Despite the initial demands for pay raise by more than 6 percent, the settlements average in the 3-4 percent range this year. This is, according to economists, considerably higher compared to 2010 and 2011, yet not high enough to set off a wage-driven inflation.

Wage increase gives workers a greater share of Germany’s economic revival. The country’s gross domestic product has grown 3 percent or more the past two years. It expanded at a 2.1 perecnt annualized rate last quarter, significantly outpacing the rest of the euro zone members. Germany’s 5.6 percent unemployment rate is about half the euro zone average.

Wage increases in Germany are beneficial for the entire euro zone because, coupled with wage cuts in countries such as Spain, this would make Europe’s troubled economies more competitive. At the same time, German households would have extra money to boost domestic demand and spending abroad, providing a market for suffering economies in Southern Europe.

However, Germany should keep a lid on its wages. The country must maintain its competitive edge with other global economies such as the US and China. Also, since its population is one of the oldest in Europe, wage-driven inflation could potential eat retirees’ fixed incomes.

Source: Wall Street Journal

Wen called for “putting stabilizing growth in a more important position” and didn’t mention concern about inflation in remarks published yesterday by the official Xinhua News Agency. China may announce stimulus actions in the near term, according to a front-page commentary today in the China Securities Journal, which is published by Xinhua.

The shift in language suggests authorities are “seriously concerned about growth” and “ready to introduce further measures,” Bank of America Corp. said in a research note today. The government on May 12 cut banks’ required reserves for the third time in six months following data that showed trade, industrial production and lending were below forecasts in April.

“The April data has been a wake-up call for China,” said Alaistair Chan, a Sydney-based economist at Moody’s Analytics. “There will probably be some stimulus measures through monetary policy, more bank lending and infrastructure projects being brought forward.”

China has allowed the yuan to weaken against the dollar this year after it strengthened 4.7 percent in 2011. The currency rose 0.06 percent today, the most in a month, to 6.3243 at 11:56 a.m. in Shanghai, following a decline of about 0.5 percent in 2012 through May 18. The MSCI Asia Pacific Index of stocks rose 0.5 percent at 12:56 p.m. in Tokyo.

The Xinhua report on Wen’s weekend visit to Wuhan, the capital of Hubei province, was reposted yesterday on the government’s website, attributing the information to the State Council’s general office.

Bloomberg

Below are some other highlights of the week:

