An Eventful Day

We highlight six main events for global investors today. Three have already taken place: the BOJ meeting, Chinese data, and the UK labor report. Three remain: Greek parliament vote, Bank of Canada meeting, and Yellen’s semi-annual testimony.

  • The Greek parliament must pass pension and tax reform measures today
  • The new wrinkle in the Greek drama is that the IMF seems to be hardening its stance
  • The Bank of Canada meets today amid growing speculation of a rate cut
  • The Bank of Japan policy is on hold.
  • China’s data was better than expected, while that in the UK was worse than expected
  • Poland and Israel report June CPI

Price action:  The dollar is mixed in narrow ranges.  The euro has been sidelined into a little less than half a cent range so far today, well within yesterday’s range.  While the market still seems inclined to sell into even small euro bounces starting near $1.1050, the downside has proven resilient as well.  The dollar is also within yesterday’s range against the yen, trading at ¥123.60.  It has taken out the downtrend line from early June (now a little below ¥123).  The five-day moving average is set to cross above the 20-day average.  The next immediate target is ¥124.00-40. The pound is outperforming at around $1.5650, despite weaker employment data.  The Shanghai Composite fell 3.0% despite the positive Chinese economic data.  The Nikkei was marginally higher, while Euro Stoxx 600 is flat near midday.  S&P futures are pointing to a lower open.  Global sovereign debt yields are a few basis points lower.  After a volatile session yesterday, oil prices managed to close over 1.5% higher, but are giving back part of these gains today.

We highlight six main events for global investors today.  Three have already taken place: the BOJ meeting, Chinese data, and the UK labor report.  Three remain:  Greek parliament vote, Bank of Canada meeting, and Yellen’s semi-annual testimony.

The Greek parliament must pass pension and tax reform measures today.  Although Tsipras is likely to suffer defections from Syriza, the three main opposition parties with 106 votes in the 300-seat parliament have united to support the reforms.  Syriza and its junior coalition partner have 162 seats.  Even if the Syriza defections double from the earlier motion to accept the reforms to 35, there is still a comfortable majority to approve the measures.

The new wrinkle in the Greek drama is that the IMF seems to be hardening its stance:  “Greek debt can only be made sustainable through debt relief measures that go beyond what Europe has been willing to do.”  If the IMF had insisted on this back in January-February, much time, money, and tearing of the social fabric might have been avoided.  In some ways, this is one of the consequences of the Greek referendum.  It has exposed the fissures among the creditors and within Europe.  It also brought debt relief into the conversation.  And if our analysis is right, Greece will once again act as the midwife to the institutional evolution of Europe.  The debt overhang in Greece is not resolved yet.  The larger debt overhang in wider Europe also remains unresolved.

Following the Greek parliamentary vote, the ECB will meet to discuss the ELA.  The re-opening of the banks requires liquidity provisions.  The Finance Ministry has indicated that the banks will not re-open tomorrow.  Even after the banks re-open, capital controls will remain in place.

The Bank of Canada meets today.  The weakness of early Q2 has prompted greater speculation of a rate cut, which would be the second one of the year.  The renewed drop in oil prices does not do Canada any favors.  The derivative markets suggest a 50/50 call.  We warn of the risk of a seemingly perverse reaction in the foreign exchange market.  A rate cut may see the Canadian dollar rally as was seen after the last cut, and some momentum traders see the US stalling near its old nemesis, CAD1.28.  The failure to deliver a rate cut would simply push out the expectation and could continue to weigh on the Loonie.

Yellen likely tipped her hand in the speech at the end of last week.  The FOMC expected the headwinds in Q1 to be transitory, and the economy has rebounded in Q2.  The pace of growth appears to be a bit below trend, but the labor market continued to absorb the slack.  If this continues, the Chair, who says her own views are near the FOMC’s central tendencies (making her a centrist on the Board), expects the Fed to raise rates later this year.  Greece and China pose some risks.  While those events should be monitored, policy is driven by domestic considerations.

The US reports PPI and industrial output while the Fed releases the Beige Book.  The July Empire State manufacturing report will also be released.  These may pose some headline risks, but do not have the heft to have a lasting impact.

The Bank of Japan policy is on hold.  As expected, it shaved this fiscal year’s growth to 1.7% from 2.0%.  It also pared its inflation forecasts.  This year was taken down to 0.7% from 0.8%.  Next year’s forecast was shaved to 1.9% from 2.0%.  The FY2017 forecast was left unchanged at 1.8%.  Nowhere does the BOJ project hitting its inflation target.  Yet Kuroda gave no hint that more QE is being considered.

China’s data was better than expected.  June retail sales rose 10.6% after 10.1% in May (consensus 10.2%).  Industrial output rose 6.8%.  The market had expected a modest decline from May’s 6.1% pace.  GDP in the second quarter was 7.0% year-over-year.  This is unchanged from Q1 and better than the 6.8% consensus forecast.  To argue about the precision and accuracy of Chinese data is to belabor the obvious.  Chinese shares fell today, however, with the Shanghai Composite falling 3% and Shenzhen falling 4.2%.   This is the second consecutive drop.  Reports indicate that 700 issues remain closed, while another 1240 fell the 10% daily limit.  Margin use rose for the third day.

The UK employment data disappointed.  The claimant count rose by 7k instead of falling by 9k as the market expected.  The 6.5k decline in May was revised to show only a 1.1k decline.   In Q1, the average monthly decline in the claimant count was 28k.  In Q2 it is 600.  The unemployment rate ticked up to 5.6% from 5.5%.  The focus has been on the average weekly earnings, which are reported with an extra month lag.  In May, they rose 3.2% (3-month year-over-year), up from 2.7%.  This was just below what the market expected.   Sterling has enjoyed a good bounce in recent days, rising from $1.5330 last Wednesday to $1.5675 today.  It is finding initial support now near $1.56, but a break could see another quick half cent move as momentum traders take some profits.

Malaysia’s June CPI came in a touch higher than expected at 2.5% y/y vs. 2.1% in May.  The central bank left rates steady at 3.25% last week, signalling comfort with the current macro backdrop.  Real sector data have been mixed recently, and so we think a more dovish stance may develop as H2 progresses.  However, political uncertainty is rising as the 1MDB investigation continues.  Last week, the police raided its offices and there are more unconfirmed links to PM Najib appearing.  We think the price of oil is a more important short-term driver for Malaysian asset prices, but the deteriorating political situation creates an entirely new set of medium-term tail risks.

Next up on the CPI roster are Poland and Israel.  Poland reports June CPI, expected at -0.8% y/y vs. -0.9% in May.  Low base effects should see the y/y rate return to positive territory in H2.  It then reports June real retail sales and IP Friday.  They are seen rising 5.7% and 7.0%, respectively.  Real sector remains robust, so we see steady rates for now.

Israel reports June CPI, expected steady at -0.4% y/y.  With deflationary conditions persisting, officials are unhappy with the firmer shekel and are likely to continue intervening to weaken it.  We think the risk of unconventional easing policies has lessened, however.  Political risk is rising ahead of the 2015/16 budget debate, with coalition members balking at proposed spending cuts.