FX Daily, July 29: Kuroda Hesitates, Yen Advances, Focus Turns to Europe and North America

Prospects for the Swiss Economy Remain Favourable

KOF Economic Barometer

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Eurozone

In Europe, there are two main developments.  First, the economic data.   The preliminary July CPI estimate came in at 0.2% after 0.1% pace in June.  The market had expected a 0.2% increase, but after the firmer than expected German data yesterday, the risk was on the upside.  The core rate was steady at 0.9%.  The median guesstimate was for slippage to 0.8%.   June unemployment was steady at 10.1%.

FX Rates

We do know that the French growth disappointed by not there not being any.  A 0.2% expansion was expected.  However Q1 GDP was revised up to 0.7% from 0.6%  Spain’s 0.7% expansion may be the envy of most in Europe, but it matches the country’s slowest pace since Q3 14.    Separately, Spain reported an easing of deflationary forces.  CPI fell 0.6% from a year ago after a 0.8% fall in June.  Lastly, German retail sales disappointed by falling 0.1% (median forecast was for a 0.1% gain) and the May gain was shaved to 0.7% from 0.9%.

The second development in Europe today is the last minute private sector attempt to buy Monte dei Paschi, Italy’s troubled bank.  Reports indicate that a local businessman has proposed to team up with a Swiss bank, which is rivaling another offer from a US bank and an Italian bank combine.   The market’s initial response is favorable.  The Milan bank index is up nearly 4.5% near midday in Italy.   The gain is enough to turn the week positive, and it is the fourth consecutive week Italian banks have recouped some of the year’s steep decline.

The development in Italy is helping lift European banks.  While the Dow Jones Stoxx 600 is up 0.25%, the financials are the strongest sector, up 1.8% at pixel time.    Overall the index is up about 3.25% this month, which is its biggest advance since last October.

 The European bank stress test results will be reported at the close of the North American session today.  The potential deal for Monte Paschi may reduce the anxiety over the results.  Moreover, it is not as simple as a pass/fail grade, or specifying precisely how much capital particular institutions must raise.  However, to be credible require in the mind of investors many of whom are not convinced European banking challenges have been addressed, there must be some actionable results.

United States 

Attention now turns to North America.  US reports Q2 GDP and Canada reports May GDP.  The wider trade deficit and weaker inventories that were reported yesterday prompted economists to slash their forecast for today’s US report.  Many economists more or less matched the Atlanta Fed’s GDPNow tracker, which cut its estimate to 1.8% from 2.3%.  One thing to watch out for today is whether the more severe inventory correction in Q2 will increase the prospect for Q3 GDP and this may be seen in the NY Fed’s GDP tracker that is published on Friday’s.

Canada

Canada’s May GDP is expected to have contracted by 0.5%.  While Alberta’s fires and the related disruption did not help matters, the Canadian economy has faltered this year after a reasonably good Q4 15, which was the first quarter since Q2 14 that the economy expanded in each month.  Canada began the year with good momentum, and in January, the economy grew 0..5%.  And that’s been it.  Small contractions were reported in February and March before the 0.1% growth in April.  The Bank of Canada seems to be willing to write off the first half and anticipating (hoping?) for better traction in H2.

Oil prices are closing the week on a soft note and is not particularly helpful for Canada.  Oil prices are off    7.8% this week.  It is the largest weekly fall since January.  It brings the loss on the month to an eye-catching 15.7% on the continuation futures contract, the largest monthly drop since the end of 2014.