Dollar and Sterling Lose Momentum

The US dollar has backed off after approaching the upper end of its recent ranges against the euro (~$1.3500) and yen (~JPY102).  US Treasuries remain firm and the 10-year yield is near 2.50%, which represents a one week low.  

  

Data due today includes weekly initial jobless claims and June housing starts.  The Philly Fed Index for July will also be reported.  At the start of the week, the Empire manufacturing survey for July surprised on the upside.    While another upside surprise may weigh on bonds, the demand has been persistent and, even if yields do not fall, they may not rise much either.    The short-end, like the June and December Eurodollar futures contracts imply 2 and 5 bp increase in yield expectations over the course of the week, while the 10-year bond yield is a couple basis points lower.  

This is to say then that the two cent range the euro has been in confined to for going on two months between roughly $1.35 and $1.37 should be respected until proven otherwise.  The dollar has been confined to a similar range against the yen (JPY101-JPY103) and within that range the greenback has been confined to the lower half of it for nearly two weeks.   

 

Earlier this week, the BOJ tweaked down its growth forecast to 1.0% from 1.1% for the year.  The Japanese government today moved in the opposite direction. It lifted its economic outlook for the first time in six months.   It raised its outlook for private consumption, saying that the impact of the sales tax was fading.  As far as official data goes, this has yet to be seen.  As the US and the UK have also experienced, the absorption of slack in the labor market has yet to translate into a meaningful increase in wages.   Part of the government's optimism may stem from its bid to begin restarting nuclear reactors.  

While there has been several euro area economic reports, the euro has been confined to less than 20 pip range in the session through the European morning.  Auto sales rose in June in the euro area (4.3%), which represents the 10th consecutive monthly increase, the longest streak in four years.  Of note, among the large European countries, Spanish sales rose the most (24%), but sales were also strong in Greece and Portugal.   The recovery in the European auto market has been bolstered by extensive incentives. 

Construction output for the euro area weakened in May, falling 1.5% on the month and April's 0.8% gain was halved.  Separately the preliminary June CPI of 0.5% (year-over-year) was confirmed.   

We note that today is Merkel’s birthday.  There has been a whirl of rumors lately of her stepping down before the end her term for some senior European or UN position.  Her criticism of former Chancellor Kohl and her mentor,  was that he over stayed his welcome.    Yet if she does step down early, it is not a relevant factor for investors as it would be some years off still.   

Separately, we note rumors that Draghi will step down to become the next President of Italy.  Draghi denied such rumors recently.   This too does not seem to be a pressing market factor.  The focus is on the TLTROs starting September, the filling of new European Commission and other senior posts (after yesterday’s failure to reach agreement, they will try again next month) and on the asset quality review and stress tests.  In the last couple of days, a couple of ECB officials have played down the need for an ABS purchase scheme, but see the benefit of having it as policy option.  

The US and European announced new sanctions on Russia.  The US sanctions will limit several large Russian companies to the short-end of the US capital markets (max 90-days).  That is expected to raise the costs of capital for them, but will not prevent US companies or individuals from doing business with them.  The EU will freeze the European Investment Bank's lending to new public-sector projects in Russia.  This may also impact lending to Russia from the European Bank for Reconstruction and Development.  

The news has seen the Russian markets sell off.  The ruble itself is the weakest currency, down.  1.7%.  The 10-year bond yield has jumped about 35 bp to near 9%.  The MICEX is off 2.7% to six week lows.  European shares are lower, with the Dow Jones Stoxx off almost 0.5%.  Some observers are linking the losses to the sanctions as well.  

There are a couple of other developments in the emerging markets to note today.  First, a regional trade and financing hub, Singapore’s economic performance is often seen as a bellwether of the broader economic climate.  It reported June exports today and they were considerably weaker than expected.  The 4.6% decline in (non-oil) exports (year-over-year) compares with expectations for a 2.7% decline.  Of note, exports of electronics were particularly poor, falling 17.4% after a 15.3% decline in May.  The consensus expected improvement. 

Second, the South African central bank will announce its interest rate decision early in the North American session.  Expectations according to surveys are divided.  Half of the market looks for a 25 or 50 bp rate hike and the other half sees it standing pat.  We are more inclined to the latter view based on the weakness of the economy.