July's Non Farm Payroll report will probably please most market participants since it was weak enough to relieve some of the pressure on the beleaguered bond market but not so weak that it will be viewed as troubling for the equity market. From our own perspective it is well within the range of outcomes that would support our view of a strengthening employment cycle, although we would admit that it lacks some of the zip of the May and June reports.

Total Non Farm Payroll additions were estimated at 162K, below expectations of 185K but not meaningfully so. May and June's reports were revised down by a total of -26K and are now 176K and 188K (June's is subject to a further revision next month). This takes the trailing 12 month ma of payrolls up slightly to 189.7K, its highest level since March 2012 and is identical to the 12 month pace of gains seen in September 2006 (right in the middle of the FOMC rate hike cycle).

Private Sector gains were estimated at 161K vs 195K consensus and this data was also revised lower by -26K in May and June to 187K and 196K respectively. This takes the trailing 12 month ma down slightly to 192.9K (see chart) which is equivalent to the pace of job creation seen in Q2 2006.

The Household Survey showed gains of 227K, allowing the tailing 12 month ma to rise to 170K. As we have discussed before this is a much more erratic measure of employment (see chart) but since it drives the Unemployment rate (along with assumptions about births, deaths and participation rates) it now needs to be monitored. The Unemployment Rate itself formed the strongest data point in the report, falling from 7.6% to 7.4%, the lowest rate since December 2008.

As the attached chart shows over the last 12 months the Unemployment Rate has fallen by 0.8% and is now 0.7% lower than it was at the time of Chairman Bernanke's Jackson Hole speech. Should this trend be maintained we would see Unemployment hit the FOMC 6.5% guideline sometime next summer, well ahead of schedule. Even though the FOMC has been at pains to make clear that it will not be bound by a single number in making its decision to change monetary policy the economic arguments behind the continuance of QE3 and the entire experiment of unorthodox monetary policy are becoming more threadbare by the day.

Spain appears to be very close to making the transition between rising and falling unemployment, and in fact this vital pivot point may already have taken place although the positive seasonal factors caused by tourism at this time of year make it hard to be certain.

As we have argued several times before (most recently with regards to Ireland) the point at which employment gains start to make themselves felt is much more important than most observers realize, even when the prevailing rate of unemployment is higher than is generally acceptable (as is the case in both Spain and Ireland today). This is because it is at this point that the confidence of those left with a job starts to recover as their own personal risk of lay off recedes, and also because a drop of unemployment by definition means an increase of wage earners, with obvious implications for overall economic activity.

In terms of July's data Unemployment fell by -64.9K and although this was slightly less than consensus expectations of -75K the massive June drop (-127K) probably included some front loading of July employment. Even so this is the best July data since 2010 and allows the 12 month ma to fall to 9.28K, the lowest level since December 2007. We do believe that this metric will fall into negative territory (signaling a YoY gain in employment) later in 2013.

As for the number of unemployed this remains very elevated at 4698K, although this is down from the February 2013 peak of 5040K it is still 2.4% higher than the level of July 2012. On the other hand this rate of increase is itself the smallest since August 2007, again suggesting that we are very close to the point that Spain's economy becomes a reliable provider of new employment.

Italy's New Car Registrations for July dropped by a mere -1.92% from their level of 2012. Although this still represents a decline in activity it is a substantial improvement from the degree of demand destruction that has been taking place over the last 18 months (the trailing 12 month ma of this metric is -13.93%) and we would hope to see this data series push into positive territory over the coming months.

In terms of the degree of demand destruction that has taken place in recent years the 12 month ma of car registrations is 109.3K compared to a prior cycle peak over 200K. If even 50% of this draw down were to be recovered it would involve a 50% increase in current activity. There is of course no assurance that this will take place, but we tend to believe in the cyclicality of industries such as vehicular transportation and would hope that the bottoming of demand is followed by a period of significant recovery.

The ISM Manufacturing Report for July 2013 is a very strong set of data that suggests that a new leg higher for the industrial sector may have commenced in recent weeks. We suspect the turn in the housing construction cycle is behind this new surge in activity and although we would always caution against reading too much into any single monthly report the strength of some of the sub indexes would survive even a substantial give back in next month's report and still be suggestive of an accelerating economy.

