Market Drivers for May 30 2014

Month end flows continue to cap lackluster trade

Japanese data deluge sends mixed readings, consensus view that BOJ will not ease further

Nikkei -.34% Europe -.17%

Oil $103/bbl

Gold $1257/oz.

Europe and Asia:

AUD Sector Credit 0.5% vs. 0.4%

JPY Unemployment rate 3.6% vs. 3.6%

JPY CPI 3.2% vs. 3.1%

JPI Household spending -4.6% vs. -3.4%

EUR Retail Sales -0.9% vs. 0.4%

North America:

CAD GDP – 830 AM

USD Chicago PMI 9:45 AM

USD U of M – 9:55 AM

Currencies remained stuck in their end of month trading doldrums tracing out very narrow ranges on the last trading day of the week amidst very little fresh newsflow. In Asia the data deluge out of Japan provided mixed results core CPI marginally improved and unemployment remained steady but household spending and Industrial production continued to disappoint.

The core CPI figures in Japan printed at 3.2% versus 3.1% eyed, but much of the gain was attributed to the new sales tax. This month’s reading was nearly twice the size of last month’s figures but it remains to be seen if price increases will take hold. One thing is clear – Japan has now had positive inflation for 11 months in a row and monetary policy officials appear to be satisfied with the size and scope of their QE program. The consensus view is that the BOJ will not engage in any further easing beyond the current scale of the program.

Monetary stimulus however has not translated into robust growth. Although unemployment remained steady in Japan, household spending continued to contract at bigger pace than forecast shrinking at -4.6% versus -3.4% eyed. Consumer spending may prove to be the key to the long term viability of Abenomics. If wage growth and inflation cannot take hold much of the stimulus efforts may be for naught.

The yen strengthened a bit with USD/JPY dropping to a low of 101.50 during the morning Asian session trade as traders saw little reason to believe that the BOJ will expand its policy but the pair found some support at that level and drifted higher in early European trade. For the most part USD/JPY continues to shadow the movements in the US 10 year rates. With 10 year benchmark yields finding support at the 2.40% level, USD/JPY appears to be basing at 101.50. If today’s Chicago PMI readings provide and upward surprise and push the 10 year rates above 2.50%, USD/JPY could squeeze higher to test resistance at 102.00 once again.

Meanwhile in Europe, trading was extraordinarily slow with EUR/USD tracing out a 15 point range for most of the night. The eco data from Germany showed that Retail Sales slowed printing at -0.9% versus 0.4% eyed in yet another sign that demand in Europe’s largest economy is starting to slow. Italian inflation also printed a tad weaker at only 0.5% on a year over year basis perhaps presaging that the flash CPI readings for EZ as a whole will be mutd as well.

At this point the market fully expects the ECB to cut rates at its next meeting in June, but the open question is whether the central bank will embark on an ambitious program to expand the ABS market and infuse greater credit liquidity into the system. It appears that policy makers are moving in that direction as European monetary officials are clearly growing frustrated with the pace of recovery in the region.

For now the EUR/USD remains trapped in a 1.3630-1.3570 range with a slight downward bias. If US data helps to rally US yields the lower end of that range could be tested as the day progresses.

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