Mixed Dollar as Market Awaits Preliminary EMU CPI and US Jobs

With the backdrop of US interest rates unable to get much traction,
despite the strong probability of another
Fed rate hike in a couple of weeks, the third since last November election, the
US dollar mixed today.
   The chief story today, though, is not
the greenback but the euro.  The euro is trading heavily for the fourth session.  

The single currency approached $1.1270 last Tuesday and approached
$1.1100 today (~$1.1110 low in late Asian turnover).
  It recovered to
$1.1160 in the European morning but may
struggle to maintain the upside momentum as the market await the return of US
participants from the long holiday weekend. 

The euro was pulled lower by two main developments:  Draghi’s
comments to the EU Parliament yesterday and the prospects for an early Italian
  Draghi was clear.  While the tail risks have
diminished “materially,” the region still requires extraordinary
monetary support.  The improving economy is necessary but insufficient. 
The inflation outlook is still not on a self-sustained path toward the
target.  The removal of the explicit promise to cut rates further if need and/or the adjustment of risk to a more
balanced stand would simply confirm what the market already knows.  

These expected adjustments to the ECB statement are not the same thing as exiting the unorthodox policies (QE and
negative interest rates) anytime
That is to say that the Federal Reserve will likely hike rates
more than once and begin shrinking its balance sheet by the time the ECB stops
its asset purchases (H1 2018?) or have a positive deposit rate.  

While political anxiety has eased in Europe following Macron’s victory in
France,  and the CDU’s strong showing in state elections, the prospects of
an early Italian election has emerged as
a new political risk
.  It will be clearer in a week’s time, but the
major political parties appear to be moving to an agreement on political reform
that will pave the way for an election in the September-November

On the one hand, by getting rid of
the bonus seats for the party with the most votes, the possibility of Five-Star
Movement victory would be reduced. 
On the other hand, an election
would stall reforms and increase uncertainty.  Indeed, the high threshold
for parliamentary representation would jeopardize the sitting caretaker
government which depends on a small center-right party which has threatened to
go into opposition unless the threshold is

Italian assets underperformed yesterday.  Today, the relative
performance is mixed.  The debt market and banks shares continue to trade
heavily.  The 10-year yield is up 10
bp since the end of last week.   The two-year yield is up three basis points but is still in negative
territory.  Banks shares are off for the fourth session, though the FTSE
MIB is trying to recover from initial losses.  

Secondarily, the failure of the official creditors to agree on a debt
relief deal with Greece continue is beginning to take a toll on the short-end
of the Greek curve.
  The ECB still does not include Greek bonds in its
asset purchases.   A new payment for the aid package is needed for
the country to service its official debt in the coming months.  Meanwhile,
despite talk of Greece wanting to bring a debt offering to market, it continues
to look as if the country will need a new aid package next year, but ahead of
the German election, it may not be discussed
The inability to agreed on debt relief does not auger well for IMF
participation, even though the German and Dutch Parliament
requires it.  

Meanwhile, the social media is still fawning over Merkel’s weekend
campaign speech in which she called upon Europe to recognize that its Fate is
in its own
hands, and it could not entirely rely on the US.
  Many insist that
this is some sort of watershed.  Yet we have heard both the calls for a strong
independent Europe and the “unreliability” of the US many time. 
Recall the Suez Crisis where the US threatened the UK with intervention against
sterling and denying it an IMF package unless it withdrew its forces from
Egypt.  And there was the French exit from the joint command of
NATO.  When Reagan insisted on deploying theater nuclear weapons in Germany, the alliance was strained.  The war in Vietnam and the invasion of Iraq
after 9/11 also tested the relationship.  

Japan report employment and consumption data.  The unemployment
rate was unchanged at 2.8% in April.  The job-to-applicant ratio jumped to
1.48 from 1.45, which is a bit more than expected.  This appears to be a new record high.  The tightness of the labor market has not
fueled strong wage pressure or consumption.    Overall household
spending fell 1.4% from a year ago.  The market was looking for
improvement after a 1.3% drop in March.  The
last time overall household spending was higher than a year ago was in February
2016, which itself was the first time since August 2015.  

The surprise of the day goes to Sweden.  Its Q1 GDP rose half of
what was expected, and Q4 16 GDP was revised lower.  Growth was estimated
at 0.4% in Q1, while the median of the Bloomberg survey was 0.9%.  The
downward revision trimmed Q4 16 GDP to a still robust 0.7% from 1.0%.  
The krona is the weakest of the majors, losing about 0.5% against the
dollar.  The euro had pulled back after testing SEK9.80 last week, its
highest level this year.  However, it was losing momentum near SEK9.70 and
is bouncing off that today.  

Ahead of this week’s preliminary eurozone CPI, German states and Spain have reported their
figures.  Spain’s CPI was flat in May, pushing the year-over-year rate to
2.0% down from 2.6%. 
German states reported a 0.4-0.5% decline in the
year-over-year rates.  The table is set
for a decline in the year-over-year rate for the country to 1.5% from

The US reports April personal income and consumption data. 
Personal spending is the key to GDP forecasts,
and a 0.4% increase is expected after a
flat March.  The upward revision to Q1 GDP reported last week was in part
due to an improved picture of consumption,
and this could be picked up in back month
revisions today.  The core PCE deflator may tick down to 1.5% from 1.6%
but is still not sufficient to reduce the odds of a Fed hike in a couple of
weeks.    S&P CoreLogic house
prices and the Conference Board’s consumer confidence measure are not the stuff
the usually moves the foreign exchange markets.   The main economic
focus is on this week’s employment data, where solid even if not spectacular report is expected.  


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