Month-End Adjustment Gives Brief Reprieve

The US dollar is mostly softer against major and emerging market currencies today.  Many observers will talk about the string of better than expected data from Europe and the polls that suggest the ND are ahead in Greece and that the Irish will easily support the fiscal pact in today's referendum.  Yet the risk is that the firmer tone in the foreign currencies, equities and commodities is but a brief reprieve from the persistent selling pressure seen recently, more related to technical factors and month end than a reversal.  

Tomorrow's PMI readings from the euro zone will offer a more current reading of the economies and the new orders component are more forward looking and this will remind participants that the euro zone economy is appears to be contracting this quarter.   Moreover, the debt crisis still seems to be overwhelming European officials. 

In fact, the bounce in the major foreign currencies in Europe is also leading to over-stretched intraday momentum indicators warning that the bulk of the bounce is likely behind us and North American players may very well see the bounce as a new selling opportunity.  The $1.2440 area in the euro and the $1.5550 area in sterling may provide the near-term cap, while the $0.9780-$0.9800 area may limit the Aussie's gains, especially ahead of the Chinese PMI early Friday in Asia.  

The US also reports a string of data and on balance is expected show world's largest economy continues to chug along even if at a pace that is less than spectacular.   It is true that Q1 GDP is likely to be revised down form the 2.2% initial estimate to 1.7%-1.9%, but the prospects for Q2 look somewhat better.  The ADP private sector jobs estimate steals some of the thunder of the nonfarm payroll report, and the Chicago PMI will help solidify expectations for the national figure, which now also has a flash report.  

Barring significant downside surprises, our anticipation of no new QE later this month (despite calls from  some large bond managers and at least one large investment house) still seems to be reasonable, especially after NY Fed's Dudley suggested (and not for the first time) that the costs of another round outweigh the benefits.  

Perhaps the most surprising data from Europe was news that the Swiss economy expanded by 0.7% in Q1 (2.0% year-over-year).  The consensus had called for a flat reading and a 0.8% rise from a year ago.  The SNB insists that it will continue to block additional franc appreciation and that it does not seem particularly disturbed by the negative interest rates.  

The 2-year Swiss note is yielding -37 bp today.   The demand for francs is so strong that one pays the Swiss about 3 bp a month to hold funds.  Besides that Switzerland is a relatively small country, it is rather surprising that given its macro fundamental backdrop, that Swiss officials do not come under greater criticism for blocking the adjustment process.  

From the euro zone, both Germany retail sales and French household consumption surprising on the upside.  German retail sales rose 0.6% in April compared with a consensus expectation of a 0.2% increase.  Moreover, the March's gain was doubled from 0.8% to 1.6% in the revision.  French April household consumption rose 0.6%, which was twice the median forecast and the 2.9% decline in March was revised to a 2.6% fall.  

Yet both reported disappointing employment figures.  France's joblessness rose for the 12th consecutive month in April.  The 4.3k increase brings the total to 2.9 mln, which is the highest since late 1999.  Germany's labor market has generally fared better.  The May unemployment rate actually slipped to 6.7% from 6.8%.  The unemployment queues were expected to have fallen by 5k but were flat.  

Recall though that the flash May PMI for Germany was 45 and France was 44.4.  Barring a significant upward revision tomorrow, the risk is that the German engine is sputtering.  The German economy grew 0.5% in Q1 and the French economy was flat.  Despite the consumption data today, the euro zone economy is poised to contract here in Q2.  The somewhat some softer euro zone CPI, the fall in commodity prices, including Brent oil which is near the lows for the year and the poor M3 figures yesterday will likely see more participants contemplate a ECB rate cut as early as next week.  

Japan reported disappointing industrial production figures for April.  The expected 0.5% rise came in at 0.3%.  Labor cash earnings were also weaker than expected, though housing starts exploded--up10.3%, which is almost three times more than expected.  

The yen is driven more by external factors than domestic considerations.  However, we do note that signals from Tokyo suggest a cabinet reshuffle is likely shortly.  Both the transportation and defense ministers have been censured by the LDP-controlled upper house and in order to help build a cross party coalition to support the retail sales tax hike, Prime Minister Noda may announce their resignations and new appointments.  

Some press indications suggest the agriculture minister may also be replaced.  A tax on consumption seems, though, to be counter-intuitive.  Consumption should be encouraged in Japan not taxed more.  It might be more desirable to reduce savings.  Maybe it should be taxed instead of consumption.  

In terms of weekly portfolio flows, the heightened anxiety among investors and narrower interest rate differentials saw Japanese investors sell JPY410.7 bln of foreign bonds in the past week, partly offset by the JPY48.3 bln in foreign shares bought.  Despite the claim of the yen's safe haven status, which we argue is less than meets the eye, foreigners were net sellers of Japanese shares and bills.  They did buy a small amount of Japanese bonds for the first time in four weeks.  Still foreigners were net sellers not buyers of Japanese financial assets even as the flight from risk intensified.