Dog Days of August Begin

The US dollar is trading with a small
upside bias in narrow trading ranges.
  The main news has consisted of
PMI reports, while investors continue to digest last week’s developments. 
In particular the BOJ’s underwhelming response to poor economic data and a
missed opportunity to reinforce the fiscal stimulus,
the dismal US GDP.  

China’s PMI readings were mixed.  The official manufacturing
reading slipped to 49.9 from 50, while the Caixin version rose to 50.6 from
48.6 ( a first reading above the 50 boom/bust in 17 months).   The official
reading, with a focus on large businesses, saw output and new orders slow,
while new export orders fell.  Caixin showed an increase in output and new
orders, while the slump in new export orders slowed.  

The yuan appreciated against the US dollar for the fifth session, the
longest run of the year. 
The yuan was fixed higher by the most in
five weeks.  Some are linking the yuan’s stability to several upcoming
events, including the World Bank may issue SDR bonds in the coming weeks, the
G20 meeting early next month, and the formal inclusion of the yuan in the SDR
in a couple of months.  On the other hand, today’s gains lack behind the
basket that the PBOC ostensibly is tracking.  The World Bank SDR bonds is
reportedly a small issue (500 mln SDRs)
to be issued in China’s interbank market.  

The eurozone manufacturing PMI came stood at 52 in July.  This is a touch better than the flash reading
(51.9) but slower than the 52.8 in June.  The improvement seemed to stem
from Germany, where the final reading was 53.8 rather than the 53.7 flash and
the 54.5 in June, which was a two-year high.  France was unchanged from
the flash reading for 48.6, compared with
48.3 in June.  It is the fifth month below 50.  Spain and Italy
softened more than expected. 

 Italy’s manufacturing PMI eased to 51.2 from 53.5.  It is
the lowest reading since January 2015.  The high for the year was set in April at 53.9.  Spain’s
manufacturing PMI fell to 51.0 from 52.2.    It is the lowest since December 2013.  

Rounding out the large European countries, the UK’s manufacturing PMI was
even worse than the flash report indicated.
The final reading stands at
48.2    The flash was 49.1.  In June the diffusion index
stood at 52.4, the highest level since January.    New orders
fell warning of downside risks.  The only positive straw to grasp was
export orders which were not as weak as the flash results.  The came on
the heels of the poor CBI outlook, which is the weakest since the end of 2012,
with a net of 3% of firms looking to cut output.    

Sterling fell a cent from the Asia session high near $1.3275 to the
European low near $1.3175. 
However, the fourth session, sterling is holding above the previous session’s
low.   A rate cut late this week is largely taken for granted, and
other measures (asset purchases and funding-for-lending) are widely anticipated.  The September
short sterling futures contract implies a one
bp higher now (44 bp) compared with the
pre-weekend close.  Support for sterling
is pegged near $1.3150.  

In Japan, the manufacturing PMI improved to 49.3 from the flash 49.0
It is better than the 48.1 seen in June, but it is the fifth
month below 50.  The Bank of Japan is the subject of much speculation
today.  First, a local paper reported that the BOJ might drop its 2% inflation target next month.  Second, there
is speculation that Kuroda may step down, accepting that his approach has not
generated the expected results.  

The dollar has been pinned today in the lower end of the 3.6 yen range
seen before the weekend.
  It has held JPY102.00, but the recovery
attempt in Tokyo found sellers in front of JPY102.70.   The reversal
of  JGBs has continued.  The sell-off
since the BOJ’s disappointment has seen the generic 10-year yield rise from almost -30 bp to -12
today.    The Nikkei rose (0.4%), while the Topix fell
(0.1%).  Financials were one of three sectors that rose (1.3%) in the
Topix (the other two were telecom and health care).  

European bourses are mixed, leaving the Dow Jones Stoxx 600 little
Of note, the financials are off 0.8% in the immediate
post-stress test response, the weakest sector.  Within the financials, the
banks are down as much as the sector.       Monte Paschi is
holding on to small gains, while the Italian banking sector is off 2.7%, giving
back a chunk of the pre- weekend’s 3.8%

La Stampa reports that Renzi wants to hold the constitutional referendum
in late-November.  Previously it seemed as if it would be held in October.
  It will be
interesting to see if Renzi tries to walk back his promise/threat to resign if
the referendum is not accepted.  Linking the government’s future to the
referendum seems reckless as it turns the plebiscite into a potential political

The euro is trading flat just below
the pre-weekend highs near $1.12
.  The
euro found support in the European morning near $1.1160.   It feels like bullish consolidation.  It may take a break of $1.1140 to shake out
some weak longs. 

The North American session features construction spending (with impact on Q2
GDP revisions) and the ISM manufacturing.
It is expected to be little changed
from June’s 53.2.  Markit is expected to
confirm its flash reading of 52.9, up
from 51.3 in June, and the highest since last October.  


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