Markets Mark Time, Dollar Consolidates Losses

After falling to new lows for the year against several major currencies
in response to disappointing retail sales and uninspiring CPI before the
weekend, the US dollar has begun the new week on a more stable note. 
is firmer against nearly all the major currencies, though is mixed against the
emerging market currencies.   

The greenback’s gains have not been very impressive.  Nor have
they exceeded important technical levels.   Short-term participants
appear caught between the strong upside momentum by the major foreign
currencies and concerns that a key driver, the ECB may try to discourage the market from getting too far ahead of itself
in tightening financial conditions.  

Draghi can be expected to emphasize that the ECB extraordinary monetary
policy is aimed at putting inflation on a
sustainable and durable path toward its target (near but below 2%).
It is using all the appropriate tools in its
mandate to achieve its legal objective.  As of last month, it judged that
its goal was still not achieved and that the accommodative monetary policy
would continue until its objective was reached.

The German 10-year bund yield rose from 23 bp on June 26 to nearly 62 bp
last week. 
It is at 57.5 bp today.   The 50 bp was an important
hurdle on the way up, capping yields in January and against in March and
May.  This will be an important area
to watch as yields pull back.  
In comparison, Italy’s 10-year yield rose from 1.87% to 2.35% in the same
period.  It is now at 2.25%.  

While many, like ourselves, expect
the ECB to continue to buy bonds well into next year, there is some thought being given to the possibility that as it
reduces its purchases, the ECB focuses on some particular asset classes, like
corporate bonds and asset backed securities
.   Draghi’s
press conference will be closely watched
for clues, but the policy announcement is more likely to come in September than
now.  There is no urgency now, and
there will be new staff forecasts available, which the ECB seems to like to
link to policy changes. 

That said, the news stream is subdued
China’s Q2 GDP of 6.9%, the same as Q1, was the main economic news. 
It was slightly above the Bloomberg median forecast, though the
quarter-over-quarter rate of 1.7% was spot on expectations.  The June
monthly data suggest the economy finished the quarter with some momentum. 
Retail sales rose to 11.0% from 10.7% a year ago, which is the strongest pace
since the end of 2015.  Industrial output jumped to 7.6% year-over-year
from a 6.5% pace in April and May.  It matches March’s high, which itself
was the strongest pace since the end of 2014.   

The robust data from China may have helped underpin commodity prices. 
Iron ore rose 2.5% in China, and copper is up around 1%.  Aluminum is up
0.5%, while Brent is extending its advancing streak into a six consecutive
session, though WTI is flat.   Gold briefly traded above its 20-day
moving average (~$1233) for the first time in a little more than a month but is struggling to sustain the move in
the European morning.  

The market is still digesting the implication of last week’s
disappointing US data. 
The only data of note today will be the Empire
manufacturing report for July, one of the first peaks into the Q3 economy, and
after surging to its best level since 2014 in May, which seems to overstate the
case, a modest pullback is expected
Meanwhile, the corporate earnings season continues.  Among today’s
highlights are Blackrock and Netflix.  The Senate vote on a health care bill is unlikely to happen this week, and the CBO evaluation will be delayed.  Some last minute compromises
may still be possible, as there is little margin for error, with two Senators
already dissenting.   

Canada reports international securities transactions for May. 
Foreign demand for Canadian securities is running near last year’s pace. 
In the first four months of 2016, net foreign demand averaged CAD17 bln a
month.  This year’s average is CAD17.8 bln.    Canada also
reports June existing home sales.  They have fallen for the past two

Notable option expires today include nearly 910 mln euro struck at
$1.1450, $660 mln at JPY112.50  (and $506 mln at JPY113). 

Tomorrow there is a 1.1 bln euro option struck at GBP0.8764

Elsewhere, we note that the MSCI Asia Pacific Index extended its advance
for a sixth session today gaining almost 0.25%. 
  The Chinese
equity market was a notable exception to the regional advance.  Despite
the economic data, a concern that
officials were going to increase the enforcement of regulations and that the
PBOC was going to have more regulatory
authority, according to reports, appeared to weigh particularly heavy on small
cap shares.  The Shenzhen Composite was off 4.3% while the large cap
Shanghai was off 1.4%.     European shares are mixed, with a
heavier bias.   The Dow Jones Stoxx 600 is off about 0.1%, with
industrials, real estate and financials
gains from energy and materials.


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