The overall index rose to 55.4, the highest level since June 2011. It should be borne into mind that because this is a diffusion index these two readings are not strictly comparable, and a later cycle reading of this magnitude is much more impressive than the growth of 2 years ago when the deep draw-down's in much of the industrial sector from the prior cycle higher were still in effect.

Even more impressive was the increase in New Orders (red) to 58.3, the highest reading since April 2011. Production was even more impressive at 65, which remarkably is the strongest reading since April 2004, thus beating even the strong 2009-10 period in recovery. Again we would stress that coming 4 years into a recovery readings of this magnitude are quite unusual (although we suspect that 65 may be a slight overstatement of underlying activity).

As would be expected under these circumstances Inventory (olive) remained in draw-down mode at 47, while Employment (pink) rose to 54.4, the best level since June 2012. Overall this report is about as good a set of data as anyone could have imagined and certainly suggests that the manufacturing sector remains in a strong recovery.

The PBOC published its June balance sheet update this morning, which showed total assets grew by 459.6 bln CNY (1.52%) to 30.67 trln CNY. Interestingly the FX holdings actually shrank slightly by -9 bln CNY (0.04%) to 24.99 trln CNY underlining the deterioration in export activity and this is only the second time in the last 24 months that FX holdings have fallen.

However, this shortfall was made up by a massive surge in "Claims on Other Depository Corp" which expanded by 433 bln (36%) to 1.618 trln CNY, essentially providing all of the expansion in June. We would imagine that this surge was connected to the injection of capital that was used to bring SHIBOR back under control at the end of June and early July. Given that this category tends to be very volatile we would expect to see a sharp drop either in July and August, which potentially would then cause the PBOC's balance sheet to shrink accordingly.

For the time being June's data means that the annual growth in the balance sheet is now 7.2%. This is the highest level since June 2012 but still lags the growth rate of broad money and credit in the local economy. The ratio of the size of the PBOC's balance sheet to outstanding Bank Loans ticked slightly higher to 0.45 in June, although it should be remembered that a considerable amount of non-bank lending also took place in June, albeit at a lower pace than prior months.

Overall the PBOC continues to be quite stingy with its liquidity creation, particularly when one considers that the large cash injection made to stabilize SHIBOR came with strict instructions as to how it was to be applied.

As we wrote in this morning's Weekly summary, the US equity market is about to switch its emphasis from corporate earnings to economic data as the July data cycle comes into view. This morning's Initial Claims data got this process off to a robust start with estimated Claims falling to 326K, well below expectations of 345K, while last week's data was notched higher from 343K to 345K. This represents the lowest single week Claims report since January 2008 on a seasonally adjusted basis.

The NSA data is perhaps even more encouraging. Late July is generally a low period for Claims (short term tourism based jobs tend to pick up a lot of labor supply and automobile factory furloughs tend to expire) but even so the very sharp drop to 279.9K is impressive. This is the lowest single week for NSA claims since October 2007, which represented the last weeks of the prior expansionary cycle.

This week's data caused the trailing 4 week ma of Claims to fall to 341.3. With the high July 5th report (358K) dropping out of the data next week the odds are fairly good that a new cycle low in 4 week Claims will be recorded, with this data now pressing considerably lower than the key 350K level during the most difficult seasonal period for the data.

Of course the market will remain far more focused on tomorrow's BLS report, which still has the potential to surprise in either direction. Nevertheless even if we receive a weak report the message from the more reliable Claims data is that a distinct improvement in employment conditions has taken hold in recent months.

Attached is a comparison of today's FOMC statement with that of June 19th (the date of the last meeting). As would have been expected little of substance was changed in the text, with the change from the description of a "modest pace" to a "moderate pace" of recovery being typical to the alterations made with the FOMC anxious to avoid another sell off in fixed income markets.

Probably the most interesting decision was to add the note that:

"The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance"

This is a useful reminder that the current FOMC interprets the portion of its mandate relating to inflation as a duty to make sure that it occurs. This is very different from the "price stability" mandate of earlier versions of the FOMC.

