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Notes/Observations

Stronger German regional CPI data add to bets of ECB tapering

Bond yields soar, EUR/USD hits new 1 year highs

Banking names outperform on reflation hopes and positive sympathy from US stress test results

European business and consumer optimism rises to the highest levels since before the financial crisis

Overnight

Asia:

Japan retail sales fall for the first time in 5 months and falls short of estimates

New Zealand June ANZ Business confidence rises to 8 month high

Europe:

German regional inflation data comes in stronger pushing German Yields to new multi month highs. Euro pushes above 1.14 marking new 1 year highs.

Eurozone Economic sentiment indicator reaches 10 year high, whilst German GFK consumer confidence post new 16 year high.

BoE Haldane reiterates hawkish stance, noting that the BoE needs to seriously look at raising rates

Americas:

Fed did not object to the capital plans of all 34 bank holding companies participating in the Comprehensive Capital Analysis and Review (CCAR). Capital One is the only bank that will need to resubmit within six months, although its plan was not entirely rejected.

Brazil President Temer said to name Raquel Dodge as new top prosecutor; Temer's residence subsequently attacked (Temer not inside)

Brendan Carr expected to be nominated to a position at the FCC by President Trump as soon as today

Economic Data

(DE) GERMANY JUN CPI SAXONY M/M: 0.2% V -0.1% PRIOR; Y/Y: 1.7% V 1.6% PRIOR

(DE) GERMANY JUN CPI NORTH RHINE WESTPHALIA M/M: 0.1% V -0.2% PRIOR; Y/Y: +1.6% V 1.6% PRIOR

(DE) GERMANY JULY GFK CONSUMER CONFIDENCE: 10.6 V 10.4E (highest since 2001)

(UK) MAY NET CONSUMER CREDIT: £1.7B V £1.4BE; NET LENDING: £3.5B V £2.6BE

(UK) MAY MORTGAGE APPROVALS: 65.2K V 64.0KE

(UK) May M4 Money Supply M/M: -0.1% v 1.2% prior; Y/Y: 6.7% v 8.2% prior

(DE) Germany Jun CPI Brandenburg M/M: 0.2 v -0.1% prior; Y/Y: 1.5% v 1.4% prior

(DE) Germany Jun CPI Bavaria M/M: 0.1% v -0.1% prior; Y/Y: 1.4% v 1.4% prior

(DE) Germany Jun CPI Baden Wuerttemberg M/M: 0.1% v -0.1% prior; Y/Y: 1.6% v 1.5% prior

(DE) Germany Jun CPI Hesse M/M: 0.1% v 0.0% prior; Y/Y: 1.9% v 1.7% prior

(ES) SPAIN JUN PRELIMINARY CPI M/M: 0.0% V 0.0%E; Y/Y: 1.5% V 1.6%E

(EU) EURO ZONE JUN BUSINESS CLIMATE INDICATOR: 1.15 V 0.94E, FINAL CONSUMER CONFIDENCE -1.3 V -1.3E

(ES) Spain Apr Total Mortgage Lending Y/Y: -11.4% v 23.1% prior; House Mortgage Approvals Y/Y: -8.8% v 20.2% prior

(SE) Sweden May Retail Sales M/M: 0.4% v 0.2%e; Y/Y: 2.4% v 1.9%e

Fixed Income Issuance:

Non seen

SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

Equities

Indices [Stoxx50 -0.1% at 3,534, FTSE +0.6% at 7,431, DAX +0.1% at 12,657, CAC-40 -0.3% at 5,234, IBEX-35 --0.1% at 10,686, FTSE MIB -0.2% at 21,014, SMI -0.4% at 9,035, S&P 500 Futures +0.1%]

Market Focal Points/Key Themes: European stocks opened higher, but turned around as the session advanced; risk sentiment improved after clarification on ECB's Draghi comments; financials supported following US stress test results; oil continues to support energy stocks; materials higher on the back of better base and precious metals; technology also outperforming; attention turning to tomorrow's NFP release; upcoming US earnings include GreenBrier, Rite Aid and Walgreens

