Overview:  The capital markets are off to a cautious start of a week that features the central bank meetings in the UK, Australia, Norway, Poland, Czech, Turkey, and Brazil.  The UK holds local elections, and the US and Canada report employment data at the end of the week.  In addition, the earnings season continues, while the US will also announce details of its quarterly refunding plans.  Several markets are closed for holidays, including China and Japan (through Wednesday).  UK markets are closed for a bank holiday.  After falling 1.15% last week, the MSCI Asia Pacific Index traded heavily today, with only Australia and New Zealand bucking move.  Europe's Dow Jones Stoxx 600 fell for the second consecutive week to the end of April and is struggling to sustain early upticks today.  US S&P and Dow futures are trading higher, but the NASDAQ was nearly flat after a mixed performance last week.  European benchmark 10-year yields are 1-2 bp firmer.  The US 10-year yield begins the new week around 1.63%.  The dollar, which rose sharply ahead of the weekend is narrowly mixed today.  Sterling and the Swedish krona are leading European currencies higher, while the yen, and to a lesser extent, the Canadian dollar, are nursing losses.  Similarly, among emerging market currencies, eastern and central European currencies are mostly firmer, while Asian currencies are mostly lower, led by a 1% loss of the South Korean won.  The JP Morgan Emerging Market Currency Index is little changed after losing 1% in the last two sessions.  Gold is consolidating in last Thursday's range (~$1756-$1790) and is slightly firmer.  Oil prices have slipped lower.  Last week, June, WTI tested $65.50 and found support in the $62.90-$63.00 area.  

Asia Pacific

Australia reported a small upward revision in April's manufacturing PMI and a further gain in house prices.  The PMI edged up to 59.7 from the preliminary estimate of 59.6 and 56.8 in March. The average in Q1 was 57.0.  The rise in house prices is becoming a greater concern to policymakers (in New Zealand and Canada).  Prices rose by 1.8% in April after a 2.8% rise in March.  Prices have risen steadily since the middle of last year.  The average monthly gain over the past six months is 1.5%, while over the past three months, the average has accelerated to 2.2% a month.   Tomorrow it reports March trade figures ahead of the central bank meeting.   

South Korea is integrated into global supply chains, making its trade figures reported ahead of most other countries a lead indicator.  Its April trade figures were released over the weekend, and the 41.1% jump in exports from a year ago exaggerates the strong recovery that is, in fact, taking place.  There were two additional working days, which, if adjusted for, still lifted South Korean exports by almost 29.5%.  The second distortion comes from the base effect.  The 25.6% year-over-year decline in April 2020 made for a low base.  Nevertheless, the takeaway is that the South Korean economy, which returned to its pre-pandemic peak in Q1, is continuing to expand. Exports are averaging about $2.2 bln a day this year. Shipments of semiconductor chips rose by a little more than 30%, and auto exports rose by almost 73.5% from year-ago levels.  Rising South Korean exports to its major trading partners, including China, the US, EU, ASEAN, and Japan, underscore that the global recovery is accelerating.  South Korean imports also surged. The nearly 34% year-over-year increase is exaggerated for the same reason imports were flattered. Three forces appear evident.  First, South Korea is embarking on a capex cycle for semiconductor chips.  Fabrication equipment imports soared by nearly 135%.  Second, importing intermediate goods and components, like display panels, will be used as inputs for exports.   Third, the 25% increase in consumer goods imports speaks to the strength of the domestic economy.  

The dollar is rising against the yen for the fifth session in the past six again.  It reached JPY109.70, its highest levels since April 13, and has met the (61.8%) retracement objective of the decline since peaking near JPY111.00 at the end of March.  The JPY110.00-JPY110.10 is the next hurdle.  Support is building near JPY109.20.  The Australian dollar retreated from $0.7800 and dipped below $0.7700 at the end of last week.  It consolidating in quiet turnover at the lower end of the pre-weekend range.  The nearby cap is seen around $0.7740. With Chinese markets closed, the offshore yuan (CNH) weakened for the second consecutive session. It is the first back-to-back decline in three weeks and appears to simply reflect the better tone of the US dollar.  The dollar closed at about CNY6.4750 and is trading around CNH6.4760.  

Europe

While the final manufacturing PMI was a bit disappointing, the real takeaway is that the eurozone economy is recovering from the Q1 contraction. Moreover, claims about a double-dip recession that the Financial Times called out in a headline are misleading.  It is hard to say that it truly recovered from the "first" one.  And recall, there is no fixed definition of a recession.  Europe's seven-day vaccination average has surpassed the US and is still accelerating.  In the US, nearly all adults who want a vaccine have gotten at least one jab.  

EMU's April manufacturing PMI stands at 62.9 rather than 63.3 of the preliminary estimate and 62.5 in March.  It was at 55.2 at the end of last year—slower supply deliveries, which are how the supply chain bottlenecks are expressed with rising prices.  German and French flash readings were shaved, and although Italy and Spain showed improvement, it was not quite as much as economists anticipated.  