Regarding inflation we see no obvious push higher in CPI, but equally we see none of the signs of "deflation" that Chairman Bernanke so eloquently described back in November 2002:

www.federalreserve.gov/boarddocs/speeches/2002/20021121/

Although interest rates have hit the "zero bound" described in this speech, this is currently more an outcome of FOMC policy rather than market forces. Certainly few of the difficulties described in servicing debt described in this speech are still relevant today, although admittedly this was not the case 5 years ago and it is far from clear that the economy would suffer a sharp reverse if the FOMC were to cease asset purchases at the current time.

Meanwhile outside of the statistical closet of CPI the signs of an inflationary impulse are building. Higher asset prices are starting to become prevalent in the US economy, with a number of residential and commercial real estate markets back to their prior cycle highs and the SPX breaking out into blue sky territory. We suspect this is a harbinger of a comprehensive victory over the foe of "deflation", and a return of the more common policy concern of inflationary pressures.

At a time that the market seems concerned to weigh up the "dovish credentials" of potential successors to Chairman Bernanke it would appear that the ability to calm a bond market spooked by overly loose monetary policy is the most likely skill required by the time the hand-over takes place.

Japan's June Housing Start data held on to most of the strong gains delivered in May with an annualized rate of 976K (982K consensus) dropping from 1027K. This still represents a 16.6% YoY increase in activity, and takes the 12 month ma up to 920K, the highest level since June 2009. In other words the report is supportive of the notion that Japan's residential construction industry is enjoyed a rebound in activity that we would expect to extend for several months going forwards. It should be noted that pre-crisis activity was stable around the 1.20mm home level, and a return to this sort of activity would involve around a 25% increase in current activity.

The ADP Employment Survey for July got the July data cycle off to a strong start with an estimation of 200K new private sector jobs, above expectations of 180K. June's report was also revised higher from 188K to 198K enhancing the quality of today's report. This takes the trailing 12 month ma of the report up to 166.9K, which trails the equivalent level of the BLS Private Sector report by almost 30K. It should be noted that since its methodological revision (which ironically was designed to bring the report into line with the BLS data) the ADP report has been consistently less bullish than the official ADP report, whereas previously the 12 month ma were virtually indistinguishable (although monthly variances were considerable).

Expectations for Friday's report are 185K for Total and 195K for Private Sector job gains. Today's ADP report is supportive of this outcome but in no way guarantees that it will be delivered. We would assume that any report above 225K for Private Sector gains would constitute an upward surprise, while a number below 170K would bring considerable relief to the bond market.

Ireland's Live Register of Unemployed citizens continues to improve sharply from its elevated level with July witnessing a -3.2K decline to 419.2K while June's report was revised from -2.5K to -2.9K. This represents the sharpest 1 month fall in the Register since December 2011 but what is more important is that a clear trend of improvement has been established with 13 straight months of falling data. Over the past 12 months the Register has fallen by -17K, which is the sharpest decline since May 2001 when the Register had fallen below 140K for the first time in its history.

The decline in the Register led to a small fall in the Unemployment Rate to 13.5% from 13.6% and clearly this degree of unemployment remains a debilitating constraint on the domestic economy. Nevertheless the sharp rate of improvement should not be ignored since it is the re-entry of individuals into employment that drives new economic activity. Ireland looks to be poised for a period of substantial improvement with a large available pool of labor now apparently in some demand from local businesses.

Although the headline Conference Board Consumer Confidence Index ticked slightly lower to 80.3 from last month's level of 82.1 (revised up from 81.4) there is some significant evidence in this month's report that consumers are starting to display an increasing awareness that economic conditions are improving in the US.

This can best be seen in the Present Situation Index, which rose very strongly from 68.7 to 73.6, the best reading since May 2008. Although this was contradicted by a decline in the Expectations index from 91.1 to 84.70 in our experience consumer's are much more reliable when talking about the present than predicting the future, and as can be seen on the attached chart the current reading is the latest in a string of improving reports.

