Kuroda Hesitates, Yen Advances, Focus Turns to Europe and North America

Bank of Japan Governor Kuroda appears to be the central banker that the
markets have the most difficulty in reading. 
The activist Governor
provide the barest of tweaks to what is by nearly any reckoning among the most
aggressive monetary policies by a high income economy.  Moreover, much of
the important data reported during the BOJ’s meeting, including inflation and
consumption were weaker than expected.  

The BOJ increased its ETF purchases from JPY3.3 trillion a year to JPY6
  This was the lowest
hanging fruit for the central bank, and there was broad agreement that this
step would be taken.  The BOJ also
doubled its dollar-lending
facility.  And that was it.  No,
cut in the negative deposit rate.  No additional JGB purchases.  No
pushing out the inflation target or increasing the JPY80 trillion monetary base

The market’s response was clear and not surprising.  The yen
strengthened.  The dollar spiked to JPY102.70 after having been squeezed
to JPY105.50 in the NY afternoon yesterday.  The JPY102.25 area
corresponds to a (61.8%) retracement of the greenback’s rally from the Brexit
low of JPY99 to last week’s high near JPY107.50.  Moving beyond that
retracement objective may embolden participants to look for another test on
JPY100.  On the topside, the dollar has been unable to retake the
JPY104-handle since the BOJ announcement.

Kuroda’s pledge of a comprehensive review of the monetary policy framework at the September 20-September 21
meeting is not the main focus now.
  However, it promises to inject
fresh volatility in the market after the summer.  Draghi also flagged the
September ECB meeting as important.  

Japanese government bonds sold off hard, with the benchmark 10-year JGB
yield rising eight bp, which leaves it is
minus 20 bp.
Japanese stocks overcame initial weakness to close
higher, with the Topix up 1.2% and the Nikkei gaining almost 0.6%.  On the
week both indices lost about a third of a percent.  Nearly all of the
other markets in the region fell, and Tokyo was sufficient to lift the MSCI
Asia-Pacific Index 0.5%, the fifth consecutive advance 13 of the past 15

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%. 

The initial estimate of GDP showed a 0.3% expansion, which was in line
with forecasts, and it follows a 0.6% expansion in Q1
.  The
year-over-year pace held in at 1.6% after 1.7% in Q1, which is seen as a bit better than a trend.   Details will be available in a
couple of weeks.  

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

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.

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

Separately the US reports the Chicago PMI, which is notoriously volatile
and the University of Michigan’s consumer sentiment report.  In addition
to the headline
, where consumer confidence remains elevated
even if not accelerating higher, the inflation expectations will be watched, as
the FOMC statement referred to survey-based measures as stable.  The 2.6%
pace expected for July matches the six- and 12-month averages. 

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. 


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