Active Stocks and Bonds Contrast with Subdued FX

The foreign exchange market is quiet and mixed.  The focus is on
the weakness of global equities and the continued sell-off in European
bonds.  The eventful week that sees
the Fed, BOJ, and BOE meet, US employment report, PMIs, and EMU GDP, inflation
and unemployment are starting

The weekend news from the US over the controversial actions on refugees,
immigrants, including green card holders, is an obvious talking point, though
with seemingly little impact on the capital markets.
  The dollar, for
example, largely recovered from the losses seen initially in Asia, where
participation was thinned in any event
due to the Lunar New Year celebration is many countries, including China
(including Hong Kong and Taiwan), South Korea, Singapore,
and Malaysia.  

The Nikkei’s 0.5% loss broke a three-day advance from the end of last
  Losses were led by
financials and telecoms
.  Consumer staples were the strongest sector, gaining 0.2%.  This comes as Japan released disappointing
retail sales figures for last month.  Retail sales fell 1.7% in
December.  This was more than three
times larger than the Bloomberg median forecast of a 0.5% decline. The
year-over-year rate fell to 0.6% from 1.7%.  Consumer spending remains a
soft spot for the world’s third largest economy, and this point will likely be
driven home tomorrow.  

The economy is finding better traction (expecting industrial output to
have risen 0.3% in December for a 3% year-over-year pace), and the labor market is tight (December unemployment to be reported tomorrow will likely show a steady
3.1% unemployment rate). 
Overall household spending remains soft
(December figures will be reported tomorrow and are expected to have fallen
0.9% year-over-year) and a 4.4% decline in December 2015 and a 3.4% falling
December 2014).  

After poking through JPY115 at the end of last week, the dollar could not
sustain the upward momentum
. It was sold a little through JPY114.30 before
rebounding back to almost JPY115.00 by early Europe.  Initial support may be seen in the JPY114.30-JPY114.50

European stocks and bonds are under pressures.  The Dow Jones
Stoxx 600 is off almost 1.0% near midday in London.  The second consecutive losing session is led by energy
and financials
.  It may be the biggest drop since November. 
Italian bank shares are off 3.2%, and it
is the third consecutive decline (for around 6%).  The proximate cause
today are reports that the ECB has demanded improvements in Italy’s largest
bank’s plans to address the bad loans (by the end of next month). 

European bonds are under pressure.  Greek bonds are getting
crushed, with the 10-year yield up more than 20 bp and the two-year yield
surging 50 bp.  The failure of the Eurogroup to find common ground last
week coupled with a sobering IMF report, reiterating its position that the
situation is not sustainable.   Greece has about 13 bln euros of bonds
maturing in H1 17.  The Eurogroup is seeking additional concessions, and Greece is
balking.    Portuguese and Italian bonds are 7-8 bp lower, while
most eurozone benchmark yields are 2-4 bp
higher, with German Bunds outperforming.  

There are two main economic reports from the euro-area today. 
Spain reported a 0.7% rise in Q4 GDP.  This
in line with the consensus.  It is the same pace as in Q3, but
slightly slower than in Q1 and Q2.  The year-over-year pace is 3%, down
from 3.2% in Q3.    German states
reported January CPI figures.  Higher energy and transportation costs are
pushing the nationwide figure closer to 2%  (1.7% in December). 
There is some risk that the core measure eased.  

This is important because the
uptick in inflation primarily reflects the vagaries of energy prices, lower
last year and stronger now.
  There may also be some impact from the
past decline in the euro.  The ECB has been putting more emphasis on the
core rate to decipher the underlying signal.  The eurozone aggregate estimate will be released tomorrow. 
Headline CPI rose from 0.6% to 1.1% in December.  It is expected to have
accelerated to 1.5%-1.6% in January.  However, the core rate bottomed at
0.6% and has been 0.8%-0.9% since last
May; stable but little traction.  

The euro was bid to $1.0740 initially in
Asian turnover and had fallen back to $1.0690 before the European
session began in earnest.
  The intraday technicals suggest the first
move in North America may be higher.  Re4call that last week, the euro was
blocked several times in the $1.0770 and recorded the lows for the week just
below $1.0660 last Thursday and Friday.   

The US reports December personal income and consumption expenditures. 
The data from these reports were contained
in the preliminary Q4 16 GDP estimate seen before the weekend.  A gain in pending home sales will be seen in the context of the 2.5% decline in
November.  The year-over-year rate may tick up slightly from 1.4% in November.  The Dallas
manufacturing activity report is for January, and we suspect there may be scope
for a small upside surprise given the strong momentum and recovery of the oil
sector.  It stood at 15.5 in December, for the fourth monthly improvement
in a row.  Last January it reached its cyclical low of -34.6.  The
main focus is on this week’s FOMC meeting and employment report at the end of
the week. 


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