Equities

Consumer discretionary [Hennes & Mauritz HMB.SE -1.0% (earnings), JD Sports JD.UK -9.7% (trading update)]

Healthcare [Paion PA8.DE -6.2% (drug update)]

Financials [Prelios PRS.IT -4.7% (receives offer), Flow Traders FLOW.NL -6.6% (analyst action)]

Industrials [DS Smith SMDS.UK +6.6% (earnings, acquisition), Gesco GSC1.DE 3.4% (prelim Q1), OCI OCI.NL +6.3% (rejects offer), Babckock BAB.UK +1.3% (contract award), John Wood Group WG.UK -2.9% (trading update)]

Technology [Logitech International LOGN.CH -0.4% (dividend hike)]

Speakers

(JP) BoJ's Harada: Monetary policy does not raise risk of a yield spike; Does not see any need to ease at this point, current monetary policy is sufficiently bold

(UK) BOE's Haldane (chief economist): BOE needs to serious look at raising rates, is happy with where they are now

Currencies

EURUSD soars to new one year highs following stronger inflation data out of Germany. Dealers note upside target of 1.1453.

GBPUSD approaches 1.30 continuing momentum following BoE Carney hawkish comments yesterday which saw 100 pip move higher. Dealers not resistance just ahead of 1.30, with a move lower seeing suppoer at 1.2950.

Fixed Income

Bund futures trade at 162.86 down 59 ticks taking out yesterday lows on stronger regional German inflation data, with the Draghi inspired downtrend continuing with downside support seen at 162.39 then 161.90.

Thursday's liquidity report showed Wednesday's excess liquidity rose to €1.634T a rise of €16B from €1.618T prior. Use of the marginal lending facility fell to €100M from €192M prior.

Corporate issuance saw $1.8B come to market in a quiet session with Baidu's $1.5B 2 part offering accounting for the bulk if the issuance. Issuance for the remainder of the week is expected to remain slow as we approach US July 4th Holidays.

Looking Ahead

05:30 (ZA) South Africa May PPI M/M: 0.5%e v 0.3% prior; Y/Y: 4.9%e v 4.6% prior

07:00 (CZ) Czech Central Bank (CNB) Interest Rate Decision: Expected to leave Repurchase Rate unchanged at 0.05%

07:00 (BR) Brazil Jun FGV Inflation IGPM M/M: -0.6%e v -0.9% prior; Y/Y: -0.8%e v +1.6% prior

08:00 (DE) Germany Jun Preliminary CPI M/M: +0.1%e v -0.2% prior; Y/Y: 1.5%e v 1.5% prior

08:00 (DE) Germany Jun Preliminary CPI EU Harmonized M/M: 0.0%e v -0.2% prior; Y/Y: 1.3%e v 1.4% prior

08:15 (UK) Baltic Dry Bulk Index

08:30 (US) Q1 Final GDP Annualized (3rd reading) Q/Q: 1.2%e v 1.2% prelim; Personal Consumption: 0.6%e v 0.6% prelim

08:30 (US) Q1 Final GDP Price Index: 2.2%e v 2.2% prelim; Core PCE Q/Q: No est v 2.1% prior

08:30 (US) Initial Jobless Claims: No est v 241K prior; Continuing Claims: No est v 1.944M prior

08:30 (US) Weekly USDA Net Export Sales

09:00 (RU) Russia Gold and Forex Reserve w/e Jun 23rd: No est v $406.4B prior

10:30 (US) Weekly EIA Natural Gas Inventories

15:00 (AR) Argentina May Industrial Production Y/Y: No est v -2.3% prior, Construction Activity Y/Y: No est v 10.5% prior

EUR and global equities better bid as risk sentiment improves

The single currency continues to climb higher amid anticipations for tighter monetary policy in the Eurozone and in UK. Investors were absolutely not disrupted by Draghi and Carney‘s apparent communication shambles on monetary policy earlier this week. Indeed, both central bankers made some hawkish comments - or interpreted as such by investors - suggesting the era of ultra-lose monetary policy is coming to an end.