The other area of clear improvement comes in employment sentiment. The Jobs Plentiful index rose to 12.2 in July, the highest reading since September 2008 while the Jobs Hard to Get Index fell to 35.5, which is the second lowest reading since September 2008. This creates the tightest spread between these two indexes since the month in which Lehman collapsed, at which time the Unemployment Rate stood at 6.1%. This suggests that US consumers are seeing rather more improvement in employment opportunity than has thus far been detected by official employment data.

In a widely expected move the RBI chose to hold India's Repurchase Rate at 7.25% and made no change to any other reference rate. What was more interesting than the decision itself was the commentary that attended it. The RBI made clear that its primary concern is now the Rupee. The RBI commented specifically on the need to rein in the unsustainable Current Account deficit and made it clear that its recent tightening of monetary policy will remain in place for a good while longer.

This determination is now shared by the Finance Ministry whose Chief Economic Advisor, in perhaps a deliberate use of Draghi's famous intonation, stated that India "will do whatever it takes" to stabilize the INR. Unfortunately the response of the market to the use of this magical phrase proved to be less than enthusiastic, with the INR falling -1.8% to close back above the key 60 level this morning at 60.48. The all time low of 61.21 is now clearly at risk of being surpassed.

Thus far the large cap SENSEX has remained fairly well behaved, with the index closing right on support at its 200 day ma, and almost exactly where it started the year. Small cap equities have suffered much more damage and we note the BSESMCAP index fell to a new 4 year low this morning (see chart) taking its YTD decline down to -27.4%. We believe the latter is probably the more accurate gauge to the level of distress being felt in the domestic economy underlining the considerable risk that the RBI's "currency first" policy may cause a further sharp downturn in economic activity in the weeks ahead.

US Pending Home Home Sales remained close to the elevated level reached in May, with the seasonally adjusted index falling by from 111.3 to 110.9 (2001 = 100). This caused the trailing 12 month ma to rise to 104.80, the highest level since July 2007. The NSA report shows the importance of strong Pending Sales at this time of year, with the index reaching 128.5, its best June reading since 2007 and well above the average of 110 for June reports between 2007 and 2012. In other words this is another very strong set of data that suggests that the sudden rise in mortgage costs has not significantly affected housing demand.

India's money market rates continue to show a fair degree of distress has been caused by the RBI's sudden tightening of monetary conditions. This morning saw the 3 month interbank rate widen another 55 bp to 10.73% the highest level since November 2008 if one excludes the financial year end squeeze of March 2012 (a somewhat artificial event caused by companies hoarding cash to window dress balance sheets).

The RBI raised the stakes further this morning by stating that "The priority for monetary policy now is to restore stability in the currency market so that macro-financial conditions remain supportive of growth". This statement is starting to become self defeating, if a stable INR comes at the expense of dramatically worse financial conditions.

Unfortunately for the RBI the weakening of the INR has been caused both by a large current account deficit (which has been in place for several quarters) and a sudden reversal of foreign flows into both equity and debt markets. Cumulative 2013 Equity flows have fallen from $15.3 bln on June 10th to $12.3 bln on July 26th, one of the sharpest withdrawals of capital in recent years. The picture for bonds is even worse, with peak flows of $5.58 bln on May 21st turning into a net outflow of -$3.25 bln on July 26th, the largest ever YTD outflow of fixed income investments since the data starts a decade ago.

In other words India would appear to have gone "back to the future", suffering from an old fashioned currency crisis, with the RBI responding in the manner of a EM central bank of 15 or 20 years ago. The clear danger is that monetary tight policy acts to worsen economic conditions which in turn further undermines investor confidence. Under such circumstances the currency could continue to weaken even as the RBI acts to protect its value, making the policy an exercise in futility.

The China Business Cycle Index, which is a joint-creation of the National Bureau of Statistics and Goldman Sachs is one of the few official statistics that actually seems to fluctuate to a credible degree across the months of publication. The index is calibrated with 5 categories of activity:

Very Hot 136.7 and above
Hot 116.7 to 136.7
Stable 83.3 to 116.7
Cold 63.3 to 83.3
Very Cold below 63.3

Over the 20 years of publication readings have fluctuated from a high of 146.7 (July 1993) to a low of 55.30 (June 1999). Over the last decade (a more relevant period) the range has been between 123.30 (January 2010) and 74.70 (January 2009) (see chart).

