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#Post#: 76--------------------------------------------------
Disappointing Euro Area and Japanese Data Underpin Greenback
By: fxvictory Date: October 1, 2014, 3:11 am
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Ahead of the ECB's meeting on Thursday where details of the
ABS/covered bond purchase scheme are expected to be delivered,
the market is particularly sensitive to developments that could
spur a strong policy response. Today's preliminary September CPI
figures were seized upon to drive the euro to fresh lows,
against both the dollar and sterling.
The disappointment was not so much with the headline rate that
slipped to 0.3% from 0.4%, though after yesterday's somewhat
firmer than expected Spanish and German readings, there was hope
of a slightly better report. Rather the problem was with the
core rate, which the ECB does not give as much importance too in
their rhetoric as the Federal Reserve. It unexpected slipped to
0.7% from 0.9%. After testing the $1.2700 area in Asia, but
midday in Europe, the euro was pushed through $1.26. The $1.25
level is the next obvious target.
The news also helped lift Spanish and Italian bonds, and helped
buoy the equity markets. Greek bonds continue to under-perform.
The benchmark 10-year yield is up about 25 bp to bring the
increase to almost 70 bp. We are picking up growing concern
among investors about Greece's next year's presidential election
and the possibility that it forces new parliamentary elections.
This in turn is thought to increase the likelihood of a Syriza
victory and its anti-EMU stance.
Earlier in the European morning, France and Germany reported
better consumption data. Household consumption rose 0.7% in
France. The market had expected a 0.3% decline after the 0.9%
rise in July. The 1.4% year-over-year rate in August was twice
what the market expected, though down from the 1.8% reading in
July. For its part, Germany reported a 2.5% increase in August
retail sales. The markets expected a 0.5% increase after the
disappointing 1.1% decline in July. Separately, Germany reported
an unchanged unemployment rate (6.7%), but the second
consecutive increase in the number of unemployed (12k), which is
also the fourth increase in past five months.
The euro drew little comfort from the constructive consumption
data but reacted strongly to the disappointing CPI report. This
says as much about speculation that the ECB will be forced to
take more action as it does about the market's bearish stance to
the euro. Meanwhile, Germany's Sinn, who previously made a stir
about the Target2 imbalances, which have been reduced, has an
op-ed piece that urges a constitutional challenge to the ECB's
asset purchase plans, The European Court of Justice is expected
to make deliver a judgment on the OMT challenge toward the
middle of October.
The small upward revision to the UK's Q2 GDP to 0.9% from 0.8%
is lost in the shuffle. There is more talk about a third Tory
backbencher defected to the UKIP. However, the Swedish and
Norwegian currencies are strong. The krona is extending
yesterday's gains against the euro spurred by its strong retail
sales report. The euro is approaching the lower end of its
three-month trading range near SEK9.12. Norway reported slightly
disappointing retail sales data today (0.6% vs 0.8% expected),
but news that the central bank will buy NOK250 mln a day in
October, was more than twice as large as expected and helped
underpin the krone. The euro is testing support around NOK8.10.
Asian news is mostly disappointing. The HSBC manufacturing PMI
for China slipped to 50.2 from the 50.5 flash reading. It is
unchanged compared with August. South Korea reported an
unexpectedly sharp drop in August industrial production. It
slumped 3.8% on the month. The consensus was for a 0.1% gain
after an upwardly revised 1.5% rise in July (initially 1.1%).
Japan also reported disappointing industrial output figures.
August was expected to have seen a 0.2% increase in output.
Instead, it fell 1.5%. On a year-over-year basis, industrial
production is off 2.9% in Japan. Separately, overall household
spending is 4.7% lower in August from a year ago. The market
expected only a 3.6% decline. This negates the stronger, but
narrower measure of retail sales, which rose 1.9% in August,
considerably more than the 0.5% expected.
Japan did report some better data as well. The unemployment rate
fell to 3.5% from 3.8%. This was not expected. Cash earnings
rose 1.4% in August (year-over-year). The consensus was for a
0.9% increase. The July series was revised to 2.4% from 2.6%.
Base wages rose 0.6% year-over-year, which the fourth monthly
gain and twice the pace of July. However, when all is said and
done, the fact is real wages are 2.6% lower than a year ago
compared with 1.7% lower in July. It is the 14th month that
wages have not kept pace with inflation.
We anticipate the weakness of the yen will boost inflation, and
in turn, this will take off some pressure off the BOJ to do
more. The economic weakness was a function of the fiscal policy
(sales tax hike), and fiscal policy will have to be used to
address it. A supplemental budget is given, the key issue not is
the size. The Q3 Tankan report is out first thing on Wednesday
in Tokyo. Softer sentiment is expected across the board.
Data from the US today tend not to be market movers. These
include July CaseShiller house prices, where increases are
expected to slow, the Chicago PMI, which is expected to tick
down, and the Conference Board's measure of consumer confidence.
Canada reports July GDP, which is expected to have risen by
0.3%, the same as June.
There is still much discussion of the impact of the departure of
Bill Gross from PIMCO. Many observers suspect that his flagship
fund was long credit and short Treasuries. The price action
suggests that participants are trying to anticipate what the
likely redemptions will mean and some credit products have
traded heavily, while US Treasuries rallied yesterday.
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