Markets closed the week on an optimistic note, shrugging off Friday's weaker China data and Italy downgrade. Possible catalysts were JP Morgan's Q2 earnings (a positive surprise, even after its US$5.8b trading loss), significant buying of EUR by Austrian banks, an advisory firm's report expecting the ECB to cut the deposit rate to below zero and engage in quantitative easing, higher than expected US PPI and Fed centrist Lockhart's dovish comments (although that has been his bias recently). US consumer confidence disappointed but was ignored. The S&P500 closed 1.7% higher. The CRB commodities index closed 1.3% higher (oil +1.3%, copper +2.6%, gold +1.1%). US 10yr treasury yields rose from 1.46% to 1.52% during the London session and closed at 1.49%. Eurozone peripherals were only modestly changed apart from Italy which gained 15bp.
The US dollar index (DXY) fell sharply around midday London. That was mainly due to a sharp rise in EUR, from 1.2163 to 1.2257, although it was directionless during the NY session. USD/JPY was directionless throughout, stuck between 79.07 and 79.33. AUD followed equities and the EUR higher, from 1.0148 to 1.0230. NZD rose from 0.7904 to 0.7966. Both AUD and NZD speculative futures positioning increased last week, according to the latest CFTC report. AUD/NZD rose from 1.2825 to 1.2870
Economic wrap
US PPI rises 0.1% in June. Possibly due to survey timing, the PPI output did not capture last month's decline in energy prices to anywhere near the extent we expected. Crude energy prices fell 5.1%, but finished energy prices were down just 0.9% (and gasoline up 1.9% after falling 12% in the previous three months). That was offset by food up 0.5% (due to higher meat prices, and next month's data may see drought impact on fresh fruit and veg) and the core rate as expected up 0.2%. Within the core, car prices fell 0.2% but ever volatile light truck prices jumped 1.4%. The headline PPI annual rate was unchanged at 0.7% yr, its lowest since the 2008-2009 recession, and the core rate slowed to 2.6% yr from the cycle high of 3.1% in January this year.
US consumer sentiment fell to 72.0 in the preliminary July University of Michigan report, exactly in line with our low end of the range forecast. That is the most pessimistic reading for the year so far, and reflected a 3 pt drop in the outlook index which offset a 1.7 pt rise in current conditions. One year ahead inflation expectations also fell, down 0.3 pt to 2.8%, the lowest since late 2010.
