), I remain bearish on the currency over the medium term.

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• Today’s highlights: During the European day, the final manufacturing PMI figures for September from several European countries, and the Eurozone as a whole are also coming out. As usual, the final forecasts are the same as the initial estimates, thus the market reaction on these news is usually limited, unless we have a huge revision from the preliminary figures. UK manufacturing PMI for September is forecast to decrease a bit, which could prove GBP negative.

• From Canada, we get the RBC manufacturing PMI for September. Market pays more attention to the Ivey PMI to be released next week. Thus, the reaction is usually limited at the release.

• In the US, the ISM manufacturing PMI and the final Markit manufacturing PMI, both for September, are also due out. The ISM index is expected to decline slightly but to stay above the 50 level, but that seems unlikely to me. All of the Fed’s regional PMIs are in contractionary territory, so I think wonder if the national PMI can still be in expansionary territory. There could be some disappointment in today’s ISM that would weaken the dollar.

• Initial jobless claims for the week ended Sep. 25 is also coming out.

• As for the speakers, Atlanta Fed President Dennis Lockhart and San Francisco Fed President John Williams speak. Both men have spoken recently and so no surprise is likely. Lockhart last spoke on Sep. 23rd, when he said the decision to keep rates on hold was “risk management” and that normalization will signal a healthier economy. Williams spoke on Tuesday and he saw the normalization process starting this year.

The Market

EUR/USD breaks below 1.1200

• EUR/USD traded lower on Wednesday, breaking below the support (now turned into resistance) line of 1.1200 (S1). The decline was halted by the 1.1150 (S1) barrier, where a clear break is likely to open the way for our next support at 1.1100 (S2). Taking a look at our momentum studies, the RSI fell below its 50 line and below its upside support line. It now points south. The MACD has topped slightly above zero and crossed below both its zero and signal lines. These indicators detect negative momentum and amplify the case that EUR/USD could fall below the 1.1150 (S1) support line. In the bigger picture, as long as EUR/USD is trading between the 1.0800 key support and the psychological zone of 1.1500, I would hold a flat stance as far as the overall picture is concerned. I would like to see another move above 1.1500 before assuming that the overall outlook is back positive. On the downside, a break below the 1.0800 hurdle is the move that could shift the picture negative.

• Support: 1.1150 (S1), 1.1100 (S2), 1.1070 (S3)

• Resistance: 1.1200 (R1), 1.1300 (R2), 1.1340 (R3)