Mixed messages from the data It’s hard to know what
to make of yesterday’s data. On the one hand, the Bundesbank was telling us
recently that growth was slowing in Germany, but on the other hand, yesterday’s
July PMIs for Europe – particularly Germany -- exceeded expectations. There was
a similar mixed picture in the US. On the one hand, jobless claims in the week
of July 19 plummeted to the lowest level since 2006, both for the latest result
and the 4-week moving average. You might expect that better employment
conditions would mean a better housing market as people who are more confident
about their futures go out and buy homes, but on the contrary: the previously
reported 19% spike in new home sales to 504,000 in May saw a record revision
down all the way to 442,000, and then June fell further to 406,000, the lowest
figure since March. All told, the data seems to have clouded the picture more
than clarified it. The market’s conclusion though seems to have been to take it
all positive: Bund and Treasury 10-year yields both rose about 3 bps, while Fed
Funds expectations for three years from now rose 6.5 bps. The higher US rate
expectations supported USD, which was unchanged to higher against all the G10
currencies except SEK. AUD dropped the most of any of the G10 currencies, with
no particular news behind the fall, perhaps just profit-taking after the recent
rise. The rise in SEK was fairly inexplicable as it follows the higher-than-expected
unemployment and fall in producer prices for June that were announced
yesterday.
Japan’s inflation seems to be cooling. The national CPI for June
slowed to 3.6% yoy from 3.7% in the previous month (although this was higher
than the forecast of 3.5%), while the Tokyo CPI eased to 2.8% yoy from 3.0%. On
the other hand, the core CPIs (excluding fresh food and energy) were both
higher: national rose to 2.3% yoy from 2.2% while Tokyo rose to 2.1% from 2.0%,
suggesting that firms may still be passing some of the increase in the
consumption tax onto consumers. Imported inflation, particularly with regards
to energy prices, should cool as the yen is no longer falling so much on a
year-on-year basis. The yen’s trade-weighted index was down around 4% yoy in
July, vs -13% in January. The Bank of Japan’s base scenario is that inflation
will pick up towards the end of the year, but if this doesn’t happen – as seems
likely – they may have to take further easing steps. The yen is likely to
weaken further as more and more investors anticipate such a move, in my view.
Today: There are several major indicators out today. The German
Ifo current assessment index and expectations index are both expected to
decline, which could weaken EUR/USD. The Ifo index is in contrast to Thursday’s
positive PMI figures, perhaps because the Ifo incorporates more recent data on
the impact that sanctions on Russia are likely to have on the German economy.
In the UK, the nation’s preliminary GDP for Q2 is estimated to
have remained unchanged in pace at 0.8% on a quarterly basis. This will drive
the yoy rate up to +3.1% from +3.0%. Such a strong growth figure could be a
reason for the pound to regain momentum following Thursday’s weak retail sales
data.
>From the US, durable goods orders for June are expected. The
headline figure is forecast to rise +0.5% mom, a turnaround from -0.9% mom the
previous month, likewise, durable goods excluding transportation equipment are
estimated to have risen +0.5% on a mom basis, after May’s 0.0% mom. Overall these
figures are positive and the dollar could strengthen if they come in as
anticipated.
We have no speakers scheduled on Friday.
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