June 2013's reading of 84 takes the index down to the boundary between "Stable" and "Cool" and also marks the lowest reading since the sharp rebound in activity took place in mid 2009 in response to China's massive monetary stimulus. The brief 2012/13 recovery fueled by massive credit expansion would now seem to have reversed and we would expect this index to move into "Cold" territory perhaps as early as next month.

It should be noted that recent policy announcements from the new administration can be expected to play a part in this process, with a halt to new party headquarters being announced last week and this morning seeing an emergency audit of all government debt (see link) http://www.bloomberg.com/news/2013-07-28/china-to-audit-government-borrowings-as-risks-to-growth-increase.html

One would imagine that the findings of this report will not be pleasant, and the decision to launch it in the first place should be taken as evidence of a re-assertion of centralized control over the economy. Our assumption remains that a sharp slowdown in both actual and reported activity will take place by the end of this year.

It would appear that the Brazilian employment cycle has finally peaked, some two years after the local equity market moved into bear conditions. June's Unemployment Rate reached 6.0%, above expectations of a flat report at 5.8%. This represents the first annual increase in the Unemployment Rate since August 2009 (when the rate was 8.10%). Given the fact that unemployment is typically a late cycle phenomenon with a strong trend we would expect to see a sustained increase in the rate from this point onwards and a move above the 6.5% level would to us signal a genuine change in conditions.

Although worsening employment conditions could be expected to have a generally dampening effect on economic activity we would be particularly concerned about its effect on personal credit default. Even with unemployment at a record low this managed to spike up from 5.7% to 8.2% between 2011 and 2012. Tightening of underwriting standards took the default rate back down to 7.50% this year, but should Brazilians start losing jobs a steady worsening of credit performance should be expected.

The Census Bureau estimation of New Home Sales activity suggests that the recent rise in mortgage rates has had as little impact on demand as we had anticipated.

Total New Home Sales were estimated at 497K, above expectations of 484K, representing the highest level since May 2008 and a 38% increase YoY. Some of this gloss was removed by a downwards revision of prior sales of 38K but we really would focus on the clear upwards trend in sales rather than the volatility of monthly data. Perhaps most importantly even after the recent surge in activity New Home sales remain at 47.4% of 2001 activity, compared to Existing Home Sales at 85.2% and New Car Sales of 90.2%. Given the highly cyclical nature of the New Home market we would expect this gap to be narrowed considerably in the next 18 months, suggesting that a continued acceleration in activity will take place.

As would be expected inventory levels remain very tight with a total of 160K homes or 3.9 months of sales, equivalent to the level seen in October 2004. Perhaps most significantly only 36K of these houses have been completed, or about 3 weeks of supply, while 93K are under construction and 32K have not yet been started. This implies a significant increase in construction activity will be required in the months ahead.

Japan's exports were 6061 bln JPY in June, a rise of 7.4% from June 2012 but still well below the last June cycle peak of 7152 bln JPY recorded in 2008. Consensus was for a rise of 10% but given the volatility of trade data month to month this is still within the error tolerance.

What is perhaps more interesting is the differing performance of Japanese Exports to the three main economic regions of the US, China and the EU. The US has once more become Japan's largest export market, with June seeing 1133 bln JPY of goods supplied, a 14.6% rise on the activity of June 2012. Exports to China on the other hand grew by a sluggish 4.8% to reach 1080 bln JPY, suggesting that Chinese domestic demand has significantly down shifted in recent months. Meanwhile Exports to the EU were 563 bln JPY, an increase of 8.6% YoY. This is the first time since September 2011 that EU export activity has risen YoY, a function both of the weaker JPY making Japanese exports more competitive but also a stabilizing of EU demand after the long post-Eurocrisis drawdown in activity.

In recent weeks the RBI has announced a number of surprising and aggressive measures to support the rupee, with both interest rates and reserve requirements being tightened. Although these measures may have contributed to a stabilizing of the INR close to the 60 level, the currency remains prone to weakness and is being undermined by a wide current account deficit and persistent equity and fixed income outflows (a new phenomenon).

