Sigh of relief lifts French markets

Overview: The market feels a bit more at ease after the first round of the French elections that extreme policies will be avoided by an effort to deny the National Rally a legislative majority. French stocks have recouped some of their recent losses and the euro reached $1.0775, its best level since June 13. The yen remains soft after the Tankan survey showed little change but an uptick in capex plans. Outside of the yen and Swiss franc, the dollar is trading with a mostly softer bias. A handful of emerging market currencies are weaker today, including the Mexican peso. Central European currencies, though, a firmer in the wake of the euro's gains, but the South African rand is leading the emerging market currencies with nearly a 1% gain as a new government is falling into place. 

Asia Pacific and European equities began the new month on a positive note. All the large bourses in the Asia Pacific region were higher but Australia after MSCI's regional index posted its first weekly advance since early June last week. Europe's Stoxx 600 is snapped its own four-day down draft today, helped by the bounce in French stocks. US index futures are narrowly mixed. Bonds are continuing their pre-weekend slide European yields are 2-8 bp higher, with core-peripheral spreads narrowing and the French premium over Germany narrowing by around five basis points. The 10-year US Treasury yield is firm near 4.41% after rising 14 bp last week. Gold is trading quietly (~$2318-$2330) after settling last month slightly below $2327.August WTI continues to probe the $82 area. It reached $82.70 before the weekend but closed near $81.40. 

Asia Pacific

Japan's Tankan Survey was little changed from last quarter. Sentiment among large manufacturers ticked up but there was no improvement for large non-manufacturers or smaller businesses. It did contain new information in terms of stronger capex plans (11.1% vs. 4.0% previously, missed expectations, 13.9%). It comes on the heels of the small increase in Tokyo's June CPI, which is a harbinger of the national report in a few weeks. At the end of the week, Japan will report May household spending. It rose in April (year-over-year) for the first time since February 2023. The combination of yen weakness and Governor Ueda's mission to normalize monetary policy suggests the risk is that both QT (fewer bond purchases than maturing issues) and a small rate hike are delivered at the end of the month. Minutes from the June RBA meetings are released tomorrow. They ought to be seen as a communication tool and the message from the meeting was that the central bank has not yet adopted an easing bias. Australia will report May retail sales Wednesday. Wage growth and income tax cuts could boost consumption in the coming months. At the end of the week, Australia reports May merchandise trade. The surplus through April has fallen to about A$28 bln from around A$36.5 bln in the year ago period. Exports have fallen by a cumulative 5.2%, while imports have risen 2.9%. China's June PMI reading can only add to a pessimistic near-term economic outlook and underscore expectations for new action at the Third Plenum in the middle of the month. The composite PMI eased for the third consecutive month to 50.5, lowest this year, from 51.0. Manufacturing remained at 49.5 for the second consecutive month in June. It was at 49.0 in June and December 2023. New orders and new exports are contracting. The non-manufacturing PMI fell to 50.5 from 51.1. This is also a new low for the year. The Caixin manufacturing PMI edged up to 51.8 from 51.7. It has not fallen since last October. 

The dollar has held above JPY160 since breaking the barrier in the middle of last week. It reached almost JPY161.30 ahead of the weekend. It is trading inside Friday's range after trading on both sides of the previous day's trading range but settled slightly above Thursday's high. The market knows it is risking intervention in what is arguably a one-way market. The dollar has a three-week rally in tow, during which it has appreciated by about 2.25%. The Australian dollar also traded on both sides of Thursday’s range ahead of the weekend and but settled within its range. It rallied from an eight-day low near $0.6620 and posted its highest close since June 3 (~$0.6675). It is trading firmly today but needs to convincingly break the $0.6600-$0.6700 range to be anything important. Meanwhile, yuan bears may be wary of official action in the offshore market and have been hesitant pushing the dollar above CNH7.30. It is straddling that level for the fourth consecutive session. Chinese officials can engineer a squeeze in the offshore market by tightening liquidity, making it more expensive to short the yuan, and they could intervene directly. The PBOC set the dollar's reference rate at CNY7.1265 (CNY7.1268 on Friday). The central bank announced its intention to borrow bonds from primary dealers to sell to stem the decline in bond yields, which have fallen to record lower. The 10-year yield reached 2.18% today while officials have suggested a 2.5%-3.5% range is appropriate. 

