On the third year anniversary of the flash crash, and in a week in which earnings season unwinds and in which there is very little macro news, the bulk of the newsflow happened overnight, starting with a drop in the Chinese Service PMI, which tumbled from 54.3 to 51.1, the lowest in two years, then we got Australian retail sales which dropped -0.1% on expectations of 0.4% gain, indicating that the Chinese slowdown is dragging down the entire Asia-Pac region further. Afterwards, we got a barrage of European non-manufacturing PMI data starting with Spain, at 44.4, down from 45.3, the lowest since December (although one wonder if Spain has finally opened a branch of the BLS, reporting that unemployment actually dipped by 46.1k, on expectations of just a 2k decline, and down from 5k the prior month: how curious the timing of the "end of austerity" and the immediate "improvement" in the economy), then Italy Service PMI printing at 47.0, up from 45.5, on expectations of a 45.8 print, the highest since August 2011, French Services PMI rising modestly from 44.1 to 44.3, Germany's up from 49.2 to 49.6, on expectations of an unchanged print, all of which leading to a combined Eurozone PMI at 47.0, up from 46.6, and beating expectations of a 46.6 print.
While everyone's attention this morning will be focused on the sheer, seasonally-adjusted noise that is the monthly NFP report (keep in mind that any number +/- 200,000 of the actual, is entirely in the seasonal adjustments and is thus entirely in the eye of the Arima X 13 beholder), which is expected to print at 140,000, resulting in an unemployment rate of 7.6%, there were some events overnight worth noting. First, the China non-manufacturing PMI printed at 54.5 in April, down from 55.6, and tied with the lowest such print in two years. The biggest red flag was that New Orders dropped below 50, with the price index also declining sharply, indicating that either the Chinese slowdown is for real, and the national bank will have no choice but to ease unleashing inflation, or that the politburo wishes to telegraph to the world that China is slowing, because what goes on in China, and what data is released out of China are never the same thing. Elsewhere, in Europe Mario Draghi's henchmen were stuck in damage control mode, and Ewald Nowotny said markets over-interpreted a signal yesterday that the ECB would consider a deposit rate below zero. Policy makers have “no plan in this direction,” Nowotny said in an interview with CNBC today. This helped boost the EUR from its languishing levels in the mid 1.30s higher by some 50 pips following his statement.
With any and every asset-gatherer capable of forming a sentence being trotted out on business media to proclaim victory and elucidate on why "there is no where else to invest but stocks" and "the US is the cleanest dirty shirt," we thought it might be useful to reflect on just how clean that shirt can remain as the rest of the world's growth slows down significantly. In the last decade, there has been particular growth in inter-regional trade, with a dramatic expansion in trade vis-à-vis Asia, reflecting globalization. At the same time, the deepening in global trade relationships means that the potential for a sudden shift in demand in one region can have a more significant impact on the rest of the world. This has been seen particularly in recent years, with the sharp retrenchment in domestic demand in southern Europe affecting the economy of Asia, particularly Japan. Looking at the rate of increase in regional imports (which we assume is what the 'heads' believe will power the US 'clean' shirt) and the picture is ugly. And while copper is enough of a tell for most, even the IMF (usually extraordinarily optimistic) sees World Trade slowing dramatically - and given these interconnections, perhaps being the cleanest shirt merely shows the stains even more clearly when they finally hit.
While it is the labor day holiday in most of the world, and as a result volumes will be more subdued than ever (meaning at least a 10 point algorithmic levitation on no volume for the S&P), let's not forget that Benny and the Inkjets are doing their best to make everyone into a professional day trader (the only "wealth effect" transmission mechanism left) so markets being open seems somewhat counterproductive. That said, futures are already up on the usual atrocious economic data out of Asia this time. First China's official manufacturing PMI slipped 0.3pt to 50.6, coming below expectations, suggesting weak momentum going into Q2. Meanwhile, Korea trade data indicated weaker momentum in exports than expected, rising 0.4% on expectations of a 2% bounce courtesy of Abenomics, and hence a lower trade surplus, while inflation defied median expectations of a rise and slowed yet further. Finally, Australia PMI was an absolute disaster printing even worse than the Chicago PMI, plunging from 44.4 to 36.7, meaning that the RBA is about to join the global "reflation effort." Given that most markets in Asia are closed today, there is no market reaction worth mentioning, aside from the fact that the yen which was logically weaker overnight then ramped up into the European open and US pre-trading as it is, after all, the primary source of "beta" for the global stock markets. Finally, while some are dreading the start of "sell in May and go away" season, what most have forgotten is that never before has May been accompanied by $160 billion per month in central bank de novo liquidity (a number which will only go up- you know, for the wealth effect). Which is why our redefinition of this infamous phrase is "buy in May and buy every day."
