Euro Eases to New 2014 Lows

The euro slipped through the low of the year and the weekly trend line going back to 2012. However, it found bids near $1.3460 and has recovered a bit.  The key on the upside now is $1.3500.  A move above there and the technical tone can begin stabilizing.  

The lower than expected core US CPI reading has helped.  The yen has also ticked higher as Treasury yields ease.  

The core CPI rose by 0.1%.  The consensus expected a 0.2% increase.  The year-over-year rate actually slipped to 1.9% from 2.0%  The headline rate rose the expected 0.2%, but roughly 2/3 of that gain can be traced to the 3.3% rise in gasoline prices, which have already eased over the past few weeks.  

Even though the CPI is not the Fed's preferred measure for policy purposes, the data illustrates that even at this late stage, measured inflation is not particularly troublesome.  It will not prompt an acceleration of tapering.  Nor does it reveal anything about the timing of the first rate hike or subsequent pace of normalization of monetary policy.

Arguably the most important aspect of the inflation report is what the implication of real earnings.  Real earnings were flat in June after declining the previous three months.  Over the course of Q2, real earnings fell by 0.1%.  This does not bode well for sustaining nearly revolving credit-free consumption.  

The dynamics of the euro have changed.  One of the driving forces previously seemed to have been the foreign demand for peripheral bonds.  Those bonds have continued to rally.  Over the past week, the yield on Italy's benchmark 10-year bond has slipped 8 bp, Spain 15 and Portugal 10. However, now the gains do not seem as supportive for the euro.   It seems that some foreign investment has moved from peripheral bonds to portfolios of bad loans and M&A activity, which for various reasons do not seem as euro friendly.