Greenback Struggles To Sustain Upticks, Though Odds Of June Hike Rise

The US dollar is struggling to maintain even modest upticks against the euro and sterling despite the recognition of the increased likelihood of a June Fed hike. Bloomberg sees current pricing in the Fed funds as making a hike in June a near certainty (97.5%), while the CME and our own calculation estimates the market is discounting around 70%-75% chance of a hike.

The main economic news today comes in the form of service PMIs. China got the ball rolling. Caixin measures of services slipped to51.5 from 52.2. It has slipped every month this year so far and is at the lowest level since last May. The composite eases to 51.2 from 52.1.It is the lowest since last June. The data, like the official PMI, warn that the world’s second-largest economy has lost momentum. It is yet to be seen whether the weaker growth impulses translate to increased debt stress and new capital outflows.  

The eurozone services rose to 56.4 from a flash reading of 56.2 (and 56.0 in March). It is a new multiyear high. The composite rose to 56.8 from 56.7 flash (and 56.4 in March). It suggests the regional economy is off to a strong start to Q2. In terms of country breakdown, German services beat the flash (55.4 vs. 54.7), but France did not. Its final services reading was 56.7 rather than the 57.7 flash report.   

 Spain and Italy offered upside surprises. Italian service PMI was 56.2 up from 52.9. The composite reading of 56.8 (from 54.2) is new multiyear highs. We suspect that if Italy’s composite PMI translates into stronger growth, investors will be surprised at how much seemingly structural problems, including non-performing loans, can be eased. Spain goes from good news to better.Its service PMI rose to 57.8 from 57.4, and the composite rose to 57.3 from 56.8.  

Separately, the eurozone March retail sales rose 0.3% for a 2.3% year-over-year pace. Although the February data were revised lower, the year-over-year pace is the strongest since last October. Spain reported a 129.3k drop in its unemployment. Typically, Spain enjoys strong employment gains in the April-May period.