ASIA

• CNY: The PBoC lowered their Required Reserve Ratio by -50bps to +20% last weekend. This will allow authorities to release approximately +CNY500b of liquidity into the banking system and “help smooth liquidity imbalances.” Analysts are not ruling out any further cuts this year as China shift to supporting growth rather than boosting it. Guilty by association has the antipodean currencies currently struggling outright as weaker than expected Chinese data of late has added to this market unease.
• NZD: Kiwi retail sales fell -1.5%, q/q, in Q1. This follows two quarters of Rugby World Cup-boosted sales (thankfully the All-Blacks won) at the end of 2011. However, antipodean currencies remain vulnerable to Chinese data reporting.
• AUD: Aussie home loans rose +0.3%, m/m, in March, following a -2.5% decline in the previous month. The RBA’s role is to promote balanced growth; however, they acknowledge that growth in some sectors of the economy will remain below the average experienced over the last couple of decades. Market continues to price in a dovish CBank.
• INR: India’s WPI inflation rose to +7.2%, y/y last month from +6.9% in March. It is worth noting that core prices fell -0.1%, m/m, on a seasonally adjusted basis with most of the rise in the headline driven by food. The higher inflation print increases the risk that the RBI may keep rates on hold at the next meeting in June.
• AUD: The RBA minutes noted that it was “desirable for interest rates to move below the levels that prevailed in December, and a 50bp cut was required, taking into account higher bank funding costs and less mortgage pass-through.” This still allows them room to ease even further. If the global economy deteriorates next quarter, a similar cut will be on the table.
• NZD: Non-resident bond holdings rose to +62.1% last month from +60.9% in March.
• CNY: China’s Foreign Direct Investment has fallen for the sixth straight month, recording a -0.7%, y/y, decline in April after a -6.1% drop in the previous month.
• KRW: South Korea’s import price index rose last month at its slowest pace in more than two-years, gaining +1.7%, y/y, compared with a +3.5% rise in March. The export price index was up +2%, y/y, after being unchanged in March.
• NZD: Analyst’s note that Kiwi whole milk powder prices dropped -8.9% in the latest Fonterra auctions. Fonterra is the world’s biggest milk exporter. Year-to-date, prices have fallen -30%. A weaker commodity price always leaves the Kiwi vulnerable.
• AUD: Aussie Westpac Consumer Confidence Index recorded a modest gain of +0.8% to 95.3 in May, compared with a -1.6% decline last month.
• JPY: Japan’s machinery orders fell -2.8%, m/m, in March, following a revised +2.8% increase in February.
• JPY: The Japanese economy expanded faster than estimated in Q1, boosted by reconstruction spending. Q1 GDP rose +4.1%, q/q annualized, while Q4 GDP growth was revised higher to +0.1% from -0.7% previously.
• JPY: Housing loans grew +2.4%, y/y, in Q1, accelerating from the +2.2% rise recorded in Q4.
• KRW: Korea’s department store sales fell the most in 3-months in April, declining -3.4%, y/y, compared with a +1.6% rise in the previous month. South Korea announced that it is “prepared to take prompt action to stabilize markets should it be needed as Europe’s sovereign debt crisis deepens.”
• AUD: Aussie average weekly earnings rose +1.1%, q/q, in February.
• NZD: Kiwi ANZ job advertisements fell -2% in April, following a revised -0.9% decline in March.
• AUD: Aussie rate markets continue to rally, pushing 2-year government yields down -22bp as the OIS market move to price in a high probability that the RBA delivers a -50bp cut on June 5.
• JPY: The Japanese government has raised its assessment of the economy for the first time in nine-months. This certainly will not help the fallout of yen appreciation. Finance minister Azumi said that he is watching the value closely and is cautious on yen strength.
• CNY: China reported that average property prices in 70 cities covered in a government survey declined on a year-on-year basis in April. This was the second consecutive monthly decline, as developers continued to cut prices to boost sales amid a two-year-old government campaign to cool the property sector.

AMERICAS Week in FX

EUROPE Week in FX

Below are some other highlights of the week:

AMERICAS

• USD: US consumer prices were flat last month (+0.3% vs. +0.3%), ending three-months of price increases as falling gas costs kept inflation at bay. Core-prices have risen +0.2%, m/m, and +2.3%, y/y. The annual rate for the overall and core continue to hover above the Fed’s+2% target. Despite falling gas prices easing overall inflation, rising core could limit the Fed’s ability to stimulate the US economy further, even by additional bond buying.
• USD: Retail sales grew just +0.1% headline and ex-autos, below market expectations of +0.2%. Analysts note the sales print is to some extent a payback after a strong Q1 gain. Last month saw a particular weakness in building materials and gas station receipts on the back of weaker gas prices.
• USD: NY Empire State manufacturing rebounded this month. The business conditions index rallied to 17.09 after falling 14 points to 6.56 in April. Most of the sub-indexes improved like new orders, shipment, labor conditions and the employment index. However, price measures eased this month as did optimism about the future.
• USD: Housing starts beat expectations, rising to +717k vs. +680k. On the flip side building permits dropped back down from +769k to +715k after March’s +62k surge. It remains the second highest monthly reading in just under four-years.
• USD: IP rebounded last month, jumping +1.1%, m/m, further proof of a healthy demand for factory goods. Other data showed that US Capacity utilization also rose to +79.2% from a revised +78.4%. Big picture however, operating rates remain below their long-run average, just above +80%.
• CAD: March Canadian manufacturing shipments gained +1.9%, beating expectations of a +0.4% monthly rise. The gain was led by an increase in sales from petroleum and coal products.
• USD: The weekly EIA reported crude inventories were up +2.1m barrels just above weekly expectations of +1.5m.
• CAD: Foreigners reduced their Canadian security holding for the second consecutive month (-$2b). On the flip side, Canadians bought the largest amount of foreign product in five-years last month (+$6.3b, with US equities accounting for +60%).
• CAD: Canadian manufacturing shipments rallied in March, up +1.9% vs. +0.4% expectations.
• CAD: Wholesale trade climbed +0.4% to +$49b in March, mostly on the back of motor vehicles and the parts sector. Sales volumes were also unchanged on the month.
• CAD: BoC quarterly review stated that “delay or front loading of fiscal consolidation may cut global GDP 7-8% by 2015. Monetary policy may be needed to support financial stability in exceptional circumstances” In translation, Governor Carney has little concern for the Euro meltdown and is flexible for liquidity injections if required.
• USD: Level of US initial jobless claims remained unchanged, w/w, at a seasonally adjusted level of +370k. The four-week moving average falls to the lowest level in more than a month (-4.7k to +375k). The data suggests that last month’s spike is likely due to seasonal factors. The May employment report is likely to confirm the slower trend in hiring that emerged in March.
• USD: The Conference board’s leading economic indicators index slid -0.1% last month, the first drop in eight-months. Negative contributions came from last month’s contraction in building permits and a jump in initial claims. The broad softness in this month’s data implies weak growth in the latter half of Q2.
• USD: Philly Fed truly disappointed and missed all market expectations, falling from +8.5 to -5.8, the worst print in eight month. The negatives came from new orders, a big plunge in the employment and the future activity index.
• CAD: Canadian April CPI (nsa) +0.4%, m/m and +2%, y/y; core +0.4% and +2.1% y/y. The market was looking for a headline print of +0.3% and +0.2% respectively. This has the hawks wondering when Governor Carney will pull the trigger. Despite probably being the first G8 country that is going to actually hike rates, the market is beginning to price in no hike this year after a disappointing Canadian GDP print in February, and because of the continued euro-zone turmoil.

