The Euro may see selling pressure in the coming session as stocks follow losses on Wall St and Asian exchanges while German’s annual inflation turns negative for the first time in 23 years, threatening deflation.
[U][B]Key Overnight Developments[/B][/U]
[B]• Japan’s Retail Sales Fall More Than Expected on Rising Unemployment
• New Zealand Business Confidence Rose to Highest in Over 7 Years[/B]
[U][B]
Critical Levels[/B][/U]
The [B]Euro [/B]stands flat at ahead of the opening bell in Europe having oscillated in a narrow 0.4% range throughout the overnight session. The [B]British Pound[/B] traded gently higher, adding 0.2% against the greenback.
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[B]Asia Session Highlights[/B][/U]
Japan’s [B]Retail Sales[/B] unexpectedly fell in June, shedding -0.3% and snapping a two-month winning streak that began in April. Retail activity shrank at an annual pace of -3.0%, a greater decline than economists had forecast ahead of the release and the tenth consecutive month in negative territory. Lackluster consumption may have been inferred from June’s Merchandise Trade Balance report which saw the surplus expand for the third consecutive month on acute weakness in imports. The abysmal job market has been the catalyst behind weakness in spending and is likely to continue to be so in the months ahead: a survey of economists conducted by Bloomberg suggests the jobless rate surpassed 5% in the second quarter and will approach the 6% mark by the second half of 2010 while minutes from the last meeting of the Bank of Japan revealed policymakers expect consumption to remain weak as “the employment and income situation [is] likely to become increasingly severe”.
In New Zealand, [B]NBNZ Business Confidence[/B] rose to 18.7 in July, the highest reading since February 2002. Details of the report revealed that survey respondents expecting economic activity to improve in the coming 12 months outnumbered those looking for continued turmoil for the third consecutive month and by an ever-increasing margin, this time by 12.6%. On capacity utilization, optimists outnumbered the pessimists for the first time in at least 6 months, albeit by a narrow margin of just 3.2%. Still, the metric suggests that expectations of higher inflation could be slowly creeping into the market, bolstering the central bank’s claims that inflation may fall below the 1-3% target range this year but return to desirable levels by early 2010. Positive export growth expectations outnumbered negative forecasts by the widest margin (10.3%) since October of last year, suggesting some relief may be coming to help with the antipodean nation’s booming current account deficit that recently prompted a downgrade of New Zealand’s long-term credit outlook. Positive cues notwithstanding, we continue to see the possibility for a dovish shift in rhetoric (if not a surprise rate reduction) when the Reserve Bank of New Zealand announces interest rates this week.
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[U][B]Euro Session: What to Expect[/B]
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Germany’s [B]Consumer Price Index[/B] is set to show the annual pace of inflation turned negative for the first time in 23 years in July after holding at a standstill in the previous two months, shrinking at an annual pace of -0.4%. If expectations of falling prices become entrenched, the Euro Zone’s largest economy and by extension the currency bloc as a whole could be facing 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.
The European Central Bank has seemingly struggled to formulate an effective policy response to the deflationary threat thus far. Jean-Claude Trichet and company have focused on banks as the vehicle through which to make money cheaper and put a floor under falling prices, promising unlimited lending to the region’s financial institutions including an unprecedented 442 billion euro in 12-month bank loans. The ECB will also implement a 60 billion bond-buying scheme. To the central bank’s credit, borrowing costs have indeed moved lower: although the ECB publicly maintains target interest rates at 1%, it has allowed the average cost of overnight lending (referred to as EONIA) to drift far below that. Indeed, borrowing in Euros has been consistently cheaper than doing so in British Pounds since late June, even though the Bank of England’s stated interest rates are substantially lower at 0.5%. However, the lower cost of credit between banks has not translated into lending, and so has offered little stimulus to the overall economy. Indeed, loans to Euro Zone businesses and households grew just 1.5% in June, the lowest since records began in 1991. Banks may be choosing to hang on to cash as a buffer against $1.1 trillion in as yet unrealized losses linked to the subprime mess, according to the IMF, as well as the fallout from looming defaults and/or devaluations among the EU’s newly-minted central European members. In any case, the door is open for traders to punish the Euro as the ECB’s inability to ensure that looser monetary conditions translate beyond the interbank market make deflation all but certain.
Turning to the UK, [B]Mortgage Approvals[/B] are expected to rise for the fifth consecutive month in June, reflecting early signs of a rebound in buying interest that was noted in the latest Hometrack Housing Survey and the Rightmove House Prices report. [B]Net Consumer Credit [/B]is forecast print at 0.3 billion pounds, unchanged from the previous month but down by a whopping -80% in annual terms. [B]Net Lending Secured on Dwellings[/B], a measure of loans using houses as collateral, is expected to rebound from the record-low 0.3 billion pounds recorded in May to rise to 0.6 billion this time around. Here too, the annualized picture underscores how far lending has yet to recover, with June’s result to amount to a -78.6% decline from a year before.
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