Monday Morning Blues

The US dollar is enjoying a respite from the recent selling, but its
gains have been shallow, and will likely prove brief.  
upticks have been concentrated in the
recently high-flying dollar-bloc currencies, and sterling.  The tone
appears to be more consolidative than corrective, and month-end adjustment provides an additional wrinkle.

The two main political issues are in the background, pending additional
The North Korean ICBM test spurred new drills by the
US, South Korea, and Japan.  The new South Korean President, who initially
halted the deployment of the US missile defense, reportedly is seeking more
launchers.  The South Korean won appreciated by about 0.25% against the US
dollar, bringing the gain in July to a little more than 2.2%.  It is the
strongest Asian currency this month.   

Korean share edged slightly higher
and continued to underperform within the region.
  The MSCI Asia
Pacific Index gains 0.3% today to bring the monthly rise to 3.65%, the most
since January, and the seventh consecutive advancing month.  The Kospi was
was up less than 0.1% today and nearly 0.5% for the month, though it is the eighth-month advance.  

The other political story is the defeat of the Republican effort to
repeal and replace the national health care system.
  It is not clear
the next step in the saga, but health care will have to be revisited.  In the meantime, a reshuffle of some posts in
the White House may help gear it up for
the next challenges of tax reform, though without health care reform and the
border adjustment tax., plans may have to be re-examined.  The debt
ceiling and spending authorization crunch come
in late September, while the summer recess provides additional time

There have been four economic reports to note today.  Japan was the
first out of the block
.  June industrial output rose 1.6% after a 3.6%
fall in May.  Industrial production rose 1.9% in Q2, its best quarter in
three years.  Autos, parts and information technology was particularly
strong.  Improved global demand is helping prime Japan’s economic pump,
and last week Japan reported the first increase in overall household spending
for the first time in more than a year.  Some secondary data, like housing
starts and construction orders, lend
credence to the idea that it is not just the external sectors in Japan that are
hitting their stride, but the domestic economy is enjoying the stronger activity as well.  

China reported softer July PMI readings.  The manufacturing PMI
eased to 51.4 from 51.7.  It averaged 51.5 in H1 and 50.3 in 2016. 
Manufacturing production fell 0.9 to 53.5, and new orders slowed to 52.8 from
53.1.  The non-manufacturing PMI slipped to 54.5 from 54.9. While services
slowed to 53.1 from 53.8, construction rose to 62.5 from 61.4.   This matches the average from H1 and remains
above last year’s average of 53.7.    The Caixin PMIs will be reported tomorrow.  

Of particular interest will be news that the steel PMI rose to 54.9, the
highest since April 2016, and steel output remained at 58 for the third month.
New orders and exports rose.  This
helped boost iron prices.  The benchmark is closing about 6% higher this
month after 14% gain in June.  Stronger construction demand, while China
has closed some factories, appears to have created a shortage of reinforced

There were two economic reports from Europe to note.  First, the
preliminary July CPI was unchanged at 1.3%, and in line with
expectations.  Unexpectedly, the core rate ticked up to 1.2% from
1.1%.  The core rate is the highest in three months.  Bloomberg
carried a story about ten days ago, citing “euro-area officials familiar
with the matter” that the ECB may not decide
on its asset purchase program until October.  We suspect the ECB prefers
to make such announcements when it has the cover of new staff forecasts, and these are provided in September,
albeit before the German elections later in the month.  We do not see the
tick up in the core CPI measure as changing the ECB’s assessment that inflation
is not yet on a self-sustaining path toward the target.  

Second, the eurozone reported an unexpected decline in unemployment. 
June unemployment stands at 9.1% after the May rate was revised down to 9.2%
from 9.3%.   It is the lowest since February 2009.  The unemployment
rate was 10.1% in June 2016. 

It is striking that the euro ticked up on the news but quickly surrendered the gains.  Support has been
found a little above $1.1720.  There is a nearly 530 mln euro option
struck at $1.1750 that expires today.   The pre-weekend price action
took place within the roughly  $1.1650-$1.1775 trading range on July
27.   The dollar extended last week’s loss against the yen, slipping
to JPY110.55.  So far, today is the first day of June 15 that the dollar has not been above JPY111.00. 
Sterling dipped briefly below $1.31 in late morning deals in Europe, but it appears poised to recover in North
America.   The US dollar bounced against the Canadian dollar, but sellers emerged near

The US session sees Chicago PMI (weaker), pending home sales (firmer),
and the Dallas Fed manufacturing survey (lower).
  Tomorrow see
personal income and consumption, ISM, and auto sales.  Canada reports
industrial product and raw material prices.  Both the US and Canada report
jobs data at the end of the week.  


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