Draghi's optimistic comments about the inflation outlook led investors to believe the ECB was about to start the process of tapering its bond buying program. EUR/USD hit 1.1435 on Thursday morning, the highest level since June 2016. The move was also exacerbated by a broad USD weakness that sent the dollar index to 95.68.

Across the Atlantic, the pound sterling was buoyed amid Mark Carney's comments about a potential tightening in borrowing costs in the event of a sharp pick-up in business investment. GBP/USD surged 1.20% to 1.2970 yesterday and consolidated around this threshold during the Asian session.

On Thursday morning, the US dollar continued to lose ground as investors started to finally understand that President Trump's economic boost will remain at the draft stage. The NOK, AUD and SEK stood amongst the best performer and rose 0.62%, 0.48% and 0.58% respectively. The Japanese yen was the only G10 currency to edge lower amid broad risk-taking mood.

Trump target of 3% growth looks less and less unattainable

Fed members look concerned by the level of equities. San Francisco Fed President John Williams declared recently that the stock market is “running on fumes” while Janet Yellen said that current stock valuation levels are “rich”. Both declarations have been made at separate moments and it is clear the Fed underpinned stocks overvaluation.

Our overview of the US economy is bearish and markets expect today's Q1 GDP to be released at 1.2% q/q. We believe that fundamentals are still soft and we consider the US recovery to be overestimated at the moment.

On top of that, the IMF in a report has slashed its GDP forecast for year-end by removing the effect of President Trump's fiscal stimulus. Indeed, it looks more and more uncertain that this fiscal plan will ever be implemented at this point. The IMF forecast for US GDP is now 2.1% from 2.3% in April. As a result the Trump target of 3% growth looks less and less unattainable.

Currency-wise, there is room for further weakness for the greenback. The Eurodollar pair, which has strengthened out of Draghi's comments, should continue heading higher on markets pricing back in US economic difficulties.

USDJPY is displaying a strong rally away from 108.80 region where a corrective wave 2 of a higher degree was completed. Current impulsive activity now suggest that a new bullish leg is in play and is already unfolding. Recently we have seen price completed minor wave one and two, which means that current rally away from 110.93 level can be minor wave three with a projection target of 161.8 and the region where the upper channel line meets.

USDJPY, 4H

On the chart for the GBP/USD currency pair a surprise jump can be observed. The surge of the Pound was caused by comments made by the Bank of England Governor Mark Carney. The jump propelled the currency exchange rate through the resistance put up by the monthly pivot point at the 1.2903 level. Due to that reason it can be expected that the currency pair will continue the surge. However, the difference in the case of GBP/USD pair is that Mark Carney’s comments have still not been analyzed as much as those of Mario Draghi in regards to the Euro. The results of this factor can be observed on the charts. The GBP/USD pair, since the jump and reaching above the 1.2950 level, has remained rather flat near the 1.2930 mark.

It can be observed that the USD/JPY currency pair did not increase its volatility massively during the panel discussion of the top central bankers. Instead the US Dollar once more attempted to break above the 112.40 mark against the Japanese Yen. For a rather unclear reason that level has been providing resistance in the recent trading sessions. It is possible that the 112.40 mark is a benchmark for the Bank of Japan or a silent player in the form of a large institution, which has enough funds to change the price of the currency pair. However, from a technical perspective the pair is still set to gain more, as the 55-hour SMA is approaching the rate from the downside just above the 112 level.

On Thursday morning the common European currency scored new heights against the US Dollar, as the currency pair managed to break a strong resistance cluster. The mentioned resistance cluster consists of the 23.60% Fibonacci retracement level at the 1.1388 mark and the first monthly resistance at 1.1395. As the cluster was broken, it has begun to provide support to the Euro in its efforts against the Greenback. The currency exchange rate is set to reach new heights soon, as the central banker forum has ended, and technical are once more viable to be used for guidance. From a technical perspective the EUR/USD pair faces no resistance up to the 1.1546 level, where the second monthly resistance level is located at. That means that a range of almost 150 base points is clear.

