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The US dollar has been largely confined to yesterday's ranges against the major and emerging market currencies. The Australian dollar is the notable exception, where it briefly pushed through $1.06 on the back of the stand pat central bank and no currency protest.

The general tone through the capital markets is consolidative. Italian and Spanish are seeing yields rise across the curve today, though Greek and Portugal yields continue to fall. Equities markets were firmer in Asia with the Nikkei rising to four week highs. Tokyo is in the middle of earnings season and a third of the Topix is to report this week. Chinese small rise was sufficient to extend its advancing streak to three days. European bourses mostly higher, though the FTSE is being weighed by the 3.6% loss among financials and Italy and Spain also are seeing some briefly extending the ECB-induced rally to 10.1% and 14.9% respectively.

The batch of soft euro zone data today has been largely shrugged off, perhaps on the basis that it reinforces expectations of not only credit easing but also monetary easing by the ECB as early as next month. Italy reported a 0.7% contraction in Q2 GDP, a little more than expected, but about the same pace as seen in the previous two quarters. The year-over-year contraction stands at 2.5%, almost double the Q1 rate. Moreover, news that industrial output fell 1.4% in June rather (vs consensus for a 1% decline) warns that Q2 finished on a weak note.

This is also the takes away from news that German manufacturing orders fell a sharp 1.7% in June. The drop in June is the largest since last November and warns of a larger than expected (-0.8% per Bloomberg survey) in the June industrial production report out tomorrow.

There were three non-euro area reports to note today. First, Norway reported a stronger than expected rise in June manufacturing output (0.8% vs 0.4% expected) and this is helping the krone recover against the euro after yesterday's dip.

Second, Swiss deflation eased to -0.7% year-over-year from -1.2% in June, but news that reserves rose another roughly 50 bln, for the third consecutive month is seen as more important. Participants will be on the look out for conversion of the euro holdings.

Third, UK industrial production did not decline as much as expected (-2.5% vs consensus of -3.5%). However, it is still the largest decline since Nov '08. One less working day helped "flatter" the results. Even if Q2 is revised up a tick or so, it does not change the underlying picture or the expectation for a dovish inflation report tomorrow, which in turn, builds the case for additional easing.

Investors have become so accustomed to a steady stream of bad news and disappointments from Greece since the crisis first rose in late 2009 that a certain cynicism understandably prevails. Yet, there have been important progress in a critical area: the government's deficit. In the first half it fell to 9.9 bln euros from 11.34 bln euros in H1 11. Moreover, this probably understates the improvement. This year's figure would have by below 8 bln euros if not for interest rate expenses. However, this will likely be offset in the second half following the restructuring of private sector debt.

The primary balance, which excludes debt servicing costs fell to 490 mln euros in H1 '12 from 4 bln euros in H1 '11. The primary deficit for all of last year was 3.6 bln euros. A primary budget surplus is seen as a key to opening more degrees of freedom for Greek policy makers. Over this past weekend, the finance minister from the German state of Bavaria, which has objected to the transfer payments system within Germany, predicted Greece would leave monetary union by the end of the year.

We are not persuaded, and to the extent that one can have confidence in a smooth Greek exit, we do recognize that it could be somewhat less disruptive for Greece if it were running a primary budget surplus. There is a slim chance this can be achieved this year, a better chance next year and even a better chance in 2014. This is not a recommendation to buy or sell Greek assets. The point is more modest. Progress is being made to rein in the deficit. The cost is a deeper economic contraction and increased social dislocation.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: Consolidative Tone And Positive News From Unexpected Source