Chicago PMI Falls to Lowest Since 2009, RBA to Cut Rates

An unexpected fall in Midwest-area manufacturing continued the string of disappointing US data. The yen was the top performer while the Canadian dollar lagged. The RBA is widely expected to cut rates in the upcoming policy meeting but will it be 25 or 50 basis points?

The Chicago PMI fell to 56.2 in April, far below the 61.0 expected and the worst reading since November 2009. The Dallas Fed also dropped precipitously. The reports set the stage for a soft ISM manufacturing report on Tuesday.

The US PCE report was mixed with spending slightly below expectations and income slightly above. Core year-over-year inflation was in line with estimates at 2.0% y/y.

The Canadian dollar slumped after the February GDP report showed growth at -0.2% compared to a 0.2% rise expected. Shutdowns in the mining sector skewed the numbers lower but manufacturing was also soft. Increasingly, it looks as though Canada will face headwinds from a weaker-than-expected US.

The euro found some support from decreasing yields in Italy in Spain, the latter was especially encouraging because of wide-spread negative weekend commentary on its future. Spanish politicians also helped the euro, saying they are considering a bad bank for troubled loans.

The RBA decision will be rendered at 0430 GMT with 27 of 29 economists expecting a 25 bps rate cut. The remainder are expecting 50 bps. The market is priced more aggressively with a nearly one-in-three chance of 50 bps. Expect AUD to fall immediately on a 50 bps cut but further declines will depend on the statement. Even a 25 bps cut with a dovish stance may hurt AUD after an initial knee-jerk move higher.