EMU Returns to Center Stage in the Week Ahead

EMU, Returns, Center, Stage in, Week Ahead, Macroeconomics, fx trader, forex

18 Jul 2016

Four large dramas being played out among the major high income countries. The drama in the Eurozone moves center stage in the days ahead, with an important European Court of Justice ruling due and the ECB meeting.

Before turning to these highlights, let's take a look where the other dramas stand.  On stage right, the US drama has economic and political acts. On the economic front; there has been a series of economic data that strongly indicate that not only has the US emerged from the October 2015-March 2016 soft patch, but it has accelerated at the end of Q2. Over the past fortnight, investors have learned of renewed strength in the US service sector PMI, a robust even if not spectacular jobs report, stronger recovery in June industrial output and manufacturing after a soft May, and mildly firmer than expected inflation gauges.

The Atlanta Fed's model sees the US tracking 2.4% annualized growth in Q2. The NY Fed's model puts Q2 growth at 2.2% and Q3 growth at 2.6%. If the data retains this vigor, it would be consistent with the Fed removing more accommodation. The global risk environment may again be the swing consideration.

On the political front, the Republican convention gets under way. Trump's candidacy is spurring or highlighting a fissure in the Republican Party. Therefore leading party officials that do not attend or do not speak may be just as revealing as who does. Typically, the candidate enjoys a small bounce in support around the convention. The recent closeness of national polls, which ultimately are less meaningful that polls in the swing states, reflects slippage of Clinton's support than a rise in Trump's support. He has rarely drawn more than 40%.

On stage left, is a drama in Japan that drove yen 5% lower last week before bouncing in thin activity as news of the coup (attempt) in Turkey was about Abenomics 2.0. This involves new fiscal and monetary stimulus.  In its extreme form, there has been more talk of helicopter money, which coincided with Bernanke's visit to Tokyo. We suspect that some in Tokyo use foreign officials to help push their own domestic agenda.

We have pointed out that on a consolidated basis, the BOJ's assets offset some of the central government's liabilities. Under QQE, Japan's net debt on a consolidated basis has fallen. However, as is the case for many central banks, the BOJ cannot buy bonds directly from the government. This means that speculation that the government will issue non-marketable perpetual bonds which the BOJ will buy directly seems misplaced.