Today has an anti-climactic feel to it. Yesterday's leak
of what is purported to be the ECB staff forecasts point to small downward
revisions to inflation forecasts and an ever small upward tweak to
growth. This would be in line with
only mild changes in the forward guidance language.
The clear indication is that inflation is
still not the conditions of a self-sustaining path toward the target.
What follows from that assessment is that it is premature to retreat from any
of the unorthodox measures. The asset purchases run through the end of
the year. The September ECB meeting is seen as a likely venue to announce
the continuation of asset purchases beyond the end of the year albeit at a
slower pace.
Two economic data today support the eurozone
growth story. Growth in Q1 was revised up to 0.6% from 0.5%. This lifts the year-over-year rate to 1.9% from
1.7%. It appears the revision was aided by
capital investment. Household consumption was revised slightly
lower, and government expenditures were unchanged.
The prospects for Q2 look solid, given the PMI readings. Today
German reported stronger than expected April industrial output figures, after
disappointing orders data yesterday. Output rose 0.8% compared to the
Bloomberg median estimate of 0.5%, and the March decline was revised to 0.1% from -0.4%.
The point to bear in mind is that because of the output gap, growth alone
is necessary but insufficient to change the ECB's stance. Prices have
to rise. Meanwhile, the euro
remains near its recent highs. Buying yesterday's pullback seems to point
to the path of least resistance. There
was a brief attempt yesterday to shake out the weak longs, but it failed as new
buying emerged ahead of $1.12.
Former FBI Director Comey's prepared remarks were released ahead of his
testimony today. There is much attention drawn to today's hearing, and it will be televised live. It may make for good theater, but it is
unlikely to be the kind of thing that moves the capital markets. It seems
widely recognized that Comey's "revelations" may not be very
flattering for the President, but they do not rise to the level of
illegality. Keep in mind that this is one hearing of one of
the two investigations being conducted by Congress, and the FBI is conducting
its own investigation. These are
early days.
The outcome of the UK election is the known unknown of the day.
The voting end at 10:00 BST (5:00 pm ET) and exit polls will be reported shortly after that. The results will likely be known within a few
hours before many North Americans retire for the evening.
Sterling is little changed today. It was
little changed last week too, but it is little changed higher for the last four
sessions coming into today and in seven of the past eight sessions.
If and as much as the outcome deviates from the Tory majority government,
the worse sterling and UK assets will likely do on first blush. At
the same time, keep in mind that developments that support a softer Brexit have
elicited positive responses by investors. For sterling, the top side had been
blocked by the $1.3055 technical level. On the downside, we
suspect the bulls will allow for some choppiness, but a break of
$1.2830-$1.2850 may be a little worrisome.
The Japanese yen is the weakest of the majors, losing about 0.25% against
the dollar. The greenback has resurfaced above JPY110 after spending
yesterday entirely below there. The dollar has recouped a big figure
after finding bids ahead of JPY109 yesterday. Firmer US yields helped. Today Japan
reported an unexpected cut in the Q1 GDP estimate to 0.3% from 0.5%.
Public investment and consumption were revised
lower, and oil inventories also
fell. The dollar may encounter resistance in the JPY110.50-JPY110.75
band.
Separately, Japan reported a larger than expected April current account
surplus. Remember Japan's current account balance is not driven by the trade surplus (~JPY553.6
bln in April), but the primary investment income (e.g. coupons and dividends,
profits on foreign investment) accounts for the bulk of the remainder of the
JPY1.95 trillion surplus.
China also reported its May trade balance. It rose to $40.8 bln
from $38.3 bln in April. Exports rose 8.7% year-over-year. It is
the third consecutive increase in exports. Recall last year they fell at
an average pace of about 6%. Imports rose 14.8% after an 11.9% pace in
April. Imports were stronger than expected and that explains why the
trade surplus was smaller than expected. Imports of iron ore rose
by nearly 8% in volume terms year-over-year and nearly 68% in value terms so
far this year. Coal imports rose 133% in value and crude oil nearly
65%.
News that China's imports from the US rose 27% in May from a year
ago will likely be embraced as a success
of the US trade policy. China's exports to the US have risen
11.5% from a year earlier. After appreciating sharply (for the
yuan) at the end of May, it has reverted
to narrower ranges and small moves. Consolidation appears to be the
theme.
Lastly, we note that oil prices are stabilizing after yesterday's 5%
tumble. The drop was sparked by US
inventory data. It not only showed the first increase in US crude
oil stocks, but across the carbon
products, the inventories rose by 15.5 mln barrels, the largest weekly increase
in nine years. The US 10-year yields, which the dollar seems to be
particularly sensitive to, firmed yesterday despite the sharp drop in
oil. The yield is up a couple more basis points today at
2.20%, the highest this week and eight
basis point advance from Tuesday's low print.
Disclaimer
Thursday's Show
Reviewed by Marc Chandler
on
June 08, 2017
Rating: