Geopolitical Concerns Ease, Poor Economic News Holds Sway

The US dollar is mostly firmer against the major and most emerging market currencies. The cease fire in Gaza and the humanitarian effort in east Ukraine has eased geopolitics off the front burner. The main driver today is poor economic news from Japan, Germany and the UK.

Japan revised down its already weak June industrial output data from a 3.3% contraction to 3.4%. More importantly, the capacity utilization rate, which was reported for the first time for June, fell a sharp 3.3% after a 0.7% decline in May. It is the third consecutive decline and the fourth in five months. This would seem to suggest that inflation will continue to stem from imports, especially energy. In this light, it may be an important relative price change, not the lifting of the general price level that economists define as inflation. Japan reports its first estimate of Q2 GDP first thing Wednesday in Tokyo. A sharp contraction is expected.

If the outlook for the world's third largest economy is still hampered by the retail sales tax, the outlook for the world's fourth largest economy, Germany, dimmed a bit further with today's ZEW survey results. A much larger than expected decline was reported. The current condition measure fell to 8.6 from 27.1 in July. The consensus was for 17. The expectations component fell to 44.3 from 61.8. The consensus was for a 54 reading. German Q2 GDP will be reported on Thursday. The risk of a small contraction after a 0.8% expansion in Q1. This can only fan expectations of a greater ECB policy response, though the central bank's hands are tied, it appears, ahead of the implementation of the TLTRO facility. The ABS purchase scheme seems more like a 2015 story than 2014.

The poor data prevents the euro from getting much traction, despite what appears to be an over-extended technical condition. A break of $1.3320 could signal another cent decline. Poor data is also weighing on sterling, which has recorded a new, two month low today just below $1.6760. The next key chart point is near $1.67.

The proximate trigger was the weaker than expected BRC sales figures. BRC like-for-like sales fell 0.3%. The consensus had expected a 0.9% rise after a 0.8% decline in June. The main culprit appeared to be a decline in food sales due to a price war. UK reports employment figures tomorrow and the BOE provides fresh guidance in its quarterly inflation report.

Norway surprised yesterday with a firmer than expected inflation report. Sweden failed to match suit today. Headline CPI fell 0.3%, wiping out in full the 0.2% increase in June. It leaves the year-over-year rate flat, erasing the 0.2% increase in June. The core rate slipped to 0.6% from 0.8% o a year-over-year basis. Euro weakness trumps krona weakness and the cross is threatening to go through yesterday's lows. The next target is near SEK9.1450.

Lastly, we note that house prices in Australia rose 1.8% in Q2 after a revised 1.5% gain in Q1 (initially 1.7%). It has not provided much of a trade incentive, leaving the Aussie still consolidating in last Friday's trading range.

The North American session features the JOLTS employment data. Although it reveals elements of the labor market not picked up by the monthly employment report, it tends not to be a market mover.