• Commodities, commodity currencies continue to fall The dollar is mixed this morning vs the G10 currencies, up vs the commodity currencies as commodity prices fell further but down vs the safe-haven JPY and CHF. On the other hand, it’s up against almost all the EM currencies, the only notable exception being MXN, which recovered after the Mexican central bank announced that it would intervene to shore up the peso. So is this a general bout of risk aversion? Commodities resumed their decline; all the metals, both industrial and precious, are lower, as are most energy futures, while agricultural commodities are mixed. But stock markets were generally higher yesterday and are mostly up in Asia today too. Chinese stocks are the exception, but a 1% decline in the Shanghai Composite is nothing to get excited about nowadays.
• US GDP disappoints, but inflation rises = lift-off more likely Yesterday’s first estimate of US GDP was notable for the mixed picture it presented. Q2 GDP missed estimates, but Q1 was revised up sharply and now shows an expansion, instead of the contraction that was initially estimated. The revisions to earlier data weren’t so kind, however; 2012 and 2013 were revised down, as were two of the four quarters in 2014 (Q2 was unchanged and Q1 was revised up). The revisions suggest that trend GDP growth in the US isn’t as strong as had been thought. On the other hand, the core personal consumption expenditure (PCE) index for Q2 rose to +1.8% qoq SAAR from +0.8% qoq SAAR, bringing the Fed’s preferred inflation gauge quite near its 2% target. Fed fund rate expectations were up about 4 bps, but it was notable that the 2017 expectations rose a bit more than the 2018 expectations
• Perhaps the view is that with inflation getting closer to the target, the Fed may start tightening earlier than expected, but with trend growth apparently somewhat lower than people had thought, their terminal rate is not likely to be as high. The impact on the dollar should be supportive however as the market probably isn’t as concerned with terminal rates in the far distant future as it is with the expected timing of lift-off. Wednesday’s FOMC statement seemed much more confident about the labor market than about the inflation outlook, so the inflation outlook is now the limiting factor for a rate hike.
• Japan remains out of deflation, just barely Japan’s national CPI excluding fresh foods rose 0.1% yoy in June, the same pace of increase as in May and keeping Japan just barely out of deflation. Excluding energy as well it was up 0.6% yoy, which did show some acceleration in price increases from May’s +0.4% pace. On the other hand, household spending in the month was down 2% yoy, the 14th decline out of the last 15 months. Moreover the unemployment rate rose while the job-offers-to-applicants ratio fell, calling into question for the moment BoJ Gov. Kuroda’s thesis that the tight labor market would cause inflation to accelerate. All told not an encouraging report. The only really good news we’ve had out of Japan recently was the higher-than-expected industrial production figures for June, which may have something to do with recent strong increases in exports. That makes me think that it’s external demand, not domestic demand, that’s keeping the Japanese economy going. In that case, there’s going to be pressure for the BoJ to keep the yen weak. I remain bearish on the currency.
• Today’s highlights: During the European day, Eurozone’s flash CPI for July is coming out. The forecast is for the rate to remain at +0.2% yoy, same as in June. Following the steady German inflation rate on Thursday, the likelihood that the bloc’s CPI will meet the forecast is high. We should keep in mind however that any disappointment could add to expectations that the ECB will have to keep QE in place for longer, which could put EUR under selling pressure. The bloc’s unemployment rate for June is also due out.
• In Norway, the unemployment rate for July is expected to increase a bit, which could prove NOK-negative.
• From Canada, the monthly GDP for May is expected to be unchanged mom and this is expected to cause the annual growth rate to decelerate. This may weaken CAD somewhat.
• In the US, the employment cost index (ECI) for Q2, a closely followed gauge that reflects how much firms and government pay their employees in wages and benefits, is coming out. It is expected to decelerate a bit from Q1, which could weaken USD, at least temporarily. The final University of Michigan consumer sentiment for July is coming out along with the surveys of 1-year and 5-to-10 year inflation expectations. The Chicago Purchasing managers’ index for July is also due to be released.