Big Week Begins Slowly

What promises to be a busy week has begun off slowly.  The US
dollar has been largely confined to its
pre-weekend ranges against most of the major currencies.  

Equity markets are mostly firmer following the new record highs on Wall
  The MSCI Asia Pacific Index eked out a small gain (0.1%),
with losses in Japan, Taiwan, and Singapore offsetting gains elsewhere.  European markets are stronger, with the Dow Jones
Stoxx 600 up nearly 0.7% after having slipped lower in the previous two
  The only industry sector that is lower is energy, and
Brent is trading 0.5% lower though holding above $45 a barrel.  

Benchmark 10-year yields are mostly 1-2 bp firmer.  The JGB was
the exception; the 10-year yield eased
1.5 bp to minus 25 bp. Gilts are underperforming
but appear to be simply unwinding some of the response to the weak flash PMI
released at the end of last week.  

There have been three economic reports to note.  The first was
Japan’s June trade surplus of JPY692.8 bln, which was nearly half again as
large as the median expectation.  It follows a small deficit in May. 
Japan’s trade has very pronounced
seasonality.  Since 1999, there has been only one June that the trade
balance did not improve over May (2008).  

The improvement in the June 2016 trade balance was a function of both
stronger exports and weaker imports. 
Specifically, exports were
expected to have fallen 11.3% (year-over-year) to match the May decline but instead fell only 7.4%. 
Exports had fallen 13.8% in May and fell 18.8% in June.  Exports to the US
were off 6.5% year-over-year.  Shipments to the EU slipped 0.4%. 
China is Japan’s largest export market,
and it experienced a 10% drop.  

The focus is on the BOJ meeting at the end of the week.  Some
reports suggested that some BOJ members may be reluctant to adopt aggressive
measures.  A Bloomberg survey found that 78% of the 41 polled expect ETF purchases
to be expanded.  A little less than
half expect more JGB purchases.  Overnight swaps suggest the market is
pricing in the likelihood that the negative rate applied to a small part of
bank reserves may cut to minus 20 bp from minus 10 bp currently. 

The second economic report was the German
IFO survey.
  It did not show the same
degree of deterioration as last week’s ZEW survey.  The overall
business climate was assessed at 108.3, down from 108.7 in June but now as poor
as the 107.5 median estimate.  The
current assessment actually ticked up to
114.7 from a revised 114.6 (from 114.5).  
The expectations component
deteriorate the most but still not as much as expected.  The 102.2 reading compares with 103.1 in June
and expectations of a decline to 101.6. 

The third report was the UK CBI survey.  Total orders fell but not as much as expected (-4 from -2 and median forecast -6).  Selling prices rose to 5 from 1.  Bloomberg did not have a survey result.  Business optimism, however, tanked and this is what stopped sterling’s recovery.  CBI Business optimism fell to -47 from -5.  The median expectation was for a decline to  -15.   The survey was conducted between June 27 and July 23. 

In addition to the BOJ and FOMC
meetings, before the week is over the European Banking Authority stress test results
will be reported.
  Media reports
suggest that the troubled Monte Paschi is the only one of five Italian banks
not to pass.   According to Il Sole, the
capital ratio of three of the banks was
at the high end of the EBA’s range, and
one was in the mid- to upper end of the
range.   The FTSE Italia bank index was off another
0.3% near midday in Milan following a 0.5%
decline before the weekend. 

North American economic calendar is light, with only the Dallas Fed’s July
manufacturing survey on tap.
 The Democratic Party convention begins with
Wikileaks timed to embarrass and sow dissension grabbing attention.  The FOMC two-day meeting begins tomorrow, and
no change in policy is expected. 
Economists and investors are more inclined to see a hike in December
than September, with November meeting ruled out due to its proximity to the
national election.  


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