BOE

Another event-free day in which the only major economic data point was the release of UK CPI, which joined the rest of the world in telegraphing price deflation, despite bubbles in the real estate and stock markets, printing 2.0% Y/Y on expectations of a 2.3% increase, the lowest since November 2009 and giving Mark Carney carte blanche to print as soon as he arrives on deck. In an amusing twist of European deja-vuness, last night Japan's economy minister who made waves over the weekend when he said that the Yen has dropped low enough to where people's lives may be getting complicated (i.e., inflation), refuted everything he said as having been lost in translation, and the result was a prompt move higher in the USDJPY, quickly filling the entire Sunday night gap. That said, and as has been made very clear in recent years, data is irrelevant, and the only thing that matters, at least so far in 2013, is whether it is Tuesday: the day that has seen 18 out of 18 consecutive rises in the DJIA so far in 2013, and whether there is a POMO scheduled. We are happy to answer yes to both, so sit back, and wait for the no-volume levitation to wash over ever. The US docket is empty except for Dudley and Bullard speaking, but more importantly, the fate of Jamie Dimon may be determined today when the vote on the Chairman/CEO title is due, while Tim Cook will testify in D.C. on the company's tax strategy and overseas profits.

In the absence of major data releases, the focal point of the week for markets becomes the release of the minutes of the May FOMC meeting. The most notable change in the statement was the inclusion of the new language: “the Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes.” In the May meeting minutes, the market will be looking for any clarification of the motivation behind this change as well as any evidence that the committee members may be becoming less comfortable with the unemployment rate threshold or more specific about tapering timelines and dates.

A quiet day unfolding with just Chicago Fed permadove on the wires today at 1pm, following some early pre-Japan market fireworks in the USDJPY and the silver complex, where a cascade of USDJPY margin calls, sent silver to its lowest in years as someone got carted out feet first following a forced liquidation. This however did not stop the Friday ramp higher in the USDJPY from sending the Nikkei225, in a delayed response, to a level surpassing the Dow Jones Industrial Average for the first time in years. Quiet, however, may be just how the traders at 72 Cummings Point Road like it just in case they can hear the paddy wagons approach, following news that things between the government and SAC Capital are turning from bad to worse and that Stevie Cohen, responsible for up to 10-15% of daily NYSE volume, may be testifying before a grand jury soon. The news itself sent S&P futures briefly lower when it hit last night, showing just how influential the CT hedge fund is for overall market liquidity in a world in which the bulk of market "volume" is algos collecting liquidity rebates and churning liquid stocks back and forth to one another.

Central bankers overshadow the economic data in the week ahead.  

Those hoping for a slew of negative news to push stocks much higher today will be disappointed in this largely catalyst-free day. So far today we have gotten only the ECB's weekly 3y LTRO announcement whereby seven banks will repay a total of €1.1 billion from both LTRO issues, as repayments slow to a trickle because the last thing the ECB, which was rumored to be inquiring banks if they can handle negative deposit rates earlier in the session, needs is even more balance sheet contraction. The biggest economic European economic data point was the EU construction output which contracted for a fifth consecutive month, dropping -1.7% compared to -0.3% previously, and tumbled 7.9% from a year before.  Elsewhere, Spain announced trade data for March, which printed at yet another surplus of €0.63 billion, prompted not so much by soaring exports which rose a tiny 2% from a year ago to €20.3 billion but due to a collapse in imports of 15% to €19.7 billion - a further sign that the Spanish economy is truly contracting even if the ultimate accounting entry will be GDP positive. More importantly for Spain, the country reported a March bad loan ratio - which has been persistently underreproted - at 10.5% up from 10.4% in February. We will have more to say on why this is the latest and greatest ticking timebomb for the Eurozone shortly.

In a world in which fundamentals no longer drive risk prices (that task is left to central banks, and HFT stop hunts and momentum ignition patterns) or anything for that matter, it only makes sense that the day on which Japan posted a better than expected annualized, adjusted Q1 GDP of 3.5% compared to the expected 2.7% that the Nikkei would be down, following days of relentless surges higher. Of course, Japan's GDP wasn't really the stellar result many portrayed it to be, with the sequential rise coming in at 0.9%, just modestly higher than the 0.7% expected, although when reporting actual, nominal figures, it was up by just 0.4%, or below the 0.5% expected, meaning the entire annualized beat came from the gratuitous fudging of the deflator which was far lower than the -0.9% expected at -1.2%: so higher than expected deflation leading to an adjustment which implies more inflation - a perfect Keynesian mess. In other words, yet another largely made up number designed exclusively to stimulate "confidence" in the economy and to get the Japanese population to spend, even with wages stagnant and hardly rising in line with the "adjusted" growth. And since none of the above matters with risk levels set entirely by FX rates, in this case the USDJPY, the early strength in the Yen is what caused the Japanese stock market to close red.

So much for Europe's "recovery." In a quarter when the whisper was that some upside surprise would come out of Europe, the biggest overnight data releases, European standalone and consolidated GDPs were yet another flop, missing across the board from Germany (+0.1%, Exp. 0.3%), to France (-0.2%, Exp. 0.1%), to Italy (-0.5%, Exp. -0.4%), and to the entire Eurozone (-0.2%, Exp. 0.1%), As SocGen recapped, the first estimate of eurozone Q1 GDP comes in at -0.2% qoq, below consensus of a 0.1% drop. The economy shrank by 1.0% yoy, the worst rate since Dec-09. The decline of 0.5% qoq in Italy means that the economy has been in recession continuously since Q4-11. A 0.2% qoq drop in France means the economy has ‘double-dipped’, posting a second back-to-back drop in GDP since Q4-08. The increase of 0.1% qoq in Germany was disappointing and shows the economy is not in a position to support demand in the weaker member states (table below shows %q/q changes).

