Italy Blocks EU Growth Pact, Japanese Inflation Up Next

A European growth-boosting deal may be derailed by Italian demands for bond buying. The yen surged while the euro and Swiss franc slumped on the day. US economic data was neutral but a surprise ruling upholding healthcare reform in the US sparked volatility. The Asian calendar is busy with Japanese jobs, inflation and industrial production.

EU leaders appeared to agree on a 120B euro plan to boost growth late on Thursday but at the last minute Italy has boycotted the agreement because it wants assistance with borrowing costs. A failure to reach any sort of agreement before Monday could lead to a market rout and Italian leaders seem to believe the threat of market chaos will be enough to convince its neighbours to participate in a bond buying program.

Negotiations could grow tense in the day ahead but the euro has avoided a sharp fall so far. EUR/USD remained above the European low of 1.2407 and rebounded has high as 1.2455 on a late rebound in US stocks. The S&P 500 closed down 0.2% to 1329 after falling as much as 1.4% late in the session.

An extra variable in trading came from the US Supreme Court decision to allow the key parts of Obamas plan to require Americans to have medical insurance. InTrade was pricing a 75% chance that the measures would be shot down and most analysts felt the same way. Stocks initially fell but overall volatility was relatively low.

Economic data was close to expectations. Initial jobless claims were at 386K compared to the 387K consensus while the third reading on Q1 GDP was unrevised at 1.9%, as expected.

The Asia-Pacific calendar is busy. Japan is in focus with unemployment and CPI at 2330 GMT. The May national CPI, ex-food and energy is expected down 0.6% y/y. More severe deflation combined with soft employment figures could spark more speculation about QE. June Tokyo CPI numbers will also add a more real-time input to the inflation picture.

Twenty minutes later, May preliminary industrial production is expected to rise 6.7% y/y, a slowdown from the +12.9% pace in April.

Later, at 0130 GMT, the focus shifts to China with industrial profit data for May. The latest Chinese newspaper reports suggest a reserve ratio cut in July; a soft reading -- -2.5% y/y or lower -- would likely confirm it.

-AB