Japan data still shows improvement though road ahead likely murky.
MAJOR HEADLINES – PREVIOUS SESSION
US May Personal Income out at +1.4% vs. +0.3% expected and +0.7% prior
US May Personal Spending out at +0.3%, as expected, vs. revised flat prior
US Jun Final Michigan Sentiment Index out at 70.8 vs. 69.0 expected and 68.7 prior
NZ May Trade Balance out at +NZ$858 mln vs. +NZ$250 mln expected and revised +NZ$319 mln prior
NZ May Building Consents out at +3.5% vs. revised +11.9% prior
UK Jun Hometrack Prices out at flat m/m, unchanged from the previous month
JP May Prelim. IP out at +5.9% m/m vs. +7.1% expected and +5.9% prior
JP May Retail Sales out at -2.8% y/y vs. -2.6% expected and -2.8% prior
THEMES TO WATCH – UPCOMING SESSION
UK Consumer Credit (0830)
UK Final M4 Lending/Money Supply (0830)
UK Mortgage lending/Approvals (0830)
EU Business Climate Index (0900)
EU Industrial/Consumer Confidence (0900)
US Chicago National Activity Index (1230)
Market Comment:
Dollar weakness that was evident at the end of last week appeared to reverse during the Asian session this morning, with the USD index gaining some 0.3%. A repeat of China’s murmurings about a replacement reserve currency were put on the back burner after PBOC’s Zhou assured at the weekend that China’s reserves policy was always quite stable and consistent relative to liquidity and returns and that “there aren’t any sudden changes”. The comments gave some early-week relief for the dollar.
The dollar’s resurgence was intensified against the commodity-bloc currencies following another report concerning China that emerged late Friday. Caijing, a top financial journal in China, quoted a NDRC official as saying that China would stop purchasing metals for building up strategic reserves because the purpose of supporting prices had been achieved. Market reaction to the news was limited, with London copper still pushing 1% higher while gold held steady at the 935 mark.
Elsewhere on the commodity front, a Nikkei News article reporting that China intendeds to increase its strategic crude oil reserves by 160% to 270 mln barrels, also had little impact on crude prices. An official from China’s National Energy Administration told the Nikkei that it would begin building a second group of stockpiling bases as early as this year, having nearly finished topping off its existing storage facilities. Oil nevertheless continued its drift south from the $70 mark, hitting a $68.36 low.
Japanese data releases this morning indicated that the government’s stimulus efforts were producing results, with preliminary industrial production for May rising 5.9% m/m, the third straight month of gains. However, the uncertain future for the data series was highlighted by the numbers coming in below market expectations, with 7.1% the median estimate. Car and electronics production showed positive growth after the recent slump, with car production up 24.8% and inventories rising for the first time in four months. However, the question remains how sustainable the growth will be once the effects of the stimulus measures wear off. With a potential end to the inventory re-build on the horizon, manufacturers were less upbeat for coming months and forecast a slower 3.1% increase in June and a more benign 0.9% increase in July.
In what may be viewed as a follow-up to last month’s move to put the UK’s credit rating on a negative outlook, S&P warned that the UK’s debt could swell four-fold from 50% of GDP to 200% of GDP within the next four decades if drastic steps to address the pensions and ageing crisis are not taken, according to a report in the UK’s Sunday Telegraph. The report also highlights that research suggests the true size of the UK’s unfunded public sector budget deficit was now a massive GBP1.177 tln, or about GBP20,000 for every person in the UK.
Elsewhere in Europe, the IMF warned that France faces uncomfortably high fiscal deficits due to the recession and the corresponding drop in tax revenues. It further urged that any additional stimulus measures be kept small and temporary. In a similar situation to the UK, it also faces an ageing population and the IMF noted that increasing debt service obligations will aggravate costs linked to this. The financial sector could face increasing stress if the Central and Eastern European economies deteriorated, the IMF noted, and may require additional support.