EUROPE Week in FX

ASIA Week in FX

Below are some other highlights of the week:

EUROPE

• Market sentiment continued this week where it left off in risk aversion mode. Fears of a disorderly Greek default and EMU exit remain the main source of market stress. The negotiating of a grand coalition was unsuccessful as the country now heads towards a June election.
• GER: Chancellor Merkel’s CDU party lost more vote share in North Rhine-Westphalia, with the SPD increasing its control of that state. The sitting Chancellor looks under pressure to win next year’s election.
• EU: Mainland data continues to point to a significant deterioration across the euro-zone. EZ IP fell -0.3%, m/m, much worse than the consensus for a +0.4% rise. Not surprisingly, the weakness came from a sharp contraction in energy production after weather related strength in Q1.Analyst’s continue to point to the weak PMI’s which convey a worrying growth outlook in the euro-zone going into Q4.
• GER: German economic expectations have fallen somewhat aggressively this month after rising for five consecutive releases (10.8 vs. 23.4). It obviously reflects the shenanigans occurring in Greece and the French political results. Collectively, both situations seem to be raising doubts about the commitment from some European Governments to fight the periphery regions debt crisis.
• EU: Overall, euro-zone GDP was flat in Q1 according to the flash estimate, better than the consensus expectation for a -0.2%, q/q, contraction. German growth surprised to the upside, rising +0.5%, q/q. Positive German contributions came from domestic consumption and net trade, while investment decreased. Both Dutch and French GDP did not deviate too far from flat. However, in the periphery, the news was less good. The Italian economy appears in a deeper recession with a -0.8% contraction in Q1, while Greece was down -6.2%, y/y and the surprise was Portugal’s GDP falling only -0.1%, q/q. The market seems to believe that the weak peripheral should trump the better news in the core in terms of EUR impact. Will the ECB set policy to maintain peripheral stability?
• GER: Despite being government less, Greece paid the +€430m international bond maturing this week, hoping obviously not to aggravate sentiment given current delicate conditions and be seen as a new trigger for systemic pressures.
• CE3: Their economies reported very weak GDP numbers. CZK GDP contracted -1.0%, q/q, after the country entered a technical recession in the past quarter. This should support the doves thinking. Elsewhere, HUF’s GDP contracted -1.3%, q/q, much worse than the expectations for -0.5%qoq. Expect renewed concerns in mainland Europe and weak growth outlooks to affect the CE3 further.
• GRD: Greek political leaders fail to build a coalition. A caretaker government will oversee next month’s election.
• EU: Merkel and new French President Hollande indicate that they would consider measures to spur economic growth in Greece, as long as voters there commit to the austerity demanded for Greece to stay in the euro.
• GBP: The tone of the BoE latest inflation report was very dovish relative to the hawkish set of minutes. Based on market interest rates and current size of asset purchases, inflation is projected to be below the +2% target at the end of the forecast horizon. Governor King indicated that the will respond if the euro crisis escalates. Are more AP’s on the horizon? Will sterling outperform the EUR and other growth sensitive currencies as a safe haven?
• UK: Jobless claims fell -13.7k last month, while March jobless claims were revised to -5.4k from +3.6k previously. These are first falls in job claims in over a year. The ILO unemployment rate fell to +8.2% for Q1 vs. +8.4%. Since Q4, the UK economy has managed to create +165k jobs. Is the UK economy in that much of a technical recession?
• EU: Euro-zone inflation was +2.6%, y/y, in April, unrevised from the preliminary estimate and slightly down from +2.7% in March. Core-inflation was stable at +1.6%, y/y.
• EU: The ECB announced that they will not lend any more to several Greek banks until their recapitalization is complete, combined with the announcement of new Greek elections for 17 June, happen to offset the overall positive outcome of Spain’s mid-week bond auctions. Spain issued €2.5b to reasonably strong demand.
• GR: Anagiotis Pikrammenos, the head of Greece’s Council of State, will head the caretaker government into next month’s elections.
• EU: Moody’s downgraded Spanish banks on rising loan defaults, a renewed recession, restricted funding access and the reduced ability of the government to support lenders.
• ITL: Following large falls in the previous two months, Italian industrial orders rose +3.5%, m/m, in March, handily beating market expectations.