The weakness in economic data (not to be confused with the centrally-planned anachronism known as the "markets") started overnight when despite a surge in Japanese consumer spending (up 5.2% on expectations of 1.6%, the most in nine years) by those with access to the stock market and mostly of the "richer" variety, did not quite jive with a miss in retail sales, which actually missed estimates of dropping "only" -0.8%, instead declining -1.4%. As the FT reported what we said five months ago, "Four-fifths of Japanese households have never held any securities, and 88 per cent have never invested in a mutual fund, according to a survey last year by the Japan Securities Dealers Association." In other words any transient strength will be on the back of the Japanese "1%" - those where the "wealth effect" has had an impact and whose stock gains have offset the impact of non-core inflation. In other words, once the Yen's impact on the Nikkei225 tapers off (which means the USDJPY stops soaring), that will be it for even the transitory effects of Abenomics. Confirming this was Japanese Industrial production which also missed, rising by only 0.2%, on expectations of a 0.4% increase. But the biggest news of the night was European inflation data: the April Eurozone CPI reading at 1.2% on expectations of a 1.6% number, and down from 1.7%, which has now pretty much convinced all the analysts that a 25 bps cut in the ECB refi rate, if not deposit, is now merely a formality and will be announced following a unanimous decision.
The week ahead will be driven by the heavy end-of-month data schedule. In addition to the usual key releases like ISM and payrolls and ECB meeting, this week we also get an FOMC meeting - though it will hardly see much more than a nod to the weaker activity data of late. For the ECB meeting a full refi but not a deposit rate cut are priced now. Outside the FOMC and the ECB meeting there will be focus on the RBI meeting in India, with a 25bp cut priced in response to lower inflation numbers recently.
With China and Japan markets closed overnight, activity has been just above zero especially in the critical USDJPY carry, so it was up to Europe to provide this morning's opening salvo. Which naturally meant to ignore the traditionally ugly European economic news such as the April Eurozone Economic Confidence which tumbled from a revised 90.1 to 88.6, missing expectations of 89.3, coupled with a miss in the Business Climate Indicator (-0.93, vs Exp. -0.91), Industrial Confidence (-13.8, Exp. -13.5), and Services Confidence (-11.1, Exp. -7.1), or that the Euroarea household savings rates dropped to a record low 12.2%, as Europeans and Americans race who can be completely savings free first, and focus on what has already been largely priced in such as the new pseudo-technocrat coalition government led by Letta. The result of the latter was a €6 billion 5 and 10 year bond auction in Italy, pricing at 2.84% and 3.94% respectively, both coming in the lowest since October 2010. More frightening is that the Italian 10 year is now just 60 bps away from its all time lows as the ongoing central bank liquidity tsunami lifts all yielding pieces of paper, and the global carry trade goes more ballistic than ever.
While the main, if completely irrelevant, macroeconomic news of the day will be the first estimate of US Q1 GDP due out later today, perhaps the best testament of just how meaningless fundamental data has become was the scheduled BOJ announcement overnight in which Kuroda's merry men simply stated what was expected by everyone: the Japanese central bank merely repeated its pledge to double the monetary base in two years. The lack of any incremental easing, is what pushed both the USDJPY as low as 98.20 overnight (98.60 at last check), over 100 pips from the highs, and has pressured the Nikkei into its first red close in days, and shows just how habituated with the constant cranking up of the liqudity spigot the G-7 market has truly become.
"The late Margaret Thatcher had a strong view about consensus. She called it: “The process of abandoning all beliefs, principles, values, and policies in search of something in which no one believes, but to which no one objects.” The same applies to most market forecasts. With some rare exceptions (like our commodity analysts? recent prescient call for a slump in the gold price), analysts don?t like to stand out from the crowd. It is dangerous and career-challenging. In that vein, we repeat our key forecasts of the S&P Composite to bottom around 450, accompanied by sub-1% US 10y yields and gold above $10,000."
It is one thing for the market to no longer pay attention to economic fundamentals or newsflow (with the exception of newsflow generated by fake tweets of course), but when the mainstream media turns full retard and comes up with headlines such as this: "German Ifo Confidence Declines After Winter Chilled Recovery" to spin the key overnight event, the German IFO Business climate (which dropped from 106.2 to 104.4, missing expectations of 106.2 of course) one just has to laugh. In the artcile we read that "German business confidence fell for a second month in April after winter weather hindered the recovery in Europe’s largest economy... “We still expect there to have been a good rebound in the first quarter, although there is a big question mark about the weather,” said Anatoli Annenkov, senior economist at Societe Generale SA in London." We wonder how long Bloomberg looked for some junior idiot who agreed to be memorialized for posterity with the preceding moronic soundbite because this really is beyond ridiculous (and no, it's not snow in the winter that is causing yet another "swoon" in indicators like the IFO, the ZEW and all other metrics as we patiently explained yesterday so even a 5 year old caveman financial reported would get it).
