In England the MPC showed
That not all the members bestowed
Their blessing on speech
Designed to beseech
To the market they’re on the right road

The two biggest stories overnight were the MPC minutes failing to show unanimity over Governor Mark Carney’s new guidance idea and the GDP data release for the Eurozone printing higher than forecast. Interestingly, adding the modestly better UK employment data to the mix did nothing to move the FX markets at all. Both the euro and the pound are virtually unchanged from yesterday despite the news…or perhaps because of it. At any rate, the MPC voted 8-1 to approve the new guidance concept with the naysayer being confirmed hawk Andrew Weale. His concern was the timeline was too long for some of Carney’s opt-outs on the low rate guidance. But the UK employment picture showed the Unemployment Rate unchanged at 7.8%, the claimant count falling and was generally perceived as better than expected. Net, the pound is marginally higher this morning but the movement has been well within the recent trading range.

As to the euro, perhaps this is a greater disappointment. It is unchanged from yesterday’s closing levels despite Q2 GDP growth of 0.3% (exp 0.2%) led by Germany and France both printing higher than forecast. Remember, Europe has been in the midst of a 6 quarter long recession, so this more robust growth should be seen as quite a good outcome. Both Italian and Spanish 10yr yields have fallen a bit and more importantly, they have narrowed their premium over German Bunds to the tightest in 2 years. That spread narrowing should also be seen as quite a positive for the euro as it implies the bond market is becoming more comfortable that the worst is over for the peripheral nations. (Personally, I am not a believer in that idea). But the euro has been unable to gain any traction at all. What to make of this outcome? I think a combination of summer holiday doldrums and insufficient pizzazz in the numbers have left traders unwilling to commit to new positions.

In the EMG space, Brazil was notable for its weakness yesterday, setting new lows for the move and continuing its march toward 2.50. It seems the only news of note was the Brazilian House of Representatives passing a bill that would prevent the administration from cutting spending already authorized by the House. However, I believe the bigger problem here is ongoing concern over China’s growth leading to softness in commodity prices as well as the continued competition for investment dollars from higher interest rates in the US. The central bank was not seen in the market yesterday, but if USDBRL continues to rise, I expect it will show up today. They are clearly concerned about allowing the BRL to weaken too rapidly.

Meanwhile in India, inflation data printed higher than expected, at 5.79%, well above the 5% target they have. The INR has moved back to within pips of its recent historic lows and I expect it to breech those and move further in the next weeks and months. Despite a faltering growth outlook, the central bank is more likely to have to raise rates than lower them in the near term to fight an inflation situation that is beginning to get out of hand. The government has imposed 10% tariffs on the importation of gold and silver as a means to prevent the current account from getting too far out of balance, but as long as the government there remains unable to cut away red tape and allow the country to grow more rapidly, the Rupee is likely to continue to suffer. I continue to look for 65.00 before it’s done.

This morning brings only the PPI data here in the US (exp 0.3%, 0.2% core) and so is not likely to move things. However, with a bunch of data tomorrow, including CPI, Empire Mfg and Initial Claims, perhaps we will see a bit more action then. In the meantime, keep your eyes pealed for any comments by Fed players as that is the best chance for market moving information, although none are scheduled to speak today.

Good Luck
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