A third attempt of the yellow metal to break through the resistance levels, which are located just above the 1,250 mark. However, the metals price is also not retreating, as the combined support of the various simple moving averages is providing the needed strength for the metal. Meanwhile, while looking back a the few previous trading sessions, one can notice that in the recent days the commodity price has formed an ascending triangle pattern. In accordance with the pattern the bullion’s price is setting itself up for a breakout to the upside, as pressure has been building up against the resistance of the 1,250 mark while the metal has gradually shown higher bounce off low levels.

'Some removal of monetary stimulus is likely to become necessary if the trade-off facing the MPC continues to lessen and the policy decision accordingly becomes more conventional.' — Mark Carney, Bank of England

The Bank of England Governor Mark Carney said on Wednesday that the Monetary Policy Committee might need to start raising interest rates soon, adding that the BoE's interest-rate decision would be discussed in the next few months. Carney's unexpectedly hawkish comments pushed the Sterling to its new session highs. In the meantime, the GBP/USD hit its highest level since the June 8 election. Earlier, Mark Carney stated that it was not yet the time to step on the path of interest rate hikes despite surging inflation. Furthermore, on Wednesday, the Governor said that at the June 15 meeting it was necessary to leave the Bank's interest rates unchanged due to 'the mixed signals on consumer spending and business investment'. On June 15, five out of eight policymakers voted to keep monetary policy and rates on hold. According to the BoE, inflation is set to rise above 3% in the upcoming months, well above the Bank's 2% target. Carney stated that in order to begin raising rates he would focus on household consumption and the economy's reaction to the country's withdrawal from the European Union.

'The most interesting thing is crude oil production was down ... which is a significant decline given the increases in previous weeks.' — Andrew Lipow, Lipow Oil Associates

Pending home sales in the United States dropped for the third consecutive month in May, official figures revealed on Wednesday. The National Association of Realtors reported that pending home sales fell 0.8% last month, following April's downwardly revised drop of 1.7% and falling behind market analysts' expectations for an increase of 0.9%. According to Wednesday's data, supply shortages mainly drove the fall. The supply of homes available for sale dropped more than 8% year-over-year in May. Other data released on Wednesday showed that US crude oil inventories rose 0.1M barrels in the week ended June 23, following the prior week's drop of 2.5M barrels, whereas analysts anticipated a drop of 2.1M barrels during the reported week. Meanwhile, weekly production declined 100K barrels per day to 9.3M bpd, marking the largest fall since July 2016. However, some analysts suggested that the production decline was temporary and was triggered by the Cindy Storm in the Gulf of Mexico and maintenance works in Alaska. Despite the unexpected US crude inventory build, oil prices rose shortly after the release.

'It does look as though those cuts have done their job. But we're just approaching a new interest rate decision so I don't want to prejudge.' — Stephen Poloz, Bank of Canada

The Bank of Canada Governor Stephen Poloz reported on Tuesday that interest rate cuts made in 2015 after the sharp oil price drop had done their job. Back in 2015, the Bank's key interest rates were cut twice but a distinctly more hawkish tone recently from policymakers in recent days has boosted the probability of a rate hike by the end of this year. The chance of a July rate hike climbed to 43% on Wednesday from 30% the day before. Poloz said that the country's major regions had been experiencing strong growth, however, the economic development phase differed from place to place. Also, he said that despite unexpectedly strong economic performance during the March quarter, economic growth would likely moderately slow in the upcoming quarters. Apart from that, the BoC Governor noted that the United States were two years ahead of Canada because of the recent oil price shock that forced the Bank to cut rates. In addition, Poloz said that uncertainty of the NAFTA's fate was putting downward pressure on businesses, adding that the NAFTA agreement was very crucial for the Canadian economy.