Meanwhile the tightening of monetary policy is starting to considerably affect short and longer term interest rates, particularly in the interbank and money markets. This morning saw the overnight call rate spike 264 bp to 9.94%, quite a move even for the volatile overnight market and a 24 bp pop in the 10 year sovereign yield to 8.40%, the highest yield in 13 months (see chart).

Perhaps the greatest disturbance has taken place in the Non Deliverable OIS Spread, where the 1 and 2 month yields now approach 11% up almost 250 bp from their level of a month ago. Although the spike in yields is less oppressive further out, a very significant repricing of liquidity has taken place over the last 30 days with the bulk of the change taking place over the last week (see chart).

As we saw with China a few weeks ago money market spikes can dissipate as quickly as they emerge, but generally it takes some central bank intervention to help things settle down. In the case of the RBI this help has not been forthcoming, indeed additional tightening measures have been implemented as recently as yesterday. Unless the INR were to suddenly appreciate it is hard to see the RBI changing its stance in the short term, and it may take some clear distress to get them to reverse course. As would be expected this has started to unnerve the financial sector, which basically sat out the recent rally in the overall equity market before starting to correct substantially in recent sessions.

The spike in treasury yields, coming at a time that most other emerging market credit markets have settled down (but not recovered their June losses) is equally problematic, since it should ensure that the local corporate credit market for new issues remains shut down. This will considerably compound the effect of tight banking conditions and the risks of an accident are growing in India at the current time.

Brazil's Current Account and FDI data for June showed some improvement from the poor data of recent months. The Current Account deficit narrowed to -$3.953 bln, compared to a level of -$4.393 bln in June 2012. The 12 month cumulative deficit was -$72.4 bln, or 3.17% of GDP. FDI had a surprisingly strong showing at $7.17 bln, the best reading since October 2012 and the strongest June since 2007. In comments made after the release the government estimates July FDI to be a little more than $5 bln. Overall flows (FDI - CA deficit) were -$6.9 bln over the last year, compared to a reading of $12.2 bln in June 2012, which shows that June's better report was sorely needed.

Ireland's battered property market has finally turned the corner by registering not only the strongest monthly price rise (1.2%) since September 2006 but also a small YoY increase in prices (also 1.2%) for the first time since January 2008. Of course during this 5 year draw-down prices have collapsed, with the official index approximately 50% lower than it was at the peak. As would be expected the Dublin market continues to lead the way, with June increases of 1.7% and an annual increase of 4.2%, although the Dublin index remains at 60.2, down from a peak of 134 in 2007. Nevertheless the point at which prices stop going down and start to appreciate is an important milestone on the way to recovery, since it suggests that functioning markets are starting to emerge in which sellers at least have the ability to stand their ground. We are hopeful that the recovery in prices will gather pace, and further encourage some migration of buyers into the marketplace.

Although the modest miss against expectations will have the headline writers focusing on mortgage rates the June Existing Home report actually shows that the robust recovery in activity has absorbed the recent rise in rates with very little disturbance.

Total Sales were 5.08mm units annualized, down from last months 5.14mm rate (revised down from 5.18mm) and missing expectations of 5.26mm units. Even so this is still a very solid pace of sales, with the "miss" well within statistical tolerance and it puts sales roughly where they were in mid-2007, up a healthy 15% YoY. There was no great difference between Single Family and Condo sales, with Single Family sales totaling 4.50mm, down about 1% from last month.

Single Family inventory remains very tight at 1.96mm homes, the lowest June level since 2001. The average number of days on the market fell to 37, compared to 41 in May and 74 back in February (the latter partly caused by seasonal factors) suggesting that demand is still quite robust. There is plenty of evidence that tight inventory is starting to crimp sales, particularly with regards to distressed sales where the pipline of deals is starting to run empty.

Distressed sales fell to 15% of Total Sales, compared to 25% back in February, while Foreclosed sales now account for just 8% of Total sales, compared to 15% back in February. Thus whatever the numbers may have lacked in quantity they more than made up for in "quality", with more voluntary transactions taking place away from the messy legacy of the last housing boom.

In any economic recovery the data needs to go through a process of becoming "less bad" before it can be considered "good", and it would appear that Italy has started to make the transition into the former category in recent months.

