Within the context of relatively subdued markets, there are four developments to note today.
First, Japan reported a larger-than-expected current account surplus for May, helped by a smaller trade deficit. The May current account surplus rose to almost JPY523 bln, 20% larger than expected, after a JPY187.5 bln surplus in April. The trade shortfall narrowed to JPY676 bln from JPY780.5 bln.
The monthly numbers swing around a bit, but looking at a rolling 12-month basis helps illustrate the deterioration in Japan's external account. In the 12 months through May, Japan recorded a cumulative current account surplus of JPY191 bln. In May 2013, the same metric stood at JPY4.9 trillion.
The change is due to the deterioration of the trade balance. In the 12 months through May, Japan has recorded a JPY10.9 trillion trade deficit (on a balance of payments accounting). In the 12-month period through May 2013, the trade deficit was JPY5.7 trillion.
For its part, the dollar has surrendered the gains recorded on the back of the strong US employment report. The dollar has again slipped through the 200-day moving average (~JPY101.82). The US 10-year yield slipped below 2.60% today, and this is keeping the dollar on the defensive against the yen.
Second, Germany reported a larger-than-expected trade surplus for May, but a smaller current account surplus. The trade surplus rose to 17.8 bln euros in May. The consensus forecast was for a 16.2 bln euros surplus, after a revised 17.2 bln euros in April. The improvement, though, was delivered in a way that is consistent with the downshift in the German economy. Exports fell 1.1%, after being revised from 3% to 2.6% in April. Imports fell 3.4%. The consensus expected a 0.5% increase.
On a 12-month rolling basis, it recorded a 200.5 bln euros surplus through May 14. This is 3.5% more than the metric for the 12 months through May 2013.
The euro has been confined to about 10 ticks on either side of $1.36 today. The $1.36 level itself is the middle of the two-cent range that has confined the euro single currency since late May. It seems ironic that the day after the front page story of the Financial Times was the French Finance Minister talking about the need to diversify away from the dollar and use the euro more, today's lead story is about a French corporate wanting the ECB to $1.20-$1.25. Aren't these at cross-purposes?
Third, the UK surprised with an unexpectedly poor industrial production report. Rather than increase 0.3% as the consensus expected, UK industrial output fell 0.7%. The year-over-year rate slipped to 2.3% from 2.9%. A slowdown in manufacturing, which that PMI data failed to signal, was the main culprit. It contracted by 1.3%, rather than expand by 0.4% as the consensus expected. ONS attributed it to metals and pharmaceuticals. However, it would not be surprising if some economists see the effect of sterling's strength.
We had argued that sterling was in need of some consolidation given its five cent run up in the five weeks. It will become interesting again closer to $1.7035. The euro is also correcting higher against sterling. It is moving into the GBP0.7960-85 area that we anticipate will offer a lower-risk selling opportunity.
The March 2015 short sterling futures imply a yield of 1.09%. This is a 6 bp decline since last week's high. Half of the adjustment is being recorded today. Although forecasts are moving around a bit as the BOE's forward guidance has shifted, we continue to see the first hike in Q1 15 as the most likely scenario.
Fourth, the New Zealand dollar rose to a new multi-year high just above $0.8800. Fitch lifted the outlook for the country's AA rating to positive from stable. The central banks meet on July 23 and are expected to hike rates again. A 25 bp hike would be the fourth hike this year, and would put the cash rate at 3.25%.
The North American session features the JOLTS report on job openings in the US. It is part of the BLS reports on the US labor market, and is expected to be consistent with the other readings, suggesting strengthening conditions. Note that the JOLTS report is for May, while the monthly report out last week was for June, and that the JOLTS methodology incorporates part of the non-farm payroll reports.
Later, May consumer credit figures will be reported. Look for the breakdown of revolving credit (credit cards), after a notable increase in April. Lastly, Alcoa (NYSE:AA) kicks off the earnings season today. Analysts expect profits for the S&P 500 to rise 5% on the back of a 3% increase in sales.
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