Japanese manufacturing PMI comes back below 50

Summary:

• Japanese PMI for manufacturing slipped below a 50-point mark due to contracting new export orders
• PM May is reportedly close to submit her resignation
• Asian shares down, slight risk-off seen in the FX market

Worrisome signal from Japan

Japanese manufacturing PMI came back below a 50-point mark in May after a recovery to 50.2 in the previous month as renewed trade tensions between the US and China weighed on managers’ sentiment. According to the Markit’s release, new export orders were among the largest culprits of a disappointment we were offered overnight. Namely, the subindex dipped to 47.1 from a final reading of 47.8 in May, mainly reflecting what we have seen in recent days on the trade war front. Keep in mind that a trade surplus Japan holds with the US is significant, so the latter has been pushing Japan to take some steps to reduce it. In turn, among key goods being exported to the US by Japan are cars, hence here is a threat that the Trump administration may decide to slap tariffs on these cars and thereby harming Japanese producers. Let us also remind that Wasington has chosen to hold off on rising duties on European cars and auto parts signalling a 90-day relief period. It is also worth mentioning that for the first time since November 2012 Japanese companies’ expectations for future output showed contraction. This is a not good omen before a slew of PMI readings from European economies as well as China. Let us recall that China saw its manufacturing PMI surging in March, but it then turned out to be a short-lived bounce spurred predominantly by VAT tax cuts, increased infrastructure spending and other steps undertaken by Beijing to revive economic growth.

May’s future hangs by a thread

We already wrote yesterday that a vote on the new withdrawal agreement might not take place as it was tiny odds to be backed by MPs in the UK Parliament. Meanwhile, we were offered some headline from Reuters yesterday evening suggesting that “PM Theresa May is considering pulling the withdrawal agreement bill”. What may happen next if no vote takes place at the beginning of June? It appears that her resignation is the most likely scenario right now. In this regard, one needs to refer to a UK Times article saying explicitly that Theresa May will resign on Friday. Along with her resignation the probability to have Boris Johnson at the helm of the UK government will increase rapidly. In turn, it would then mean the higher likelihood for a hard version of Brexit (without agreement) and here is exactly why the pound is losing steam again. In the morning the British currency is trading 0.2% down against the US dollar being close to this year’s lows. The EURGBP chart looks also impressively as the pair has gained almost 4% in less than three weeks.

The EURGBP has faced the first obstacle in the form of the orange trend line. Keep in mind that the European Parliament elections may affect the cross. Source: xStation5

In the other news:

• Asian equity markets have been largely down with the Hang Seng falling 1.8% at the time of writing; DAX and SP500 future also point to a red opening

• US dollar trades subtly higher following the minutes release, JPY and CHF resist the US modest strength

• Australian CBA/Markit PMI (May) for manufacturing rose to 51.1 from 50.9, for services increased to 52.3 from 50.1

• New Zealand’s finance minister said the country would shift its net debt target range to give the government more flexibility, a new target is to be set at 15-25% of GDP from the 2021/2022 fiscal year