Half Full or Empty Glasses

The balance of forces continues to weigh on the US dollar. Earlier this year news form Europe was read as the glass was half empty. Now it is being understood as half full. At the same time, the earlier momentum of the US economy has stalled.

Leave aside the fact that Greece dropped plans to offer 1-year bills yesterday, the success of the 6-month bill sale, at a rate lower than the EU/IMF offer in their lending facility is remarkable. Even the downgrade of Portugal was taken in stride and today the country managed to raise a little more money in its bonds sales than it initially intended. In addition, The ECB continued to drain liquidity, helping to validate the backing up of money market rates. Yesterday’s 200 bln drain seems to have largely funds from overnight deposits, which fell to less than 53 bln euro.

At the same time, US glass is seen as half empty. If yesterday’s Greek bill sale captures the spirit of the market’s current attitude toward Europe, the trade figures did the same for the US. The deterioration in real terms has prompted a number of economists (and more are likely to follow) substantially cutting Q2 GDP forecasts. If the previous median was around 3%, the new median is probably coming in at 2.5% or lower. Today more of the same form the US should be anticipated, soft retail sales, business inventories and minutes from the recent FOMC meeting in which the Fed staff likely cut its GDP and inflation forecasts and many expect that the members discussed possible new easing steps.

Yesterday the UK reported somewhat firmer than expected inflation data. The pace of increase slowed, but not as much as expected and still sufficiently higher that BOE’s King will have to write yet another letter explaining why inflation continues to overshoot. There are several BOE members, including King, that continue to attribute the resilience of inflation to one-off factors and have confidence that the underlying economic weakness will limit price pressures.

Andrew Sentance, the sole dissenter last time, does not appear to have changed his mind as much as refrained from escalating his rhetoric. It is not clear that he has won any allies either. Recall that one voting member on the FOMC has repeatedly dissented and it has not weakened the market’s conviction that the Fed will keep rates low for an extended period. Recall that the ECB’s Weber objected to sovereign bond purchases, which now total about 59 bln euros, rivaling in size the covered bond purchase program.

That said, it has not just been inflation that has been resilient in the UK, so has the labor market. The claimant count fell almost 21k, the fifth month in a row and the 7th of the past 8 months that the claimant count has fallen. There were also downward revisions to recent month’s claimant counts as well. The unemployment rate slipped to 4.5% from 4.6%, which is a 15 month low. The ILO’s measure is thought to be more accurate and it shows UK unemployment ratre easing to 7.8% from 7.9%. However, the improved tone in the labor market does not appear to be lifting earnings and this may be a factor supporting the dovish wing at the BOE. Average weekly earnings are reported with a month lag, so the May earnings data are reported alongside the June claimant count. Average weekly earnings rose 2.7% on the traditional way of looking at the date on a 3-month year-over-year basis. The consensus had expected a 3.0% increase. The downwardly revised 4.1% (was 4.2%) increase in April was largely a function of bonus payments. Excluding bonuses, weekly earning rose 1.8% in May after 1.9% in April (on a 3-month year-over-year basis).

Sterling is the strongest of the major currencies today. Sterling is making new session higher near midday in London as the euro returns to yesterday’s lows near GBP0.8320. Above $1.5300, sterling can rise toward $1.5340 near-term before likely encountering stiffer resistance. If the euro can’t find support near yesterday’s low, the risk is that it falls toward GBP0.8260-80.

Thailand became the latest Asian country to hike rates. It follows Malaysia, South Korea, Taiwan and India. It is one of our key emerging market themes: a combination of relatively strong regional and domestic factors has seen price pressures emerge in Asia, even though developing countries are seeing the opposite—that is deflation or too low of inflation—is the bigger risks.

Singapore’s GDP figures are very impressive, a little more than 18% growth in H1 and nearly 26% annualized pace in Q2 puts it as one of the fastest growing economies in the world. The fact that exports were up 28.7% year-over-year in June after a 24.3% rise in May is a favorable comment about world growth. That said, there are press reports suggesting that tomorrow’s release of China’s industrial production and CPI figures may be lower than the consensus forecasts.