AMERICAS Week in FX

ASIA Week in FX

World stocks, as measured by the MSCI index, dropped 0.7 percent and are now below where they began the year, having relinquished all the first-quarter gains fuelled by the European Central Bank’s injection of more than a trillion euros of three-year money.

That rally is now a distant memory as an ugly week for stock markets looked likely to end even uglier.

Across the board, riskier assets from commodities such as oil and currencies like the euro and the Australian dollar were all heading for big weekly losses.

While U.S. stock futures pointed to a modestly higher open on Wall Street, following a sharp drop on Thursday, the FTSEurofirst 300 of leading European shares slid 0.6 percent to 975.71 by 1130 GMT, falling for a fifth day running and taking its weekly loss so far to nearly 5 percent.

Facebook will make its Wall Street debut after the world’s No.1 online social network raised about $16 billion in one of the biggest initial public offerings in U.S. history.

Benchmark 10-year German bond yields hit a record low of 1.396 percent and two-year yields also fell to their lowest-ever level at just 0.028 percent.

Investors were spooked by a ratings downgrade of 16 Spanish banks by Moody’s Investors Service – although the move had been expected – and an unexpected contraction in U.S. regional factory activity reported on Thursday.

Reuters

Guarantees provided by U.S. lenders on government, bank and corporate debt in those countries rose 10 percent from the previous quarter to $567 billion, according to the most recent data from the Bank for International Settlements. Those guarantees refer to credit-default swaps written on bonds.

JP Morgan and Goldman Sachs Group Inc., two of the top CDS underwriters in the U.S., say they have bought more protection than they sold, indicating they may benefit from defaults in the region. That outcome is called into question by JPMorgan’s $2 billion loss on similar derivatives, which shows that risks don’t vanish when offsetting bets are taken, said Craig Pirrong, a finance professor at the University of Houston.

“All these hedges trade one risk for another,” said Pirrong, whose research focuses on derivatives markets. “The banks say they’re flat on European risk, but that’s based on aggregated positions. We don’t know how those will hold off if the European crisis blows up.”

JPMorgan Chairman and Chief Executive Officer Jamie Dimon said last week that the bank was trying to reposition a portfolio of corporate credit derivatives and used a flawed trading strategy. The lender, the largest in the U.S. by assets, is believed to have sold protection on an index of corporate debt and bought protection on the same index to hedge its initial bet, according to market participants who asked not to be identified because their trading strategies aren’t public.

The two bets moved in opposite directions this year, causing losses and proving that even hedges that look perfect can break down, Pirrong said.

