The US dollar is mostly firmer, with the dollar-bloc under-performing.  Month-end flows appear to be favoring the euro though the Swiss franc is also firmer. While the dollar is within yesterday’s ranges against the euro and yen, it is firmer against sterling for the third consecutive session.

Asian stocks and bonds were mostly higher though Chinese shares fell.    In Europe, bond yields are slightly higher, and the equity markets are narrowly mixed. The Shanghai Composite fell 1.1%, bringing the monthly decline to 15%, which is the worst monthly performance in six years.  The Hong Kong China Enterpise Index which has previously held up better lost 14% in July, though only 0.1% today.  

Margin use has fallen by more than a third (down roughly $145 bln to $220 bln since mid-June peak through mid-week). Regulators reportedly have asked financial institutions in Hong Kong and Singapore for stock -trading recovers to help investigate investor behavior.

We identify eight things investors should know before the weekend:

1.   The combination of the FOMC statement and GDP report has generally increased the odds of a Fed hike in September.  Next week’s employment report is an important data point.  Weekly initial jobless claims did correct higher last week after falling to more than 40-year lows, but not as much as expected, and another ~220k increase in nonfarm payrolls is expected.   Today’s data includes Q2 Employment Cost Index. In the 2010-2013 period, the quarterly average was just shy of 0.5%.  It rose to 0.55% last year  and appears to be rising slightly faster this year.    The Chicago PMI is expected to rise back above the 50 boom/bust level after dipping below there in recent months.  In the last three quarters, the first month has been the strongest.  The headline was above 50 in January and April this year, only to fall below there in the other months.   The University of Michigan’s consumer sentiment report poses headline risk, especially if there is disappointment.

2.  Canada reports May GDP.  The consensus calls for a flat report.  It has fallen each month this year.  With the year-over year rate expected to slow to 0.8% from 1.2%, and oil prices under pressures, it is difficult not to see further Canadian dollar weakness.  The immediate target is last week’s high just above CAD1.31 though short-term technicals have been stretched by the sharp three-day advance from near CAD1.2860 in the middle of the week.

3.  The eurozone confirmed a 0.2% rise in July’s CPI.  What surprised the market was the upward revision to the core rate from 0.8% to 1.0%.   This matches last year’s high.  Although the euro ticked up on the news, we don’t think it changes anything.  We share the IMF’s concerns that the ECB will likely not achieve its inflation objective, and rather than end its asset purchase program early, the risk likes in the other direction.

4.  The US 2-year premium over Germany continues to trend higher.  It is one manifestation of the divergence of monetary policy.  Of course, it also is sensitive to safe-haven flows.  The premium is just below 100 bp today and is at the highest level since 2007.  Many basic models trying to forecast the euro-dollar exchange rate have a role for interest rate differentials.  As the bill market is subject to a number of distortions, economists often use the two-year differential as a key input.

5.  Japanese data was disappointing.  However, it is unlikely to change the outcome of next week’s BOJ meeting.  The unemployment rate ticked up (3.4% from 3.3%), and the job-to-applicant was unchanged (1.19) though the market had looked for improvement.  The main disappointment was with overall household spending.  It fell 2.0% year-over-year.  The market had expected an increase of nearly the same magnitude.  It makes the May increase (4.8%) appear as a fluke as it had broken the streak of contractions since the retail sales tax was hiked in April 2014.  The report underscores our fear that the Japanese economy probably contracted in Q2.  Separately, the inflation data was mixed, but key measures were a little better.  While the BOJ targets the core rate, which simply excludes fresh food, officials are keen to look past the drop in oil prices.  While the core rate was unchanged at 0.1% year-over-year, the measure that excludes food and energy rose to 0.6% from 0.4%.  The consensus was for an unchanged report.

6.  The immediate risk that the Greek government would collapse as early as this weekend eased as Syriza’s central committee balked at Prime Minister Tsipras’ offer to hold a party-referendum on the aid package.  A special party congress will be held in September, ostensibly after the completion of negotiations.   Greece’s track record of implementing reforms and the unsustainable debt level are the main reasons why a staff agreement with the IMF is not possible now.  However, this does not end the IMF’s involvement.  It will be still participating in the negotiations along with the IMF, ECB, EC and now going forward the ESM.  It could conceivably provide more funds once the implementation has begun, and EU devise a debt relief strategy.

7.  Commodities have had one of the poorest months in a few years.  It is not just oil.  Precious and base metals are near 5-6 year lows.  Wheat has fallen to the lowest level since 2011.    We note reports suggest that Saudi Arabia may cut back on output starting in September.  This is not surprising and is unlikely to impact their exports.  The kingdom is one of the few countries that burn oil for electricity.  After the summer months, it often reduces output that had been increased to provide for domestic demand.  The reduction in output is expected to be around 200-300k bpd, which would bring its production back to around 10.3 mln bpd.  According to the EIA, its average production in the 2006-2014 period was around 9.22 mln bpd.

8.  The fall in commodity prices, political challenges, and the short-dollar overhang weighed on emerging markets. Reports that cite the EPFR fund tracker note that in the week through yesterday $4.5 bln has left EM funds, bringing the three-week outflow to $14.5 bln, of which Asia accounted for $12.1 bln.   Asian-oriented funds saw $2.7 bln withdrawal this week. The MSCI emerging market equity index was off 7.7% this month.


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