Europe

The first round of the French elections gave Le Pen's National Rally a plurality of votes but even with a generous look at round two, it most likely will not secure an outright majority after the second round this coming weekend. The markets have responded well. French stocks have rallied around 1.4% and the French 10-year premium over Germany has narrowed by about five basis points. Meanwhile, tomorrow the preliminary aggregate June CPI will be reported, and the year-over-year rate is likely to be little changed from May's 2.6%, but for the rounding. Before the weekend, France, Italy, and Spain reported their figures and today, German states have. The national figure is due shortly and it looks to have risen a mild 0.1% for a 2.4% year-over-year pace (down from 2.5%). Eurozone consumer prices appear to have accelerated in Q2 (4.3-4.4% annualized vs. 4.0% in Q1). Looking further ahead, the base effect warns of a difficult second half. In H2 23, eurozone inflation rose at an annualized rate of less than 1%. May unemployment is due at the same time. This is a good story. Eurozone unemployment reached a record low of 6.4% in April. It was at 7.5% at the end of 2019. The tightening of monetary policy and the economic slowdown, which included a small contraction in H2 23. the labor market has fared better than anyone reasonably expected. 

The euro traded last week in the lower end of June's range. It traded below $1.0675 on three occasions since mid-June and found good buyers each time. Pre-weekend position squaring ensured the euro snapped a three-week fall but stalled near $1.0725. The results of the French election have seen the euro jump to about $1.0775, its best level since the day after US May CPI (June 12). The euro has found intraday support in early European activity near $1.0750. Nearby resistance is seen in the $1.0785-$1.0800 area. Sterling traded in a narrow range ahead of the weekend of a little more than a fifth of a cent in both directions around $1.2640. It was confined to less than a cent range last week. The $1.2600 area offers important support. Sterling is trading firmer but has held below $1.2690. On the topside, $1.2700-$1.2710 offers nearby resistance. Still, potential may extend toward $1.2735-65 in the coming days. 

America

North American participants have one eye on Thursday's holiday and one eye on Friday's jobs report. There is wood to be chopped first. On tap today, the ISM manufacturing is more important than the final PMI manufacturing survey (preliminary estimate rose to 51.7 from 51.3). Except for this past March, the ISM manufacturing diffusion index has been below 50 since October 2022. May construction spending is due, as well, and it fell in March and April. A 0.3% rise in May will nearly offset that decline. The highlight for Canada this week is also the employment report at the end of the week. Canada's unemployment rate is rising, and the Bank of Canada took advantage of the softer CPI measures to become the first G7 central bank to cut rates last month. The unemployment rate has risen from 5.7% in January to 6.2% in May. Canada created about 63k full-time jobs in the past five months. Mexico has a full schedule of economic reports this week, but the most market-sensitive data are today (May remittances and IMEF June survey) and tomorrow (June manufacturing PMI and April private consumption).

The US dollar posted an outside session ahead of the weekend against the Canadian dollar. It reversed from eight-day high near CAD1.3735 to CAD1.3655. Quarter-end position adjustments may have exacerbated the move, but the greenback still managed to settle within the previous day's range. Last week's low was near CAD1.3625. The greenback has not settled below CAD1.3600 since April 9. Canadian markets are closed today for Canada Day. The exchange rate is subdued today, and the greenback is in a narrow range (~CAD1.3665-CAD1.3690). The greenback also traded on both sides of Thursday's range against the Mexican peso ahead of the weekend. It also settled inside Thursday's range. Initially, the dollar reached a nine-day high against near MXN18.60 in the pre-weekend Asia Pacific session. It trended lower through Europe and the North American morning to approach MXN18.20 before bouncing back above MXN18.30. The US dollar is trading firmly today ~MXN18.2665-MXN18.4120) but within last Friday's range.