3 Numbers To Watch: UK Construction PMI, US Trade, USDJPY
Tuesday’s report on the UK Markit/CIPS Construction PMI will shed new light on the prospects for a rebound in Britain’s construction sector. Later, the US trade report for April is released and the crowd will be looking for signs that the recent revival in domestic oil production is trimming the deficit. Meanwhile, the USDJPY cross will remain a crucial barometer for the outlook on the Japanese economy for a week that's light on hard data updates.
UK Markit/CIPS Construction PMI (08:30 GMT): Is Britain’s construction sector poised to become a source of growth for the economy in the months ahead? Optimists point to the recent revival in the Markit/CIPS Construction PMI as one source for thinking positively. This index of sentiment among purchasing managers in the construction trade has increased in the past two updates, putting the April reading at 49.4. That’s still below the neutral 50 mark, which means that economic activity in the sector continues to shrink. But the decline is slight—the smallest pace of retreat since the index registered an outright gain in last October’s report.
Construction has become less of a weight on the UK economy in recent months. “The sector appeared to have benefited from a catch-up in work after a disruption caused by cold weather earlier in the year,” Markit’s chief economist noted with the previous PMI update. “The overall survey findings are an early indication that construction will act as less of a drag on UK GDP over the second quarter of 2013.” Today’s release for May will provide some context for deciding if that forecast still looks plausible.
US Trade Balance (12:30 GMT): Record US petroleum exports are paring the nation’s long-running trade deficit. “The trend toward energy independence is there, and it is picking up,” an energy consultant recently told Bloomberg. The trade numbers in recent months certainly support that analysis. In March, the deficit shrank to USD 38.8 billion, or the second-smallest trade gap in three years.
Will today’s update for April reflect an even smaller deficit? Unlikely, according to the consensus forecast. Analysts expect that the red ink for trade will revert to an old habit and retreat a bit. But that’s not likely to alter the fundamental outlook for domestic oil production, which in turn lends support for thinking that the trade deficit will continue to narrow. The renaissance in US oil production is the reason, a trend that some analysts think puts America on track to become the world’s biggest producer in the years ahead. The International Energy Agency, for instance, projects that the US will regain the number-one spot for crude output as early as 2020 (pdf). For a country that's been the world's biggest oil importer for decades, that's a game-changer on multiple levels, even if today's trade report suggests otherwise.
USDJPY: Has the revival in expectations for Japan’s economy run its course? The answer is closely linked with the outlook for so-called Abenomics—the monetary and fiscal stimulus programs launched under Prime Minister Shinzo Abe. The initial reaction was quite positive, as this year’s powerful rally in Japanese equities through mid-May reminds us. But doubts returned in recent weeks, or so the dramatic selling wave in Japanese stocks implies.
The persistent seven-month decline in the yen versus the dollar has also reversed course. That's a big deal because devaluation as a tool to boost exports and juice the economy is widely considered a core plank for Abenomics. It’s unclear if the stronger yen of late is only temporary, but the pause in the devaluation trend that elevated USDJPY to over 100 last month for the time in four years has raised questions about what comes next. Indeed, USDJPY dipped under 100 yesterday for the first time since May 9. Suffice it to say that the market is considerably more sceptical these days over the prospects for Abenomics. But there are also encouraging signs to consider, including last week’s May update on the Markit/JMMA Japan Manufacturing PMI, which gained the most in 19 months. “The recent strengthening of Japan’s manufacturing sector was sustained in May,” notes the accompanying press release.
But there's a bit of an information vacuum in the days ahead. With no major economic releases for Japan scheduled this week, the currency and financial markets will drive and reflect expectations for now. It’s still debatable if the honeymoon with Abenomics is over, although Mr. Market’s sentiment may tip the scales more convincingly in the days ahead, for good or ill, until more hard data arrives in the weeks ahead.