Becalmed Markets

  • The relatively light news stream continues to facilitate corrective action in the capital markets
  • The Bank of England’s MPC recognized that the spare capacity in the labor market, and in the economy more broadly, is being absorbed
  • Yesterday, the BOJ’s Kuroda reiterated the central bank’s stance
  • Australia reported Q2 CPI, which was largely in line with expectations
  • The strong rally in the back of Brazil’s local rate curve yesterday left many market participants scratching their heads
  • South Africa June CPI came in lower than expected, reinforcing our call for the SARB keep rates on hold

Price action:  The dollar is mostly firmer against the majors but remains within very narrow ranges.  Sterling is outperforming, while the Scandies are underperforming.  The euro is trading around $1.0930, hanging on to most of yesterday’s gains.  Sterling is trading around $1.5625, while dollar/yen is near 123.80.  EM currencies are mixed, with KRW and MYR outperforming.  TRY and THB are underperforming.  MSCI Asia Pacific fell 1%, with the Nikkei down 1.2% and breaking a six session winning streak.  The Shanghai Composite posted a 0.2% gain, while the Shenzhen Composite rose 1%.  Nearly 20% of Chinese stocks are still not trading.  The Greek stock market still remains closed despite banks re-opening.  MSCI EM is down 0.6%.  Euro Stoxx 600 is down 0.3% near midday, while S&P futures are pointing to a lower open.  The US 10-year yield is flat at 2.33%, while European bond markets are narrowly mixed.  Gold is pushing below support around 1100, and further losses seem likely.  Oil prices are softer ahead of DOE inventory data, where a 1.45 mln barrel crude oil drawdown is expected.

  • The relatively light news stream continues to facilitate corrective action in the capital markets.  The advancing streak in global equities was broken while Chinese shares continue to stabilize after their recent dramatic slide.  Peripheral bond markets are giving back some of their recent gains.  The US dollar has been pushed from its recent highs but is largely in a consolidative mode.
  • Sterling underperformed yesterday but is back in the driver’s seat today.  It is the strongest of the major currencies, gaining around 0.4% against the dollar.  A base is seen now near $1.5530.  The upper end of the consolidative range is seen in the $1.5670 area.  Sterling was bolstered by the minutes from the recent MPC meeting.  Many suspect it will be the last time that there was a 9-0 vote for standing pat.  The tone of the minutes indicates that more than a couple MPC members see the call as finely balanced, especially if the risks emanating from Greece are reduced.
  • The Bank of England’s MPC recognized that the spare capacity in the labor market, and in the economy more broadly, is being absorbed.  It is possible that in August, three MPC members will vote to increase rates.  The likely candidates are Miles, Weale, and McCafferty.  Next month’s meeting is Miles’ last, and as his departing shot is likely to vote for a hike.  Weale and McCafferty have dissented previously in favor of hikes before rejoining the majority.  BOE Governor Carney has indicated that the rate outlook will be clearer toward the end of the year.  While the risk of a rate hike this year seems small, market participants seem divided between a hike in Q1 or Q2 2016.
  • The Nikkei’s six-session advancing streak ended today with a 1.2% decline.  It was dragged down by the sharp losses in US markets yesterday following disappointing earnings.  This saw the dollar extend yesterday’s losses after it posted a key reversal yesterday.  After first making new highs for the move, (to almost JPY124.50), the dollar was sold through Monday’s low to about JPY123.75.  Those losses were marginally extended to just below JPY123.60.  As the North American session is set to begin, the dollar is trading in tight ranges near its lows.
  • Yesterday, the BOJ’s Kuroda reiterated the central bank’s stance.  Inflation is likely to pick up from current near-zero levels, and there is no need to increase the asset purchase program now.  Separately, the Japanese government more than halved this fiscal year’s inflation forecast from 1.4% to 0.6%.  It expects CPI to rise to 1.6% in the next fiscal year.  It revised up to 2.9% (from 2.7%) its nominal GDP growth forecast for FY15.  However, real GDP growth was left unchanged at 1.5%.
  • Australia reported Q2 CPI, which was largely in line with expectations.  The headline rate rose 0.7% for a 1.5% year-over-year pace.  The Bloomberg consensus was for a 0.8% increase and 1.7% year-over-year after a 1.3% year-over-year pace in Q1.  The trimmed and weighted mean measures were slightly firmer than expected.  RBA Governor Stevens did not expand much on the recent insight gleaned from the minutes of this month’s central bank meeting.  A further decline in the Australian dollar is desirable.  Additional rate cuts remain possible.  Stevens sounded optimistic that non-mining investment will increase and the outlook for productivity.  The Australian dollar is little changed, within yesterday’s ranges.  There has been no follow-through buying after yesterday’s recovery.
  • The North American session features June US existing home sales.  A continued recovery is expected.  The May pace of 5.35 mln units is the best since 2009.  This report tends not to move the foreign exchange market.  During the New York morning/European afternoon, investors will be on watch for indications whether the ECB will allow for greater ELA for Greek banks.  It increased it by 900 mln euros last week.  Meanwhile, the Greek parliament will be voting on the banking resolution bill and reform of the judicial system.  Yesterday, the ECB was critical of Greece’s effort to transpose the banking resolution rules into domestic law on the grounds that it left too many technical issues in the hands of politicians.  For its part, the euro has been confined to a narrow range of less than half a cent in the upper part of yesterday’s range.
  • Late in the North American session, the Reserve Bank of New Zealand is expected to deliver a 25 bp cut in the cash rate.  Of the 19 economists surveyed by Bloomberg, 18 expect a 25 bp cut and one expects a 50 bp move.
  • The strong rally in the back of Brazil’s local rate curve yesterday left many market participants scratching their heads.  After all, inflation is rising and, if anything, the fiscal situation is becoming more tenuous, despite good intentions and some encouraging words from Finance Minister Levy yesterday.  Also, the risk of a credit downgrade is rising.  Still, rates fell as much as 18 bp, flattening the curve.  For us, this move in rates reflects a simple combination of factors: (1) monetary policy will remain tight; (2) The government will try to the best of its powers to continue the fiscal adjustment; (3) the economy is weakening faster than many had expected. Anecdotal reports also suggest that foreign inflows are picking up.  Brazil reports mid-July IPCA inflation today, expected at a cycle-high 9.28% y/y.  Let’s see if the rate curve can maintain the rally.
  • South Africa June CPI came in lower than expected, reinforcing our call for the SARB to keep rates on hold.  The rate came in at 4.7% y/y vs. 4.6% in May.  Consensus was 5.0%.  The central bank meets tomorrow and the market is split.  Of the 31 analysts polled by Bloomberg, 17 see a 25 bp hike to 6% while the rest see steady rates at 5.75%.  We do not think a rate hike is the right call now.  Inflation is not coming from the demand side, and will likely be driven by a weak rand and external developments.  And now with oil prices coming off again, there is one less argument for early tightening.