May's Industrial Orders are a good example of this, with the NSA index falling -1.1% YoY to 101.9 (2005 activity = 100). This is the second best (or least worst) YoY performance since November 2011 and caused the trailing 12 month ma to move up to -5.5%, which compares with the December 2012 level of -7.2%. We would hope to see Industrial Orders to start to grow again later in 2013. At their current level they are approximately -10% below their 2011 recovery high, and -20% below their 2008 cycle high. On the other hand they are 10% above their 2009 low, underlining that for the industrial sector this period of economic weakness has been much less destructive than the collapse of late 2008.

Spain's distressed domestic economy continues to be aided by a very powerful export surge which reached €20.9 bln in May, the second highest month on record and the highest for any May. This represents a 7.3% increase on May 2012 activity, which was itself a seasonal record, and the trailing 12 month ma has now reached a new high of €19.12, which compares to a prior cycle peak of just under €16 bln (see chart).

As well as generating corporate earnings and aiding employment this strong export performance has dramatically reduced Spain's long standing trade deficit. May saw a Trade Balance of a mere -€27.5 mln, the second best reading since the data starts in 1991. This took the 12 month ma up to -€1.71 bln, the smallest deficit since October 1998, and this compares with the pre-crisis levels of almost -€8.7 bln. Given Spain's difficulty in retaining bank deposits this massive reduction in the capital negative flows connected to trade has been of significant help in recent months, and if Spain is able to actually move into trade surplus in the months ahead (as Italy has already managed to do) then the positive flows from trade would start to aid the build up of domestic liquidity levels.

As we outlined in the summary of the current Weekly Speculator central banking has recently become dominated by a fetish of communication, in which the distinction between "walking the walk" and "talking the talk" has been become redundant.

We note two very differing views on this new style of central banking (which are central to what we like to term the "Bernanke Doctrine") were published this morning. Arguments in favor of communication were made by RBI Governor Subbarao in a speech to the European Economics and Financial Centre entitled "Central Banking in Emerging Economies Emerging Challenges" (see link):
http://rbidocs.rbi.org.in/rdocs/Speeches/PDFs/07EEFCSP072013.pdf

Readers should focus on Section V. in which Governor Subbarao outlines the case behind the use of "Communication as a Central Bank Tool". We are not convinced by the arguments made in this speech, which primarily rest on the few times that a central bank's comment coincided with a sharp (and beneficial) move in financial markets. We could list a myriad of times that helpful comments were made but ignored by cascading markets. Timing (and moderation) is everything with regards to creating credibility.

The opposite viewpoint is offered by Caroline Baum in the attached Bloomberg editorial "Masters of the Universe Don't Need Fed Hand Holding", which broadly echoes the arguments we made in our own research (see link): http://www.bloomberg.com/news/2013-07-17/masters-of-universe-don-t-need-fed-hand-holding.html

There is little doubt that we are currently in the minority at the present time, with many investors (particularly those concentrated in fixed income) exhorting central banks to be ever clearer in their message. Central bankers (who are increasingly drawn from the same narrow pool of academically trained individuals, rather as the French Civil Service came to rely almost exclusively on the closed world of the Enarques) seem only too happy to oblige, with the fetish of communication feeding into their own concept of heightened importance in the aftermath of the Lehman and Euro crises.

As we have already seen with QE3 this presupposes a level of control over markets that is clearly absent, even in those cases that the message is backed up by actual asset purchases. At some point in time the failure of this policy is likely to cause something of a crisis of credibility resulting in a backlash in central banking policy. Although we are unlikely to go back to the dark-ages of pre-1994 secrecy we would imagine that the world of central banking in 2020 will look as different to us as the limited policies used by central banks in 2006 does today.

This week's Initial Claims data erased the July 4th surge in Claims, with the headline index falling to 334K, below expectations of 345K and last week's level of 358K (revised down from 360K). The NSA report showed a large increase in Claims to 408.7K, which is typical for this time of year and once more represented the lowest level for the current week since 2007 (see chart).

