Markets Looking for Next Cue

Investors await fresh policy clues as the Bank of England’s Broadbent is
seen as a key vote on a closely balanced MPC, while the Fed’s Brainard, is also
seen as a bellwether, will speak shortly after midday in NY.  
has not spoken since the election, and
his current views are not known

If he sides with the dissenting hawks, sterling
could rally and rechallenge the $1.30
On the other hand, if the Deputy Governor sides with Governor Carney,
as we suspect, sterling could return to sub-$1.29 area.  Note that
there are two large option strikes that expire today. At $1.2933 there is a
GBP400 bln that is on the bubble today,
and GBP773 struck at $1.30.

BRC sales figures were stronger than expected, rising 1.2% in June after
a 0.4% fall in May. 
This seemed
to underpin sterling, which largely held support seen near $1.2860
yesterday.  BRC cautioned that unseasonably warm weather boosted clothes
sales and higher food prices flattered the report.  Tomorrow, the UK’s
employment report will provide an update on wage pressures, which, at the
headline rate, may have slowed.   

The Fed’s Brainard express caution recently in the face of the four-month
slide in core prices (both CPI and PCE
  Little has been reported to make her less
cautious.   However, if she indicates that she is sympathetic to what
seems like a majority view that the decline in price pressures are due to
transitory factors it could neutralize her cautious stance.  Still, we
expect the Federal Reserve to announce the beginning of its balance sheet
operations at the September FOMC meeting to start in October, leaving the possibility of a third rate hike this year to

Brainard is not the only Fed news.  Late yesterday, reports
indicate that the White House has indicated it will nominate Quarles, formerly
in the G.W. Bush Treasury Department as the Vice Chairman of Supervision to the
Federal Reserve.  If Quarles is confirmed, and there is little doubt over
this, he would have a four-year term as in that role as Vice Chair and 14 years
as a Governor, (serving until 2032). Note that even though the Trump
Administration has been critical of Dodd-Frank,the appointment fulfills one of the law’s requirements.

The main economic news comes from Europe today, where Italy reported
stronger than expected industrial production for May. 
The 0.7%
increase on the month compares with the median forecast in the Bloomberg survey
for a 0.5% rise.  The April decline was revised to -0.5% from -0.4%. 
However, the year-over-year pace (work-day adjusted) was 2.8%.  Germany,
France, and Spain have reported their figures (all 1% of above), and the
aggregate figure is due tomorrow.  Industrial output in Q2 appears to be
running at its best clip in a couple of years.  

Japan dodged a trouble with its successful five-year bond auction
There was concern that although the BOJ drew a line before the
weekend to buy unlimited 10-year bonds, its defense did not extend to the
five-year.  Nevertheless, today’s five-year bond sale was
well-received.  The bid-cover was 4.85x, the highest in nearly three
years.  Nevertheless, yields stay elevated, and the focus shifts to
tomorrow’s scheduled BOJ short-end bond purchases.  

Separately, we note reports suggest that the BOJ has begun applying the
negative deposit rate to some deposits by foreign central banks and other
international institutions.
  If the deposits exceed a threshold
amount, they will be charged the market
rate (zero) minus five basis points.  As of the end of March, foreign
official accounts had about JPY13.6 trillion (~$119 bln) at the
BOJ.    Note that according to the IMF’s COFER data, the dollar
value of yen reserves at the end of Q1 was $403 bln.  

Oil prices briefly extended yesterday’s recovery, ostensibly helped by
talk that OPEC may seek to cap Nigerian and Libyan output.
prices reversed course after briefly rising through
yesterday’s highs.  The August light sweet crude was turned back from $45.  Yesterday’s low was set near
$43.65, while last month’s low was set
near $42.00.    US production increases and strong exports are seen blunting the impact of a decline in
local inventories.  

US economic data includes the JOLTS report and wholesale inventories and
  These are not typically market-moving reports.  The Fed’s
Beige Book is out tomorrow, and Yellen’s
semi-annual testimony begins.   Canada reports housing starts today
ahead of the Bank of Canada meeting tomorrow.  A rate hike is well discounted.  The Bank of Canada
appears to have initiated a campaign beginning in the middle of last month to
prepare the market for a hike.    Since May 5, the Canadian
dollar has been the strongest major currency, appreciating 5.7% against the US

The dollar is up against the yen for a third session.  It has
now edged through the May highs set near JPY114.35.   The next chart
point is near JPY114.60, but the JPY115 area is more psychologically
important.  The euro is consolidating in less than a 20 tick range through
the Asian session and most of the European morning.   The Australian
dollar edged higher for the third session today but it is finding the air above
$0.7600 is thin.  The three-day rally snapped a four-day down


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