Europe Quiet, Asia Steals the Spotlight

View of feet from below a modern translucent glass staircase

  • The news stream out of Europe has been fairly light
  • China’s foreign reserves rose slightly in June to $3.21 trln
  • Kiwi is leading the pack today on some RBNZ comments
  • The Aussie recovered from early losses after S&P cut its outlook on Australia’s AAA rating from stable to negative.
  • During the North American session, the US reports June Challenger job cuts, ADP jobs, and weekly jobless claims

The dollar is mixed against the majors as markets await fresh drivers. Kiwi and sterling are outperforming while the Swiss franc and the Scandies are underperforming. EM currencies are mostly firmer. KRW and ZAR are outperforming while the CEE currencies are underperforming. MSCI Asia Pacific was up 0.2%, with the Nikkei falling 0.7%. MSCI EM is up 1.1%, despite Chinese markets being marginally lower. Euro Stoxx 600 is up 1.5% near midday, while S&P futures are pointing to a lower open. The 10-year UST yield is up 1 bp at 1.38%. Commodity prices are mixed, with oil up 1%, copper down slightly, and gold flat.

The news stream out of Europe has been fairly light.  UK IP fell -0.5% m/m in May vs. -1.0% expected.  Manufacturing also fell -0.5% m/m vs. -1.2% expected.  Several more UK property funds had to suspend redemptions, bringing the total up to seven since the Brexit vote.  The second round of the Tory leadership vote will be held today, with the top two candidates going before a vote by the wider Tory membership.  A new leader should be declared by September 9.   

German IP fell -1.3% m/m in May vs. a gain of 0.1% that was expected.  The April gain was revised down to 0.5% from 0.8% previously.  This comes on the heel of a weaker than expected German industrial orders report yesterday.  While we don’t want to make too much out of one month, the Eurozone economy may have been softening into the Brexit vote, just as the UK was.  This bears watching.

The ECB releases minutes from its last policy meeting.  At that meeting, the ECB left policy unchanged but gave the markets more details about its corporate bond buying program (CSPP), which it then started the following week.  Given that the CSPP has just begun and other measures are still relatively young, the ECB is likely to stand pat for several meetings.  The next one is scheduled for July 21, and no action is seen then.

China’s foreign reserves rose slightly in June to $3.21 trln.  They were expected to fall to $3.17 trln.  This is a good sign that capital outflows from China may have abated.  In June, the dollar was firmer against GBP and EUR, and softer against the yen and the dollar bloc.  If we assume that the valuation effect was neutral overall, the increase in total reserves suggests that leakages have eased, at least for now.

Kiwi is leading the pack today on some RBNZ comments.  Deputy Governor Spencer noted that further rate cuts could pose a risk to financial stability.  However, he said that the inflation outlook will ultimately determine monetary policy.  Q2 CPI is due out July 18, while the RBNZ next meets August 11.  Bloomberg consensus is for a 25 bp cut to 2.0% then.  NZD is on track to test the year’s high near .7300, and recent currency strength has tightened monetary conditions.

Elsewhere, the Aussie recovered from early losses after S&P cut its outlook on Australia’s AAA rating from stable to negative.  The agency said that the move reflects risks that “material government budget deficits may persist for several years with little improvement.”  S&P said there is a one in three chance that the rating is lowered within the next two years if parliament is unable to enact sufficient measures to move to a balanced position by the early 2020s.

During the North American session, the US reports June Challenger job cuts, ADP jobs, and weekly jobless claims.  ADP consensus is 160k vs. 173k in May.  Canada reports May building permits (1.5% m/m expected) and June Ivey PMI (51.2 expected).

Mexico reports June CPI, which is expected to remain steady at 2.6% y/y.  This comes after Banxico hiked rates last week by a larger than expected 50 bp to 4.25%.  Clearly, there are no price pressures to speak of, with CPI inflation well below the 3% target.  The economy is sluggish (PMI readings fell below 50 in June), while oil prices are getting toppy.  We didn’t agree with the aggressive 50 bp hike.  The next policy meeting is August 11.