Waiting for Godot

The US dollar is holding on to yesterday's gains as the market awaits the key events of the week:  the ECB meeting and press conference and the US jobs data--for which the imprecise ADP data will serve as the proxy today ahead of tomorrow's national report. 

While yesterday's free-fall in peripheral European bonds has moderated today, helped perhaps by a solid reception to the Spanish bond auction, pressure is still evident in the credit-default swaps market.  Portual 5-year CDS is moving above 1000 bp today, which in the past has been an important threshold.  

Even stronger than expected German industriaal production data and the prospects of the ECB hike has proved insufficient to do more than stabilize the euro near 7-day lows and near the retracement objective near $1.4280.  While there is additional support near $1.4235-40, a convincing break of the $1.4280 area could signal a move back toward $1.4100.  A move now above $1.4350 would go a long way in helping boost sentiment.  

Trichet's press conference could determine whether this happens.  A rate hike is a done of a deal as these things get.  The key is that he will have to keep the door open to further normalization of monetary policy.  Despite the slowing picked up by the recent PMI reports,  monetary policy is still perceived to be accommodative.  The refi rate is still below the rate of inflation.  The ECB's latest monthly bulletin highlighted the fact that excess capacity is being absorbed and the output gap is falling.  Trichet needs to say that the ECB is "closely monitoring" inflation. 

The ECB is hiking rates at the start of Q3.  The next hike should be penciled in for November, the middle of Q4 as Draghi takes over.  Of course, much could happen between then and now. 

Neither the foreign exchange market nor the equity markets are making much hay from the positive growth impulses reported today.  Japan reported stronger than expected machinery orders (3.0%), best in four months.  This is more evidence that an economic recovery is taking hold.  Australia report stronger than expected jobs data.  Hiring continues to appear strongest in the resource states.  The implication is that the jobs data is consistent with the bifurcation of the Australian economy with the external sector still being bolstered by the favorable terms of trade shock.

The UK reported a slightly smaller than expected rise in May industrial production (0.9% vs 1.1%), but this disappointment reflects the mining/quarrying, not the manufacturing sector, which did exceptionally well.  The 1.8% rise in UK manufacturing completely offsets the 1.6% decline in April.  It is the strongest report since March 2010, but most likely cannot be sustained.  

Germany also reported stronger than expected industrial production.  The 1.2% rise in May offsets in full the revised 0.8% decline in April.   Yet more recent data, like the PMI, warns that the Germany economy has stopped accelerating.