European Outlook: Asian stock markets are slightly down, as banks and carmakers weighed on the index and the Yen held gains while investors look with some concern to political events in the U.S. In Europe, Draghi failed to calm tapering nerves yesterday and the EUR surged higher in the wake of the press conference, which saw Eurozone stock markets closing in the red. After the tumultuous afternoon, yesterday the GER30 seems to be heading for a quiet end to the week. The FTSE 100 outperformed yesterday and managed slight gains, amid a weak pound and could get some support today from reports that the government is accepting the need for a transitional period that will see the U.K. remaining in the single market and customs union for some time after 2019. Today’s data calendar is quiet, focusing on U.K. public finance data, although the ECB’s survey of professional forecasters could also attract some attention.
FX Update: The euro has been in consolidation mode after rallying strongly yesterday in the wake of the ECB’s policy announcement, which has left markets anticipating a tapering in QE, even it is still some way down the road. EURUSD has been settled in the mid-to-low 1.16s, below the 23-month high logged yesterday at 1.1658, although lifting somewhat in early European trade. EURJPY managed to edge out a fresh 10-day high, at 130.32. EURGBP has plied a narrow range just of yesterday’s eight-month peak 0.8977, weighed on slightly by a bid in Cable, which has lifted above 1.2980, putting in a little distance from the five-session low it saw yesterday at 1.2933. The UK’s international trade secretary, Fox, said that he is not planning on leaving the EU in 2019 without a deal, although the prime minster and other ministers had formerly used this “cliff edge” threat as an apparent bargaining tool in pre-negotiation salvos. Fox said that could be a two-year “implementation phase,” or transition period. His remarks help allay market concerns of divisions in the government’s approach to Brexit.
ECB’s President Draghi: Yesterday’s ECB meeting didn’t bring any real surprises. Rates and forward guidance were left unchanged and Draghi was eager to calm nerves ahead of the summer break as he tried to explain and clarify his comments from Sintra, which sent yields sharply higher at the end of last month. As Draghi said the last thing the ECB wants is for financing conditions to tighten prematurely and against that background, the central bank is not just keeping the easing bias on QE in place, but also remains reluctant to commit not just to actual tapering, but to the timing of the decision on the future of asset purchases. Also, yesterday Eurozone consumer confidence unexpectedly fell back to -1.7 in July from -1.3 in the previous month. Expectations had been for another improvement as labour markets continue to stabilise and inflation falls back again, but it seems lingering concern remains U.S. equities rolled over from highs coinciding with a surge in the euro through 1.16 and another whipsaw on yields. The presumption is that the ECB/euro/bund axis is still driving the volatile trade, but there was also a US AG Sessions presser expressing his wish to continue with his job at the Justice Department, along with others, despite criticism from President Trump.
U.S. reports: revealed a big Philly Fed drop to a still-solid 19.5, following a 7-month stretch of oddly robust levels, while initial claims tightened by 15k to 233k in the BLS survey week after lofty readings as we entered the July auto retooling period. We also saw a 0.6% leading indicators surge that left a 10-month string of gains. The Philly Fed drop accompanied an Empire State July decline to 9.8 from a 3-year high of 19.8 in June, while the ISM-adjusted Empire State fell to 53.3 from a 6-year high of 56.2, leaving a resumption of the drop-back in the available producer sentiment figures after an unexpected June bounce. The mix left a neutral signal for 190k July nonfarm payroll estimate, and an assumed GDP growth bounce to 2.6% in Q2 and 3.1% in Q3 after a 1.4% Q1 rate.
Main Macro Events Today
- CAD CPI – The CPI, expected, to dip 0.1% in June (m/m, nsa) after the 0.1% rise in May, leaving a slowing in the annual growth rate to 1.0% in June from the 1.3% y/y pace in May. Gasoline prices pulled back in June compared to May, which drives forecasts. The three core CPI measures remained tame in May, and are expected to be subdued in June.
- CAD Retail Sales – The Retail sales, expected to rise 0.3% gain in May after the 0.8% bounce in April. The ex-autos sales aggregate is seen improving 0.1% in May following the 1.5% surge in April. Gasoline prices tumbled 4.0% m/m in May after the 9.5% gain in April, according to the CPI. Hence, gasoline station sales should exert only a hefty drag on total and ex-autos retail sales. But vehicle sales were solid in May, which should support total sales.
- UK Public Finance data – June’s Public borrowing data is also up today, and expected to go down to 4.80B from 5.99B last time.
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