Although last week's release of Q1 GDP figures takes away some of the interest in the high-frequency data from March, German retail sales were stellar.  March retail sales soared by 7.7%, more than twice the median forecast in the Bloomberg survey.  Moreover, the February series was revised to show a 2.7% gain instead of 1.2%.  

European negotiators appear more restrained than Iranians about the prospect of a deal on the nuclear accord.  Separately, Iran's state television claimed a deal was struck--prisoner swap with the US and UK and as much as $7 bln in funds, which the US quickly denied.  Getting the US and Iran back into compliance with the 2015 agreement has ramifications not just for Iran, which apparently has been hit hard by the pandemic, but also for the oil market.  Already, last month, Iranian output is believed to have risen by 200k barrels per day to around 2.5 mln, which would be the largest increase in OPEC.  Iran and several small producers were exempt from the OPEC+ output cuts, which are now being slowly reversed.  Iran's capacity is estimated to be a bit higher than 3.5 mln barrels per day, but it needs around 1.2-1.5 mln bpd for its domestic consumption.  Estimates suggest Iran has around 70 mln barrels in floating storage.  A deal is thought necessary before the end of this month, ahead of the June 18 Iranian elections.  

Russia may be withdrawing its forces that had massed on the Ukraine border, but relations with Central and Eastern Europe are the most strained since the annexation of Crimea in 2014.  Whatever goodwill Putin sought through is vaccine diplomacy has been undermined its aggressive behavior.  Bulgaria and the Czech Republic believe Moscow was behind explosions in arms depots and the 2016 poisoning of an arms dealer.  They expelled some Russian diplomats, and Moscow retaliated in kind, and Prague kicked out more.  Of particular note, Lithuania and Slovakia moved in sympathy and also expelled Russian diplomats.  There arguably is a lost opportunity for the UK.  Eastern and Central European were natural allies for the British on various issues, including a harder line toward Russia.  Meanwhile, the Greens, whose fortunes in Germany are rising as the center (CDU/CSU and the SPD) continues to lose support, seems to also take a harder line against Russia (and China).  

The euro initially extended its pre-weekend drop but has subsequently rebounded from a little below $1.2015 to about $1.2055 in the European morning.  The intraday technicals are stretched, and the $1.2065-$1.2080 area offers a nearby cap.  Similarly, sterling successfully tested $1.3800, where a large option (~GBP845 mln) expires tomorrow.  It has recovered to around $1.3860, which stretched the intraday momentum indicators.  Resistance is seen in the $1.3860-$1.3880 area.  Separately, we note despite a slightly smaller increase than expected in Turkey's April CPI (17.14% year-over-year from 16.19% in March, and 17.3% median forecast in Bloomberg's survey), there is little chance that the central bank will cut rates this week.  Last week, it raised this year's inflation forecast.  Yet, the drop in the manufacturing PMI (50.4 from 52.6) illustrates how the high rates and pandemic are weighing on the economy.  The dollar has traded on both sides of its pre-weekend range against the lira and is firm in the European morning around TRY8.30.  

America

The US has a packed economic diary this week, with the April employment report at the end of the week, the highlight.  Another gain of around a million jobs is expected.  Today features the final April manufacturing PMI report and the initial ISM manufacturing index, and the economists in Bloomberg's survey look for a 60k jump in manufacturing jobs last month.  The preliminary look at Q1 GDP last week gives good reason to expect a sharp recovery in construction spending in March after a 0.8%, weather-induced decline in February.  April auto sales will trickle in over the course of the North American session.  Recall that in March, they jumped to a 17.75 mln seasonally adjusted annual rate.  It was the most since December 2017.  It may be difficult to have sustained that level in April.  

Canada sees its manufacturing PMI today, but the Canadian dollar does not seem particularly sensitive to this report.  The March merchandise trade balance is out tomorrow, but the week's highlight is the employment report at the end of the week.  In March, Canada grew a dramatic 303k jobs.  The risk is of a weaker report.  Note that the better part of three rate hikes has been discounted over the next two years.  Mexico reports its PMIs today, but the focus may be on March worker remittances after President AMLO tipped a record of $4.128 bln.  Last year, worker remittances were a greater source of capital inflows than Mexico's trade surplus ($40.6 bln vs. $34.5 bln).  The highlight of the week, though, maybe the CPI report and another gain will solidify ideas that its rate cycle is over.  Brazil has a full economic diary, including what is expected to be a record trade surplus. Still, little will distract the market from Wednesday's central bank meeting, which is expected to signal another 75 bp rate hike.  

The US dollar has carved out a small shelf against the Canadian dollar in the CAD1.2265-CAD1.2275 range. Initial resistance near CAD1.2320 has already been tested.  A break of it could see the greenback firm to around CAD1.2400.  Meanwhile, the dollar is extended last week's 2.1% gain against the Mexican peso that halted a four-week slide.  Today's high near MXN21.3150 is the best level of the US dollar since early April.  The next technical target is a little above MXN21.37.  At the end of last week, the dollar jumped 1.8% against the Brazilian real to around BRL5.4450.  A move above there will target the BRL5.49 area.  

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