Dollar Mostly Bid, Sterling and Kiwi Offered

The US dollar remains firm against most of the major and active emerging market currencies. The euro and yen have thus far remained confined to yesterday's ranges while sterling saw yesterday's losses extended, following yesterday's reversal. US 10-year Treasury yields have pushed back below 2.5%, which seems to cap the dollar near JPY102. Better than expected Norwegian retail sales (0.5% vs.-0.3% consensus) helps the krone resist the dollar bid.

The most important data, however, was the euro area money supply figures. M3 grew by less than 1% in April (0.8%), which is the slowest since September 2010. The March pace was revised to 1.0% from 1.1%. The consensus was for an unchanged reading. Credit to the private sector continued to contract as it has for the past two years. The pace moderated, however, to -1.8% from -2.2%. The report is not going to change anyone's view about the outcome of next week's ECB meeting.

Separately, there were three other pieces of the macroeconomic picture that the market received today, and they were all unexpected. First, German unemployment rose by 24k in May. The consensus was for a 15k decline. Second, reported that household consumption fell 0.3% in April. The Bloomberg consensus was for a 0.5% gain. The March data was revised a bit higher (0.6% from 0.4%), but not enough to take the sting out of the disappointment.

Third, Spain's positive data stream continued with April retail sales jumping 0.7% year-over-year. The market had a flat report after a -0.5% reading in March. Separately, Spain reported mortgage lending was up 16% in March year-over-year, a reversal from the 11.6% contraction in February and is the highest since early 2007.

Taken together, the picture is fairly consistent with what investors have already come to appreciate. The German economic engine has begun moderating after a strong Q1. The French economy continues to struggle to sustain any meaningful momentum. The Spanish economy is leading the periphery.

Spain and Italy's bond and stock markets are performing well, extending recent gains. Over the past five sessions, Spain's 10-year yield is off 17 bp and Italy's is off 23 bp, with both pushing below the 3% threshold. Italian and Spanish shares are the strongest of the major bourses in Europe. Over the past five sessions, those bourses are up 4.6% and 2.0% respectively. Yet the euro itself is not finding much traction, as speculators appear to be moving to the sidelines ahead of the ECB meeting, where great uncertainty continues shroud next week's big event. The $1.3640 area is now resistance. Support is seen $1.3600-10. A break of that would target the $1.3520-45 band. 

Sterling has underperformed in recent days. The Pfizer/AstraZeneca cooling off period (GBP60 bln deal?) may have weighed on sentiment, and there is some talk of euro demand against sterling related to month end. Sterling was already on its back foot when the CBI disappointed with a distributive trades (retail sales) report showing a +16 balance in May after +30 in April. The consensus had looked for improvement. The forward looking indicators also softened. With the $1.6770 level now violated, the next target is $1.6720. Euro resistance against sterling is seen near GBP0.8160.

The New Zealand dollar is the weakest of the majors, off about 0.75% (sterling is second with a loss of about 0.25% near midday in London. The Kiwi initially firmed in response to the Fonterra auction, which set a payout of NZD$7.0 (per kilo) for 2014/15 and cut the payout for the current period by 25 cents to NZD$8.40. New Zealand appears to be producing more milk than can be absorbed presently, and this appears to be the main reason for the 23% slide in whole milk powder prices over the 3.5 months. The market consensus is for the RBNZ to continue its tightening cycle with a hike in June. Indicative prices suggest another hike in July is largely anticipated, but there is where we think the market may be a bit ahead of itself. 

There are no US economic reports of consequence today, and no Fed officials scheduled to speak. Tomorrow the US reported its second estimate of Q1 GDP. It is widely expected to be revised lower from the initial 0.1% pace. The Bloomberg consensus is for a 0.5% contraction, but risk is to the downside. In may not matter much for investors, as the news is old and the more recent news is that the US economy is recovering smartly in the current quarter (~3.0%). However, when the Fed updates its forecasts next month, the poor performance in Q1 will likely see officials revise down their 2014 forecasts. This is likely to be a simple accounting function rather a less optimistic outlook.