The week ahead brings key leading indicators of global activity. The flash PMI's in China and Euro area will be published on Tuesday. Bloomberg consensus expects the China flash to be slightly lower than the previous reading and that the Euro area flash releases for manufacturing and service activity will rise slightly. In addition, Korean 20-day export data for April will provide a good guide to both the external sector in Korea and the likely momentum of Asian exports more broadly. For the same reasons, Taiwan export orders are worth a look as well. The week ahead also provides Q1 GDP prints in US, UK, and Korea. Goldman expects US GDP to rise by 3.2%. The Australia CPI print may open the door to an RBA rate cut as soon as May and Japanese CPI is likely to underscore why the BoJ policy has shifted aggressively. Friday also brings an update of the BoJ's outlook, along with the next BoJ meeting (unchanged policy expected).
When the BOJ announced two weeks ago the full details of its expanded easing program, which amounts to monetizing a whopping $720 billion in government bonds over the next year (a move which makes even the Fed's own open-ended QE appear like child's play in perspective), one thing it did was lay to rest any hope of a rotation, great or non-great, out of bonds and into equities. The reason is simple: while the Fed is en route to monetize $1,080 billion in UST and MBS debt in the current year, when there is just $760 billion in net US issuance, what the BOJ has done is add a bid for another $720 billion when Japanese net supply of debt is just $320 billion in the next 12 months. In other words, between Japan and the US, there is now some $660 billion in secondary market debt that the two banks will have to purchase over and above what their respective treasury departments will issue.
With the entire world's attention focused on Boston, the FX carry pair traders knew they had a wide berth to push futures, courtesy of some EURUSD and USDJPY levitation overnight, which started following news out of Japan that the G-20 would have no objection to its big monetary stimulus - of course they don't: they encourage it: just look at the levitation in the global wealth effect stock markets since it started. The Friday humor started early: "Japan explained that its monetary policy is aimed at achieving price stability and economic recovery, and therefore is in line with the G20 agreement in February," Aso told reporters. "There was no objection to that at the meeting." "We explained (at the G20 meeting) that we're convinced that the measures we're taking will be good for the global economy as they will help revive Japanese growth," Aso said. And by global economy he of course means stocks. Shortly thereafter, when Europe opened, the real levitation started as someone, somewhere had to offset what would otherwise be a 100 point plunge in the DJIA just on IBM's miserable results alone. Sure enough what better way to do that than with a wholesale market "tide" offsetting one or two founder boats.
Following yesterday's most recent Europe-led rout, the market is attempting a modest rebound, driven by the usual carry funding currency pair (EURUSD and USDJPY) levitation, although so far succeeding only modestly with not nearly enough overnight ramp to offset the bulk of yesterday's losses. In a centrally-planned, currency war-waging world, it is sad that only two key FX pairs matter in setting risk levels. But it is beyond hypocritical and highly ironic that according to a draft, the G-20 will affirm a commitment to "avoid weakening their currencies to gain an advantage for their exports." So the G-20 issues a statement saying nobody is doing it, when everyone is, thus making it ok to cheapen your exports into "competitiveness"? In other words, if everyone lies, nobody lies. Of course, also when everyone eases, nobody eases, and the world is back to square one. But that will only become clear eventually.
In what may be a first in at least 3-4 months, instead of the usual levitating grind higher on no news and merely ongoing USD carry, tonight for the first time in a long time, futures have drifted downward, pushed partially by declining funding carry pairs EURUSD and USDJPY without a clear catalyst. There was no explicit macro news to prompt the overnight weakness, although a German 10 year auction pricing at a record low yield of 1.28% about an hour ago did not help. Perhaps the catalyst was a statement by the Chinese sovereign wealth fund's Jin who said that the "CIC is worried about US, EU and Japan quantitative easing" - although despite this and despite the reported default of yet another corporate bond by LDK Solar, the second such default after Suntech Power which means the Chinese corporate bond bubble is set to burst, the SHCOMP was down only 1 point. The Nikkei rebounded after strong losses on Monday but that was only in sympathy with the US price action even as the USDJPY declined throughout the session.