Overnight Sentiment Sours As Bank Of Japan Does Just As Expected And Nothing More
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.
"We didn’t get anything new from the BOJ and that’s exactly what was expected,” said Ichiro Yamada, who helps oversee about 300 billion yen ($3 billion) in stocks as general manager at Fukoku Mutual Life Insurance in Tokyo. “Earnings so far haven’t been quite as good as share prices would warrant because best-case scenarios have been built in.”
What added insult to injury was the previously reported Japanese CPI number which tumbled to the lowest Y/Y reading in the past three years, confirming that at least so far, Abenomics has been stellar at spurring... deflation if mostly for core items. As has been reported previously, prices of non-core items such as food and energy are soaring, meaning consumers have no choice but to spend less on "core" purchases, thus leading to core deflation. And yes, before all is said and done, the BOJ will need to at least once more double the estimate for doubling its monetary base, something the market is starting to anticipate as shown the latest overnight gold surge.
Another development to keep an eye on is the growing popularity of Berlusconi's PDL, as its lead over rival PD has exploded. This is important in the ongoing race to form a government around Napolitano proposed PD deputy Letta, which may be Italy's last chance to form a government and avoid elections: an outcome the market has widely priced in. Not so fast. From Reuters:
Italy's prime minister-designate Enrico Letta started "encouraging" talks on Thursday for a new government to end two months of political deadlock, but said significant differences with the centre-right would take more time to iron out.
Letta, the 46-year-old deputy head of the centre-left Democratic Party (PD), said he would use Friday as a "day to reflect" on his chances of piecing together a broad coalition to govern the euro zone's third-largest economy.
"I think we'll need many more hours because we're coming from a period of deep mutual opposition and the differences that still remain are very significant," he told reporters after a day of talks that included a two-hour meeting with officials from Silvio Berlusconi's People of Freedom (PDL) party.
"I was encouraged by everyone but that does not resolve the problems," he said.
President Giorgio Napolitano, who appointed Letta on Wednesday, is eager for him to form a broad coalition before financial markets open on Monday and seek confidence votes from parliament's two houses early next week, political sources say.
The PDL delegation told Letta he had to agree to economic priorities on growth and tax cuts to win their support.
"We are satisfied by how the meeting went but we are cautious because there are still issues that have to be resolved," PDL secretary Angelino Alfano said.
Alfano said the PDL was seeking Letta's backing for eight points on how to revive the economy, including tax breaks for companies that hire young people, cutting red tape and the abolition of a much-hated tax on primary residences.
And this is how according to early speculation, the horse trading in government would play out:
Italian media have already begun speculating on how the posts might be carved up among politicians and technocrats. The economy ministry could go either to Fabrizio Saccomanni, the Bank of Italy's director general, or Carlo Padoan, chief economist at the Organisation for Economic Cooperation and Development (OECD), according to Italian media.
Alfano has been tipped by some to become deputy prime minister, a choice that would placate Berlusconi but upset some on the left of the PD.
The industry and labour ministries could go to politicians and the foreign affairs portfolio to Monti or former Prime Minister Massimo D'Alema of the PD, local media speculated.
But first, let the Trilateral commission-affiliated psuedo-technocra get the support he needs. For now it is not working quite as planned even if Italian bonds have alrady priced in a stable Italian government well into 2014.
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Some of the other overnight bulletin highlights from Bloomberg
- Japan CPI (excluding fresh food) slid 0.5% in March from a year ago; median est. in Bloomberg survey was for 0.4% decline; overall prices fell 0.9%
- U.S. GDP rose at 3% annualized rate in 1Q on increased consumer spending, according to the median estimate in a Bloomberg survey; report follows this month’s lower-than-forecast durable goods, ISM Manufacturing, Michigan Confidence, Empire Manufacturing and Philly Fed reports
- Britain’s new banking regulator has rattled lenders by holding off disclosing how much capital each firm will have to raise after ordering the industry to plug a GBP25b shortfall by the end of the year, three people with knowledge of the discussions said
- The U.S. Senate revived and passed a measure to end air- traffic controller furloughs as most members were flying home on recess, after four days of flight delays blamed on staffing shortages from budget cuts
- BofAML Corporate Master Index OAS holds at 147bps; $6.975b priced yesterday. Markit IG narrows to 79bps from 80bps, YTD low 78bps. High Yield Master II OAS narrows to 461bps, tightest since April 2011, from 466bps; $1.66m priced. CDX High Yield rises to 105.18, highest since March 2011, from 104.89
- Global sovereign yields mixed, with U.K., Netherlands, Australian, German yields lower. EU sovereign spreads to Germany widen
- Nikkei -0.3%; other Asian stock markets lower, with Shanghai down 0.9%. European equity markets fall, U.S. index futures decline. Energy futures, gold, copper fall
Finally, a summary of key macro events of the day from SocGen:
Today's first look at Q1 GDP data from the US should in theory not be a game changer for the currency and bond markets, and by extension the beleaguered commodities, unless we get an annualised growth number seriously short of 3%. The market is bulled up for a strong bounce in Q1 growth from a meagre 0.4% in the previous quarter, boosted by a gain in inflation-adjusted consumer spending and residential investment. Domestic demand is forecast to have accelerated to 2.6%, the fastest rate since late 2010. No one is expecting a surprise of any major kind but the positive outcome of UK Q1 GDP yesterday (putting to rest 'triple-dip' demons) and the resulting spike in GBP was an illustration of how markets can get badly caught out. In the case of the US, we are off course talking being caught out long (USD) and short/neutral US Treasuries, i.e. a disappointing number would see USD/JPY and UST yields and swaps retreat. More importantly, do the data impact the Fed debate? In the sense that some Fed officials, and hence markets, are not ruling out that no tapering will come into effect this year (SG call Q3), the backward looking Q1 data should not make a huge difference to policy expectations and markets beyond today, simply because incoming data for Q2 has already started to turn. The proverbial proof of that being in the pudding in next week's payrolls report is really what markets want to see before backtracking on a hawkish Fed turn in the autumn.
Leaving out the JPY, the SEK has been the worst performer month-to-date and a data inspired sell-off could follow the Riksbank-inspired walloping last week. For USD/SEK, short-term bulls will be targeting a move up to 6.80 after successfully defending 6.5735 yesterday (200d ma). As the suspense for the ECB continues to build, EUR/SEK too should benefit reversing the profit taking of the last 48 hours. Other releases today include eurozone M3 and final Michigan confidence. Weekly ECB LTRO repayment data are also due and at the average rate of refunding observed in recent weeks, this could bring the central bank's balance sheet below E2.6tn for the first time since Dec-11.
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