- Digesting as expected Korea Q2 GDP, awaiting busy run of US data - Durables,
Trade, Inventories, Claims, KC Fed - but blockbuster run of US and European
earnings likely to dominate; Turkey and Colombia rate decisions
- Fed: markets' 'dovish' spin on Fed statement at best self-interest, at
worst 'wishful seeing'
- USD weakness morphing into EUR strength?
- US Durables: headline to be boosted by aircraft, some upside risks on
core measures if ISM orders are a guide
- US Goods Trade Balance: marginal narrowing expected, anecdotal data on
imports imply bigger improvement possible
- Chart: EUR/CHF
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** EVENTS PREVIEW **
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While there are the as expected South Korea Q2 GDP data to digest ahead of a busy run of US data, which includes Durable Goods Orders, Advance Goods Trade Balance, Wholesale Inventories and weekly jobless claims, today's schedule is dominated by US and European corporate earnings, which reach their peak for the week and cover companies in nearly all sectors. Markets have also put a very dovish spin on the tweaks to the Fed's language on current inflation, shifting from saying that inflation has been 'somewhat below' to 'below' target, though it stuck to the view that this will be transitory - this looks to be a case of markets having an asymmetric view of policy outlooks, borne on the wings of financial repression. Be that as it may the FOMC also changed the wording on balance sheet reduction to 'relatively soon' from 'this year', as such paving the way for a September announcement and a start in October. The US also completes this week's refunding with $28.0 Bln of 7-yr T-Notes. There are a couple of points worth making about the surge being witnessed in some EUR FX cross rates, most notably the EUR/CHF (see chart) which is set to challenge the post SNB 1.20 cap abandonment high of 1.1200, which underlines that the current move is now morphing from primarily being politically driven USD weakness into forcing longer-term EUR underweight positions to be covered. The other is that, as we go through this earnings season in the Eurozone, there is one bit of mythology that really needs to be 'called out' as a case of finding some (tenuous, though ostensibly plausible) reason for a rotation trade out of European stocks, and that is that a stronger EUR will hit exporters hard. Firstly a long-term look at German export performance relative to the fluctuations of the DEM and latterly the EUR highlights minimal impact, indeed the single biggest negative impact was from reunification, a time during which the DEM was weak. In point of fact the biggest impact of a stronger currency has tended be a reduction in the cost of (imported) raw materials, though this has a variable impact across companies and sectors contingent on hedging strategies. Last and definitely lest, this also ignores a critical point about the current upturn in the Eurozone, and that is that it is being paced by a recovery in domestic demand after years of being hampered by austerity, thus much of the pick-up in exports is in intra-Euro area trade, which is of course not subject to any currency risks!
** U.S.A. - Durable Goods, Trade Balance **
- As the consensus of 3.7% m/m for headline Durable Goods Orders makes clear, a substantial boost from aircraft orders (both civilian & military) which will be more a case of mean reversion from May's weakness. Core Orders measures are expected to post modest gains of 0.4% m/m ex-Transport and 0.3% m/m for non-defence Capital Goods ex-Aircraft, signalling a relatively substantial loss of momentum in Q2 relative to Q1's buoyant growth levels. The anecdotal evidence has been mixed, with the June ISM Orders index surging back towards the year's high, while Markit PMI Orders languished at its lows. As ever it is Shipments (forecast 0.3% m/m), which need to be watched for any last minute tweaks to forecasts for tomorrow's Q2 Advance GDP estimate, as will the Advance Goods Trade Balance, where a further modest narrowing is seen to $-65.5 Bln from May $-66.3 Bln, with oil import data suggesting there is some risk of a narrower deficit. However this would still imply that Trade or rather Net Exports are likely to make a modest (ca. 0.2 ppt) deduction from Q2 GDP.
from Marc Ostwald