Euro, British Pound Gains Threatened with Key GDP, CPI Data on Tap (Euro Open)

The Euro and the British Pound may reverse recent gains as UK first-quarter GDP is revised lower while Euro Zone CPI slips into negative territory, threatening deflation. The US Dollar fell -0.4% in overnight trading as Asian stock markets extended the rally seen on European and US exchanges, sapping demand for safety-linked currencies.

[U][B]Key Overnight Developments[/B][/U]

[B]• Japanese Economy Sheds 440k Jobs, Unemployment Rate Rises
• Australian Lending to Private Sector Unexpectedly Fell in May
• US Dollar Slumps as Stocks Extend Gains in Asian Trading[/B]

[U][B]Critical Levels[/B][/U]

The [B]Euro [/B]and the [B]British Pound[/B] advanced in overnight trading, adding as much as 0.4% and 0.6% against the US Dollar, respectively. The greenback fell in overnight trading as Asian stock markets extended the rally seen on European and US exchanges, sapping demand for safety-linked currencies.

[U][B]Asia Session Highlights[/B][/U]

Japan’s labor market continued to deteriorate in May: the economy shed a staggering 440k jobs, pushing the [B]Jobless Rate[/B] to 5.2%, the highest in over 5 years. Meanwhile, the ratio of available vacancies to job-seekers fell to 0.44, the lowest since records began in 1963. Continued job losses will weigh on disposable incomes and trimming spending. Indeed, retail trade came to a standstill in May while minutes from the last meeting of the Bank of Japan has said that consumption is likely to remain weak as the “employment and income situation becomes increasingly severe.” While Household Spending unexpectedly rose 0.3%, the first increase in 15 months, the improvement is unlikely to be sustainable and likely owes to the temporary boost from the government’s record-setting $25 trillion yen stimulus package as well as the rebound in share prices (the Nikkei benchmark index has surged 42% to date since early March).

Separately, the [B]Nomura/JMMA Manufacturing PMI[/B] figure rose for the fifth consecutive month in June, printing at 48.2. A reading below the 50 “boom-bust” level that suggests the manufacturing sector continues to decline, but at the slowest pace since January. It is quite telling that companies continue to cut jobs even as PMI figures improve, suggesting any improvements in recent data owe to inventory adjustments rather than a meaningful recovery. The dismal outlook for global trade in 2009 and 2010 means that export-oriented Japanese firms are likely to keep output level low and labor forces lean, making any sustainable rebound in GDP growth a distant prospect for the world’s second-largest economy.

Australia’s [B]Private Sector Credit[/B] unexpectedly shrank in May, falling -0.1% versus forecasts of a 0.2% expansion. The annual pace of credit growth fell to 3.9%, the lowest in over 15 years. Loans to businesses fell -0.7%, the most since December 2008, hinting that companies are delaying expansion plans and suggesting that unemployment will remain a concern in the months ahead. Indeed, a survey of economists conducted by Bloomberg calls for the jobless rate to hit 5.9% this year and top 7% in 2010.

[B]Related Article[/B]: RBNZ Less Concerned With Inflation ‘Just Now,’ Statement Says

[U][B]Euro Session: What to Expect[/B][/U]

The final revision of [B]UK Gross Domestic Product[/B] is expected to reveal the economy shrank -2.1% through the first quarter, a greater contraction than the originally-reported -1.9% decline. In annual terms, GDP is expected to have shrunk at a pace of -4.3%, the fastest in at least 53 years. The most recent GDP forecast from NIESR, a think tank, suggested the turmoil may slow in the second quarter of the year, predicting that March was “the trough of the depression, with output rising in April and May.” A validation of such an outlook in the forthcoming data would surely lift a great deal of pressure from the shoulders of policymakers who have effectively exhausted most stimulus options. Indeed, the government is unlikely to offer much more of a boost with the fiscal gap expected to reach a whopping 14% of GDP by next year, while the central bank has already slashed rates to a meager 0.5% and embarked on quantitative easing. On balance, consensus economic growth forecasts suggest that the UK will trail behind the US but outpace the Euro Zone through the end of 2010, suggesting the Bank of England will follow the Fed but lead the ECB in lifting interest rates as the recovery takes hold. All told, this points to a bearish bias for both GBPUSD and EURGBP in the months ahead.

Turning to the Euro Zone, a preliminary estimate of the [B]Consumer Price Index[/B] is expected to show that prices shrank at an annual pace of -0.2% in June, the first negative reading on record since the creation of the single currency in 1991. The latest PPI report supports continued pressure on consumer prices, with forecasts calling for wholesale inflation to shed -5.6% in the year to May. Entrenching expectations of lower prices threatens to commit the currency bloc to a long-term period of stagnation as consumers and businesses are encouraged to wait for the best possible bargain and perpetually delay spending and investment. German labor-market figures are also on tap, with expectations calling for the EZ’s largest economy to shed 45k jobs in June to push the [B]Unemployment Rate[/B] back to a 16-month high at 8.3% after the metric slipped to 8.2% in the previous month. Job losses will weigh on consumer spending, the largest contributor to overall economic growth, keeping a lid on any substantive recovery in GDP growth in the months ahead. The prospect of deepening recession and an increasingly credible deflationary threat have boosted expectations that the European Central Bank will cut interest rates later this week, with overnight index swaps suggesting the market now sees a 56.5% chance of a 0.25% reduction.

Rounding out the session, the [B]UBS Consumption Indicator[/B] that aims to forecast the trend in private spending in the coming 3-4 months is likely to fall to a fresh 4-year low in May as the pace of unemployment continues to push higher, ticking up to a seasonally-adjusted rate of 3.5% in the same period for the first time since March 2006.

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