Currencies Consolidate Pre-Weekend Moves

The major foreign currencies were unable to build on the euphoric gains seen before the weekend in response to the EU Summit developments.  Even before it was clear that the Netherlands and Finland were not keen on the direct bank access to ESM funds, the euro's gains were being trimmed.  

In part, this is a learned behavior.  Participants have seen euro gains on the back on the EU summit progress quickly unwind.  In fairness, the major foreign currencies are holding on to the bulk of those gains still. Thus, the price action is more consolidative (at this juncture) than corrective, we'd argue.

The main economic news consists of the last survey reading.  It began in the Asia/Pacific region.  China's official June PMI slipped to 50.2, which while better than 49.8 consensus, was still the weakest reading since last November.  Forward looking components, such as new orders and export orders continued to fall.  The large manufacturers fell to 50.6 from 51.1, while the reading for small manufacturers was below 50 for the third consecutive month (which is what the HSBC measure seems to track closer).  The bottom line is that the Chinese economy has yet to land.  

Australia's PMI rose to 47.2 from 42.4.  The RBA was expected to stand pat at the Tuesday's meeting.  The Australian dollar remains firms even if follow through buying has been elusive.  

Japan's Tankan survey was slightly better than expected and the forward looking September expectation is for the first positive reading since last September.  The diffusion index rose to -1 from -4.  Of particular note, capital expenditure plans were strong at 6.2% from a flat March reading, with manufacturers leading the way (12.4% vs 3.6%), but non-manufacturers also improved to 3.0% from -2.0%.   Large manufacturers also see the dollar averaging JPY78.95 compared with JPY78.12 in March.   While the worst may be over for the Japanese economy, the recovery remains fragile and additional easing through asset purchases by the BOJ still looks likely.

Separately, note the Ozawa bolted from the DPJ which he had helped form and lead. He left with about 41 other members, ostensibly protesting the sale tax effort.  This will increase the pressure on Prime Minister Noda to call for elections.   His days as Prime Minister look increasingly limited.  He may not survive until the Sept DPJ leadership challenge previously thought likely.   

At 45.1, the June PMI for the euro zone was slightly better than the 44.8 flash reading, but remains at a 3-year low.  This mostly reflected the increase in Germany to 45.0 form the 44.7 flash reading (45.2 in May).  France ticked down to 45.2 from the flash's 45.3, but was still an improvement from May's 44.7).  

Italy and Spain remained weak, even though the former came in at 44.6 compared with expectations for 44.5.  Still it is the 11th month below 50.  Output contracted for the 9th month and new orders for the 13th month.  Spain was even more dismal.  The June reading stands at 41.1, down from 42.0 and even worse that the 41.5 expected.  It is the 14th month below 50 and the weakest since May 2009.  New orders at 38.1 is the lowest since April 2000.

The UK CIPS PMI was better than expected at 48.6.  The consensus was for improvement to 46.5 form 45.9 in May.  Manufacturing was weaker in Q2 than Q1 and this will weigh on GDP.  Input prices fell and this can only reinforce ideas that the BOE will announce a resumption of gilt purchases later in the week.  

Elsewhere, Norway reported a shockingly poor PMI.  The headline fell to 46.3, the first reading below 50 this year and down sharply from the 59.3 reading in May.  Ideas that the Norges Bank could hike rates soon has to be re-examined and this has weighed on NOK.  Separately, Sweden also reported a disappointing PMI.  The 48.4 reading missed the 48.5 forecast after the 49.0 print in May.  The Riksbank meets this week and is expected to stand pat.  However, additional disappointing data, after robust Q1 could see more calls for a rate cut.  

Lastly, we note that Switzerland also surprised to the upside.  The June PMI came in at 48.1 from 45.4 in May.  The consensus expected a decline in June to 45.  Output rose above 50 (51.1 vs 48.9) and new orders improved (45.5 from 42.7), but remains below 50.  Prices fell, keeping the deflation threat alive.  Separately, Switzerland reported a large jump in retail sales.  The 6.2% year-over-year rate compares with 0.2% in May.  This suggests the Switzerland is succeeding in replacing the weakness in foreign demand with domestic demand.