Dollar Advances

The US dollar has turned a little better bid, but activity remains subdued and ranges narrow. There are two catalysts today.

First, the German ZEW survey disappointed, though it consistent with recent anecdotal data suggesting many German businesses and investors think this is the best it gets and going forward, conditions will deteriorate. This succeeded in pushing the euro through last week lows, breaking below $1.3740, its 100-day moving average. It has not closed below this average in three months. The next technical target is near $1.3675.

Second, China's economic data was softer than expected, and this may have weighed on commodity prices, after the recent advance, but is fueling ideas that the PBOC could ease monetary policy, and this appears to be lending support to many emerging market currencies.

In a couple of days, Germany will report its first estimate of Q1 GDP. It is expected to have expanded by 0.7%, after a 0.4% gain in Q4 13. Germany remains the regional locomotive. Ten-year bund yields have fallen nearly 50 bp this year, which should help support the economy, as well. However, and this is one of the weaknesses of its export-led model, German growth is high dependent on foreign growth. It is true that the euro area is recovering. Only Cyprus remains in a recession. However, growth remains weak, especially domestic demand. China's economy has downshifted, and the US economy appears to have contracted in Q1, given the likely revisions.

Whatever growth Japan saw in Q1, which will be reported this week, is not expected to be sustainable in Q2 after the sales tax was hiked. In addition, some German investors likely accept what the IMF and EU officials have said and what some real and leveraged fund managers have indicated; namely that the rally in the peripheral European bond markets are "pricing in perfection" and are likely not to be sustainable. Indeed some are arguing that the bubble that was thought to be in the US Treasury market may really be in the European periphery, and this is before an asset purchases plan that many expect to be announced at the June ECB meeting.

The expectations component of the ZEW survey fall to 33.1 from 43.2. It fell every month this year, after recorded a multi-year high at the end of last year (62). It stands at its lowest level since January 2013. At the same time, the assessment of current conditions rose to 62.1 from 59.5, which the highest since July 2011. The Bundesbank's views align more with this than the government's economic forecasts. The BBK warns the German economy is slowing this quarter.

Note that the DAX, which the ZEW often seems sensitive to, gapped higher today to approach the year's high set in late January just below 9800. Gains have been led by the industrials and consumer goods sectors today, with the help of better than expected ThyssenKrupp earnings. There is some profit-taking in the telecoms space after yesterday's news that British Sky Broadcasting Group would begin talks to buy Sky Deutschland. The utility sector is being held back by losses in Eon, after it reported a decline in underlying net income on an 11% decline in sales.

China's slew of data included softer than expected year-over-year growth in industrial output, retail sales and fixed asset investment. Sequentially they all slowed from the March readings, though the declines were modest. Fixed asset investment slowed to 17.3% from 17.6% in March. Retail sales slowed to 11.9% from 12.2%, and industrial output slipped to 8.7% from 8.8%. To be sure, these are still the kind of reports that most countries would be envious.

Chinese leaders have suggested that investors and businesses need to come grips with the fact that growth is slowing, many observers are suggesting that today's data miss will spur policy makers to provide more stimulus. While China is bringing forward some spending, it is not clear that officials really want to reflate, if such a term is meaningful for a country that still appears to be expanding by 7% or more. Separately, we note that the PBOC set the yuan reference rate at an 8-month low (CNY6.1636) and the currency traded at a 1.1% discount to the fix. After weakening from mid January through the end of April, the yuan has strengthened since the start of May. It has gained about 0.5% this month.

The US reports April retail sales today. Although auto sales were softer, chain store sales were stronger. US consumers have been remarkably stable. The measure used for GDP calculations, which excludes autos, gasoline and building materials has risen by an average of 0.23% over the past 6, 12, and 24 months. It is expected to have risen by 0.5% in April after a 0.8% rise in March. The US also reports March business inventories, which will help economists finalize revisions to Q1 GDP. Based on recent reports, a contraction on the magnitude of 0.5% or so now looks likely.