Becalmed Markets

The relatively light news stream continues to facilitate corrective action in the capital markets. The advancing streak in global equities has broken while Chinese shares continue to stabilize after their recent dramatic slide.  Peripheral bond markets are giving back some of their recent gains.  The US dollar has been pushed from its recent highs but is largely in a consolidative mode.  

Sterling underperformed yesterday but is back in the driver's seat today.  It is the strongest of the major currencies, gaining around 0.4% against the dollar.  A base is seen now near $1.5530.  The upper end of the consolidative range is seen in the $1.5670 area.   It was bolstered by the minutes from the recent MPC meeting.  Many suspect it will be the last time that there was a 9-0 vote for standing pat.  The tone of the minutes indicate that more than a couple MPC members see the call as finely balanced, especially if the risks emanating from Greece are reduced.  

The MPC recognized that the spare capacity in the labor market, and in the economy more broadly, is being absorbed.  It is possible that in August three MPC members vote to increase rates. The likely candidates are Miles, Weale and McCafferty.  Next month's meeting is Miles' last, and as his departing shot is likely to vote for a hike.  Weale and McCafferty have dissented previously in favor of hikes before rejoining the majority.  BOE Governor Carney has indicated that the rate outlook will be clearer toward the end of the year.    While the risk of a rate hike this year seems small, market participants seem divided between a hike in Q1 or Q2 2016. 

The Nikkei's six-session advancing streak ended today with a 1.2% decline.  It was dragged down by the sharp losses in US markets yesterday following disappointing earnings.  This saw the dollar extended yesterday's losses after it posted a reversal yesterday.  After first making new highs for the move, (to almost JPY124.50), the dollar was sold through Monday's low to about JPY123.75.  Those losses were marginally extended to just below JPY123.60.  As the North American session is set to begin, the dollar is trading in tight ranges near its lows.  

Yesterday, the BOJ's Kuroda reiterated the central bank's stance.  Inflation is likely to pick up from current near-zero levels, and there is no need to increase the asset purchase program now.  Separately, the Japanese government more than halved this fiscal year's inflation forecast from 1.4% to 0.6%.  It expects CPI to rise to 1.6% in the next fiscal year.  It revised up to 2.9% (from 2.7%) its nominal GDP forecast for FY15.  However, real GDP was left unchanged at 1.5%.  

Australia reported Q2 CPI, which was largely in line with expectations.  The headline rate was 0.7% for a 1.5% year-over-year pace.  The Bloomberg consensus was for a 0.8% increase and 1.7% year-over-year after a 1.3% year-over-year pace in Q1.The trimmed and weighted mean measures were slightly firmer than expected.  RBA Governor Stevens did not expand much on the recent insight gleaned from the minutes of this month's central bank meeting.  A further decline in the Australian dollar is desirable.  Additional rate cuts remain possible.  Stevens sounded optimistic that non-mining investment will increase and the outlook for productivity.  The Australian dollar is little changed, within yesterday's ranges.  There has been no follow through buying after yesterday's recovery.  

The North American session features June US existing home sales.  A continued recovery is expected.  The May pace of 5.35 mln units is the best since 2009. This report tends not to move the foreign exchange market.  During the New York morning/European afternoon, investors will be on watching for indications whether the ECB will allow for ELA for Greek banks.  It increased it by 900 mln euros last week.  Meanwhile, the Greek parliament will be voting on the banking resolution bill and reform of the judicial system.  Yesterday the ECB was critical of Greece's effort to transpose the banking resolution rules into domestic law on the grounds that it left too many technical issues in the hands of politicians.   For its part, the euro has been confined to a narrow range of less than half a cent in the upper part of yesterday's range. 

Late in the North American session, the Reserve Bank of New Zealand is expected to deliver a 25 bp cut in the cash rate.  Of the 19 economists surveyed by Bloomberg, 18 expect a 25 bp cut and one expects a 50 bp move.  

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