The 4 weeks ma of Claims fell back to 346K from 351.3K, taking the data back below the key 350K level. Although we do not expect much more progress to be made in the remaining weeks of summer we are hopeful that the easier post Labor Day seasonal adjustments will allow the average to fall back to around 325K towards the end of 2013, signalling an increasingly healthy labor market.

June's China house price data shows the property market to be in full swing, which perhaps underlines the increasing determination of the administration and PBOC to restrain credit growth in this portion of the economy.

The NBS report (see link): http://www.stats.gov.cn/english/statisticaldata/monthlydata/t20130718_402912245.htm

UK Unemployment Claimant data for June showed considerable progress being made with Claims falling -21.2K versus -8K expected, and May's data revised from -8.6K to -16.2K. This is the largest monthly drop in Claims since June 2010 and ties in with other data which suggests that the UK economy is now rebounding from its brush with recession in 2011/2 at a faster pace than most considered possible a few months ago.

Total Claims remain elevated at 1478K but we would be hopeful that they can now fall below the plateau around 1450K reached in late 2010. Readers should note that although this is almost twice the level of Claims seen pre-crisis it is far below the levels of the early 1980's and 1990's recessions, although changes in benefit entitlements over the last 30 year have played a large part in reducing Claimants. We remain hopeful that having experienced a deep and long lasting decline in activity the UK economy can now rebound appreciably in the months ahead.

The weekly MBA Mortgage Application data continues to show shrinking refinance activity while purchase mortgage applications remain resilient in the face of higher mortgage rates, although the data is still likely to be effected by the after effects of the July 4th holiday which makes this seasonally a very quiet part of the year for applications.

In terms of the report itself the Refinance Index fell again to 2351, the lowest reading since July 2011 and would seem likely to fall below 2000 in the weeks ahead. The Purchase Mortgage Index rose slightly to 202.70, causing its 10 week ma to dip to 209, compared to a reading of 213 in late May. This took the percentage of Refinancing Applications down to 62.9% of the total, the lowest since April 2011, although this metric is still well above what was seen in the housing boom of a decade ago.

In terms of the types of mortgages used ARMs bounced back to 7.2% this week in volume and 15.4% in terms of value, indicating that borrowers continue to migrate slowly towards this type of financing. With the 30 year mortgage at 4.48% and the 5/1 ARM at 3.53% there is a considerable incentive to take the risk of a variable rate mortgage and we would expect to see more use of ARMs in the weeks ahead.

The June Housing Start and Permit report at first sight shows a sudden drop in construction activity but on closer inspection the draw-down is entirely due to a freakish reduction in the multi-family housing portion of the report that we assume has more to do with the arcane methodology of the Census Bureau than any change in on the ground activity.

Total Housing Starts were estimated at 836K, the lowest since August 2012 and well below consensus of 960K while May's report was revised higher to 928K from 914K. However, Single Family Starts were almost unchanged at 591K (from 596K in May and the strongest June report since 2008) while Multi-Family starts were shown to have dropped -26.71% to 236K from 322K. The latter is simply not a credible piece of data given that a collapse in multi-family housing activity of this magnitude would not have gone unnoticed outside of the walls of the Census Bureau, while the Single Family data is shows the recent recovery in activity to be intact.

Permit data was similarly affected, with Total Permits estimated at 911K, well below consensus (1000K) and May's 985K (revised up from 974). Single Family Permits (the most important metric in the report) actually rose to 624K from 620K, reaching the highest level since June 2008. Multi-Family Permits collapsed -21.4% to 287K from 365K for their lowest reading since June 2012. Again we take comfort from the steady rise in the Single Family data.

Interestingly a separate set of data on Housing Under Construction shows no collapse in Multi Family activity (see chart). Total Housing Under Construction is estimated at 624K units (up from 621K in May), split evenly between Single Family (309K) and Multi Family (315K). As can be seen on the attached chart we have not seen overall construction dominated by Multi Family since the late 1960s and early 1970s when a massive surge in public housing projects heavily weighted the data to the Multi Family sector. Clearly the greatest opportunity for future growth now lies in the Single Family portion of the data, and there was nothing in this portion of the report to suggest that June was anything other than a continuation of the steady process of recovery.