Dollar Trying to Stabilize after Giving Back Jobs-Inspired Gains

The losses the US dollar suffered yesterday were extended into Asia today.  The dollar has  stabilized in Europe.  Short-term technical indicators warn against expecting a deep retracement today.   Support for the euro is seen near $1.12.  A break of $1.5260 could see another half a cent decline for sterling.    Dollar support is seen in the JPY123.60-80. 

At the same time, it is important to recognize that the fundamentals are more supportive.  A strong retail sales report should reinforce the sense that US economy is snapping back after the contraction in Q1.  Retail sales rose the most in March in a year.  Consumers took April off but appear to have come back strong in May. 

There is also next week's FOMC meeting.  Although it may cut its 2015 GDP forecast (to recognize the contraction in Q1), it is likely to do nothing to dissuade expectations for a September rate hike.  

The eurozone economy grew faster than the US in Q1, but the divergence in monetary policy remains.   The other divergence that we think is particularly relevant is in the banking system.  US banks have written off or made provisions for an estimated 90% of their bad loans.  Comparable figures for Europe are near 50%.  Those bad loans are roughly 9% of the eurozone GDP, compared with 1% in the US.  

The Greece tragedy continues to play.  Just like Greece's last minute decision to bundle its IMF payments was just as much a political signal as a financial one, senior European officials talking about a Greek exit is gratuitously provocative.  When the rhetoric is stripped away, it comes down to a sequencing issue:  debt relief and reforms. 

As seems clear, austerity during contractions do not produce growth but more contraction.  One of the reasons that Spain's economy is doing well is that it dramatic austerity end.  Pressure is likely to rebuild after the national elections at the end of the year.  The timing of that pressure is political.  Prime Minister Rajoy's PP is part of the center-right that dominates European governments and institutions.   On one hand, the IMF seems to recognize this.  On the other hand, it is not allowing this recognition to alter is policies. 

At the same time, it would be most helpful if Greece recognized that its multiple VAT rates and exemptions are not efficient.  It also needs to recognize that its pension system is being used as unemployment insurance.  Workers who are laid off (made redundant) are often offered early retirement.

Greece wants to boost demand.  Its GDP has fallen by a quarter since the crisis.   The creditors want to broaden Greece's tax base to plug the pension hole for two reasons.  One is obviously to enhance the chances of being repaid.  The other reason is that the creditors would much prefer an economic successful Greece than a perpetual drag.    If narrow financial calculations are pulling it apart, then larger political and geo-strategic considerations push back. 

There are four new data points to be aware of today.   First, the disinflation winds in China continue to muster strength.  CPI for 1.2% in May after 1.5% in April.  Headline CPI has been halved in China over the past year.  Non-food prices were broadly stable, rising 1.0% year-over-year (0.9% in April).  Food price inflation eased considerably, falling to a 1.6% year-over-year rate from 2.7%.  

Producer prices are 4.6% below year ago levels.  They have not been positive since January 2012.  They had been off 4.8% in February, which is the lowest since 2009.  

Second, the  UK reported a smaller than expected trade deficit, but this failed to do much for sterling.  The April goods deficit fell to GBP8.56 bln from a revised GBP10.71 bln (from GBP10.12) bln).  Exports rose 2.8% on the month though exports to non-EU countries (e.g., China, Saudi Arabia, and the US) rose 4.7%.  Imports fell 4.3%.  The UK recorded a GBP7.4 bln service surplus (think financial services) reducing the overall trade deficit to GBP1.2 bln from a GBP3.09 bln (initially GBP2.8 bln) deficit.   Short-term participants may be cautious ahead of tomorrow's Mansion House speeches by Chancellor of the Exchequer Osbourne and BOE's Carney.  

Third, Australia reported stronger than expected homes loans.  The 1% rise in April contrasts to the Bloomberg consensus of -2.0%.  However, the job advertisements were weaker than expected.   This seemed to stop the Aussie's rally just above $0.7720 after bottoming yesterday near $0.7600.  Tomorrow Australia reports its May employment data.   Overall jobs are expected to rise by 15.0k but note that Australia lost almost 22k full-time jobs in April.

Fourth, New Zealand reported dismal manufacturing figures for Q1.  The 2.8% decline was the largest since 2009, but this is partly a function of weak prices.  In volume terms, it was off 0.3%, the worst since Q2 2014.  The RBNZ meets in a couple of days.  The market is split over the outlook. 

The North American session features the US April JOLTS jobs data and while sales inventories.  These are not the stuff that moves the markets.  There are no Fed speeches.  Nor does Canada report any data.  After the North American markets close, MSCI is expected to announce its decision on inclusion of China A-shares into its global indices. 

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