The US Dollar Index advanced in the first three days of the week but is under some pressure today.  The FOMC minutes confirmed what the market had already known, which is a rate hike next month is highly unlikely. 

Meanwhile outside of the UK's strong retail sales report, most of the data today has disappointed. These include the flash PMIs in both China and the eurozone.  

April retail sales in the UK jumped 1.2%, three-times more than the market expected.  It completely recoups the 0.7% decline in March and more:  the 1.2% gain is more than the entire first quarter.  Warmer weather induced strong buying of clothes and footwear, which were up 5.2% on the month.  Shoppers are also responding to discounts.  The price deflator stands at -3.2% year-over-year.  

The UK debt markets did not respond much to the unexpected strength of retail sales.  The equity market turned higher, bucking the losses elsewhere, but it was sterling that was the big winner. Yesterday it had snapped a three-day decline that had seen it shed about 3.5 cents.  Sterling rallied more than a cent on the news.  Between yesterday and today, it has retraced 61.8% of its three-day drop (~$1.5670).   Above there, resistance is seen near $1.5700.  The intra-day technicals are stretched by the sharp advance, warning of the need for some consolidation or correction.   

The eurozone composite flash PMI slipped to a three-month low of 53.4 in May from 53.9 in April.  It was Germany that disappointed.  Its flash manufacturing survey eased to 51.4 from 51.9 and services softened to 52.9 from 54.4.  Both were weaker than expected.  French manufacturing did better than expected.  However, at 49.3, it remains below the boom/bust level though it is above the 48.4 print in April.  The service PMI rose to 51.6 from 50.8.  The consensus was for 51.9.  

HSBC's flash PMI for China's manufacturing firmed to 49.1 from 48.9.  This was a touch lower than expectations and is the third month below 50.  New orders were at nearly a two-year low of 46.8, suggest the manufacturing sector may not have bottomed.  Output itself fell to below 50 for the first time this year.  Employment contracted for the 19th consecutive month.    

On one hand, the rise of the China's service sector could blunt the impact of the contraction in the manufacturing sector.  On the other hand, recent reports have suggested that the state-owned enterprises are shedding employment while the budding private sector is hiring.  The HSBC report raises questions about that assessment.   Chinese stocks rallied, with the Shanghai Composite tacking on 1.8%, ostensibly in anticipation of more economic stimulus.  That said, Chinese stocks have been on fire this year.  The Shanghai Composite is up 40% this year, and the Shenzhen Composite (perhaps partly in anticipation of Shenzhen-Hong Kong link) is up almost 92% this year.  

The  Bank of Japan meets today and tomorrow.  There are some reports suggesting that it may upgrade its assessment of the economy.  While this is possible, remember that at the last meeting the BOJ trimmed its growth forecast and pushed out when it would meet its inflation target by six months.  

Separately, the MOF weekly portfolio flow data showed that last week Japanese investors stepped up their purchases of foreign bonds.  The JPY1.099 trillion was the largest since last November.  Japanese purchases of foreign stocks fell to JPY39.4 bln, the lowest since last November and have been trending lower since March.  Foreign demand for Japanese assets has waned.  They sold JGBs in sufficient size to practically offset the past three weeks of purchases. Foreign investors were big buyers of Japanese stocks in April, but demand has softened in May. 

Merkel says an agreement with Greece must be reached within 12-days.  She wants to go to the G7 meeting in early June and say that a solution is in hand.  Talk is of a two part deal.  The first unlocks liquidity, and that is what is needed soon.  The second is a longer-term agreement that may take a few more months to hammer out.  

The Greek government is expected to make new proposals for VAT reform today or tomorrow.  The two sides are also reportedly converging on primary budget surplus targets.  Greece may also agree to find another five bln euros in savings.  The main stumbling blocks remain labor market and pension reforms.  It seems that the official creditors may focus their efforts on pension reforms while allowing the Greek government some latitude on minimum wage. The Syriza-led government wants to return minimum wage to pre-2012 levels.  A compromise here may be a gradual return.  

Just like Tsipras reined in his finance minister, Merkel may have to do the same thing:  Have her finance minister Schaeuble tone down his antagonizing rhetoric.  With the EU leaders summit beginning today, this is an opportunity for Merkel to take more control of the process.  Merkel, who is widely heralded as among best leaders of a generation, is on the verge of seeing her legacy undermined.  

The Minsk II ceasefire is being threatened.  Under her watch, Russia has grabbed Crimea and parts of east Ukraine.  Meanwhile, following the Tories electoral victory in the UK, a referendum on its membership in the EU is likely next year.   Although it seems like a majority of the UK want to stay in the EU, polls have been misleading (see Scottish referendum polls and UK election polls).  Given the strength of the euro-skeptic wing of the Conservatives, partly encouraged by Cameron himself to pressure the EU into concessions, the Prime Minister is in an awkward position to give a rousing speech of why the UK should remain in the EU.  There have been some suggestions in the UK press that a referendum could be held as early as next year--something Merkel has endorsed.    

And then there is Greece.  As recently as earlier this week, Schaeuble was endorsing a Greek referendum that would put the official creditors position on one hand and exiting EMU on the other.  Even now, he is playing up the default scenario.  

The US economic calendar is packed today.  The highlights include weekly jobless claims that have trended lower, suggesting labor market improvement continues.  The Philly Fed survey is among the most important regional surveys and is expected to edge higher for the second consecutive month.  It had averaged 5.5 in Q1.  The April report came in at 7.5, which was the highest since December.  Separately, April existing home sales are expected to have edged higher after a 6.1% increase in March.   Note that the annualized pace of existing home sales in March was above anything seen in 2014.  In fact, one has to get back to September 2013 to see such a pace (5.19 mln).