Bloomberg

The euro reached a four-month low versus the dollar after Fitch Ratings downgraded Greece’s long-term credit rating, citing heightened risk that the nation may not be able to sustain membership in the monetary union. Bullion jumped 2.5 percent yesterday, the most since October, as a U.S. report showed manufacturing in the Philadelphia region unexpectedly shrank in May for the first time in eight months.

“To see a return of gold reacting positively to macro stresses is indeed refreshing, but it is still far too early to make any firm conclusions from here that gold has indeed turned the corner,” Edel Tully, an analyst at UBS AG in London, wrote in a report today. “Follow-through buying will have to kick in to encourage investors to jump in.”

Gold for June delivery gained 1 percent to $1,590.70 an ounce by 7:58 a.m. on the Comex in New York. Prices are up 0.4 percent this week. Bullion for immediate delivery was 1.1 percent higher at $1,591.70 in London

Gold is up 1.5 percent this year after 11 consecutive annual increases. It slumped the previous two weeks as a stronger dollar cut demand for the metal as an alternative asset. Holdings in bullion-backed exchange-traded products rose 3.3 metric tons to 2,381.8 tons yesterday, about 1.2 percent below the March 13 record, data compiled by Bloomberg show.

Gold reached the lowest price this year on May 16 as Greece’s inconclusive May 6 election sparked political turmoil and reignited concern the country will renege on pledges to cut spending as required by the two separate rescue packages. In Spain, the cost of insuring against a default jumped to a record. Moody’s Investors Service lowered the credit ratings of 16 Spanish banks yesterday.

Silver for July delivery rose 1.4 percent to $28.405 an ounce. Palladium for June delivery was little changed at $605.15 an ounce. Platinum for July delivery gained 0.5 percent to $1,460.80 an ounce.

Bloomberg

Moody’s has been kept busy in the overnight session, downgrading 16 Spanish banks by one to three notches, with ten of the institutions left on negative outlook. Without going into too much detail, the downgrades reflect each bank’s operating conditions, rapid asset quality deterioration (long too many holiday homes on their books), funding concerns and finally, each entities creditworthiness of the Spanish sovereign. This final point is probably the most significant, analysts note that it affects the ability of the government to support banks. Moody’s is currently Euro country hopping, and this will not be the last of the European banks to be downgraded in this cycle.They have eleven more EU member announcements to handle before the end of next month. Not to be left in the cold, Fitch cut Greek long-term sovereign rating to CCC from B-, bringing its rating in line with S&P’s.

The Greek radicals under Tsipras believe they still have the hammer over the rest of the Europe, presuming that fellow members will not roll the dice and cut off funding to his country. His party believes a financial collapse in Greece would drag his compatriots down as well. Obviously quoting Hollande visions, Europe must consider more growth oriented policies for his homeland. Coming back to the EUR reality, there is no alternative for Greece, she must stick to the deal that has been agreed. Other Euro policy makers concur that this is the country’s only rational option. It’s no wonder that contingency plans are being drawn up in case Greece were to exit the Euro-zone. Their woes reinforce the dollar bull views that the single currency will struggle to make it back above 1.30 even if the polls start to signal a greater chance of a pro-EMU composition of the Greek parliament. Any Greek coalitions will still have to face a difficult negotiation on a modified austerity plan. The thought of an ECB easing, to promote growth, does not strengthen the currency either!

The position ratios continue to show that the market has been quietly gathering EUR’s ahead of this years low print of 1.2624. The EUR bears are happy to pare some of their ‘one directional’ trade positions to at least recycle said funds. There are a few significant strikes occurring today. The larger sizes will only increase short term spot gravitation of certain levels (specifically, 1.27 and 1.2725). Single currency supply is expected to be on hand as the market approaches 1.2750. The longer term focus still remains fixated on breaching the psychological 1.26 barrier below. It will not be unusual for the markets to see the EUR rally intraday, cutting some of the record short positions ahead of this weekends G8 meetings. It’s always prudent to play the percentages in case of event risk. Obviously counteracting this will be the possibility of fresh Euro negative news occurring during the weekend from any embattled member. The trend remains your friend and having cash to recycle also feels good!

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