Overnight risk continues to ignore all newsflow (today the economic reporting finally picks up with advance retail sales due at 8:30 am as expectations for a second modest decline in a row of -0.3%) and is focused entirely on what the consensus decides to make of the Hilsenrath piece, even as the difficulty level was raised a notch following another late Sunday Hilsenrath piece, which puts more variable into the "tapering" equation, and whose focus is whether Bernanke will be replaced by Janet Yellen, Geithner or Summers, or anyone. With all three classified as permadoves, one does scratch their head how the market can be confused: worst case Fed tapers by $10/20 billion per month, market tumbles, then Bernanke's replacement or Ben himself ploughs on even more aggressively with QE. QED.

A look at the main drivers.

The main story overnight is without doubt the dramatic plunge in the Yen, which following the breach and trigger of USDJPY 100 stops has been a straight diagonal line to the upper right (or lower for the Yen across all currency crosses) and at last check was approaching 101.50, in turn sending the USD higher in virtually all jurisdictions. However it is not so much the Yen weakness that was surprising - a nation hell bent on doubling its monetary base in two years will do that - but the accelerating response in neighboring countries all of which are seeing Japan as the biggest economic threat suddenly and all are scrambling to respond. Sure enough, midway through the evening session, Sri Lanka cut its reverse repo and repurchase rate to 9% and 7% respectively, promptly followed by Vietnam cutting its own refinancing rate from 8% to 7%, then moving to Thailand where the finance chief Kittiratt called for a rate cut exceeding 25 bps, and more jawboning from South Korea suggesting even more rate cuts from the export-driven country are set to come as it loses trade competitiveness to Japan. Asian financial crisis 2.0 any minute now?

With another listless macro day in the offing, the main event was the previously mentioned Bank of Korea 25 bps rate cut, which coming at a time when everyone else in the world is easing was not too surprising, but was somewhat unexpected in light of persistent inflationary pressures. Either way, the gauntlet at Abenomics has been thrown and any temporary Japanese Yen-driven export gains will likely not persist as it is the quality of products perception (sorry 20th century Toshiba and Sony), that is the primary determinant of end demand, not transitory, FX-driven prices. And now that Korea is set on once again matching Japan in competitiveness, the final piece of the Abenomics unwind puzzle has finally clicked into place.  Elsewhere overnight, China reported consumer price inflation increasing by 2.4%, on expectations of a 2.3% rise, driven by a 4% jump in food costs: hardly the thing of Politburo dreams. Or perhaps the PBOC can just print more pigs, soy and birdflu-free chickens? On the other hand, PPI dropped 2.6% in April, on estimates of a 2.3% decline, as China telegraphs it has the capacity, if needed, to stimulate the economy. This is ironic considering its inflation pressures are externally-driven, and come from the Fed and the BOJ, and soon the BOE and ECB. And thus its economy stagnates while prices are driven higher by hot money flows. What to do?

All Chinese economic data is manipulated: that much is known. So is its trade data. However, the manipulation has become so grossly evident, some wonder if there is a far bigger problem behind the scenes. Turns out there is: a $60 billion per month "hot capital" inflow problem, and an economy on the very of bursting at the inflationary seams.

Following last week's macro fireworks, the coming week will be an absolute snoozer with virtually nothing on the calendar until Thursday's Initial claims, which is the key event of the week, as well as much Fed president jawboning again, including both good and bad cops talking QE4EVA either up or down. And with earnings season basically over, at least coffee consumption will be higher than average.

The clear message from the doctors this week is that they plan to keep administering the pills, in larger quantities if necessary, until the donkey turns into a butterfly. Citi's Matt King reminds us though that they failed to mention the associated risk that the donkey dies of the side effects first (apart, that is, from Dr Osborne, who urged the other doctors to ignore any such possibility entirely). For investors, King notes the immediate implication is that the central banks would like the party in any and all risk assets to carry on. This raises the spectre of a rally back to 2007 valuations, made all the more dizzying this time by the lack of any accompanying justification in the state of the economy. And yet we have played this game before, and it does not end well. Ideally at some point the central banks realize that the donkey is just a donkey, realize that their sole focus on their inflationary (& employment) mandate is blinding them to the risks of asset price inflation. To paraphrase a certain former CEO, when the central bank music is playing, investors are compelled to get up and join the party. Yet we know how that one ends...

The overnight macroeconomic news started early with China where the second, HSBC Manufacturing PMI declined from 51.6 to 50.4, below estimates of 50.5, yet another signal of a slowdown in the country (where one can argue the collapse in copper prices is having a far greater impact), and where the Composite closed down 0.17% after its Mayday holiday. China wasn't the only one: India dropped to 51.0 from 52.0 in March, and Taiwan dipped to 50.7 from 51.2, offset however by the bounce in South Korean PMI from 52.0 to 52.6, the best in two years (a number set to tumble as Abenomics steal SK's export thunder). The focus then shifted to Europe, where virtually everyone was once again in contraction mode, as German Mfg PMI declined from 49.0 to 48.1, the lowest since December, if a slight beat to expectations (while VDMA industry body said March Machine orders dropped 15% Y/Y so little optimism on the horizon), France rose modestly to 44.4 from already depressed levels of 44.0, Spain PMI also rose from 44.2 to 44.7, Italy PMI at 45.5 from 44.5, Poland at 46.9 from 48.0, a 45-month low. At least Greece seems to be doing "better" with the Mfg PMI "rising" to 45.0 from 42.1. Across the reports, the biggest decline was in input prices following the recent clobbering in commodities, which in turn is translating into price deflation.