Euro Strengthens With ECB in the Spotlight

July 20, 2017

The euro advanced 0.6% against the dollar and is not far beneath $1.16. The dollar otherwise climbed 0.4% relative to sterling, 0.3% versus the yen and Aussie dollar, 0.2% relative to the yuan and 0.1% versus the peso. The dollar dipped 0.1% against the Swissy and loonie.

WTI crude oil rose 0.4% to $47.31 per barrel. Comex gold slid 0.3% to $1,238.40 per ounce.

Ten-year German bund and Japanese JGB yields are steady. The 10-year Treasury yield dipped 2 bps, while its British counterpart is a basis point firmer.

Equities advanced 0.6% in Japan, 0.5% in South Korea and 0.4% in China but fell 1.0% in Singapore and 1.1% in New Zealand. European stocks are generally higher. The DOW hasn’t move much at all.

The ECB Governing Council reviewed policy and left all settings unchanged. No fresh clues on forward guidance were signaled. While growth indications have been good, officials want to see more data before nailing down a timetable on tapering quantitative easing. The current plan is to keep buying assets at a pace of 60 billion euros a month until yearend. That’s been in place since March 2016. Also since then, the refi rate has been at zero and flanked by a negative 0.4% deposit rate and a MLF rate of +0.25%.

The Bank of Japan left policy targets unchanged. The overnight money rate is negative 0.1%, and the 10-year JGB is being kept near zero with central bank purchases around 80 trillion yen per year. The Board revised down projected inflation to 1.1% this year, 1.5% in 2018 and 1.8% in 2019 despite bumping up projected growth to 1.8% this year followed by 1.4% in 2018 and 0.7% in 2019. These forecast were contained in an updated Outlook. Most tellingly, the projected time for attaining the 2% core inflation target was pushed back by 12 months to April 2019.

The South African Reserve Bank as expected sliced its repo rate to 6.75% from 7.0%. The move constitutes a directional reversal. There had been 6 hikes from January 2014 to March 2016, lifting the rate by 200 basis points to 7%. The backdrop to today’s decision involves better inflation prospects but worsening growth and a steadier rand.

Released Japanese data today showed

  • A JPY 440 billion customs trade surplus in June, slightly less than forecast. Exports and imports were 9.7% and 15.5% above year earlier levels. The seasonally adjusted trade balance improved.
  • The all industry index, a monthly supply-side proxy for GDP, fell 0.9% in May, but its on-year rise of 3.0% showed progressive improvement from 2.1% in April, 0.8% in 1Q and 0.5% in 2016.

Australian labor statistics were mixed. The jobless rate in June stayed at 5.6%. While full time workers jumped 62K, part-time employees fell 48K. Lots of distortion.

German producer prices were unchanged on month in June and decelerated to a 2.4% on-year pace from 2.8% in May and 3.4% in April. The Czech Republic and Hong Kong also reported price data with lower on-year comparisons.

Euroland consumer confidence weakened to -1.7 in July from -1.3 in June. July’s reading was the second best of 2017 and compares to -5.2 last December.

Euroland’s current account surplus widened to a seasonally adjusted EUR 30.1 billion in May from EUR 23.5 billion in April.

The Philly Fed manufacturing index for July reflects a significant slowdown of factory activity in the region. The U.S. index of leading economic indicators jumped 0.6% in June, three times the improvements in both April and May. U.S. jobless insurance claims last week dropped 15K to a mere 233K.

British retail sales bounced back in June, rising 0.6% on month and 2.9% on year.

The Swiss trade surplus in June narrowed 17% in June.

Copyright 2017, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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