Muted Sentiment Following German Confidence Miss
There was a time three months ago, when "beating" German confidence served as an upward stock and EURUSD catalyst not once but twice in the same week. One would therefore assume a German confidence miss, such as with today's German ZEW, which barely budged from 36.3 to 36.4 on expectations of a rise to 40.0, with the current situtation dropping from 9.2 to 8.9, on expectations of a rise to 9.8, should be risk negative. Well, it wasn't: it is the new normal after all, and in fact the EURUSD jumped in a kneejerk reaction at 5 am, rising over 1.3000, albeit briefly, assisted by ZEW members saying that respondents do not see a further ECB rate cut - well, of course not - they are Germans, and Draghi isn't. Perhaps the news of a better than expected Eurozone Industrial Production print, which rose from 0.3% to 1.0%, on expectations of a more modest increase to 0.5%, is what catalyzed the subsequent drop in both the EUR, and US stock futures. The IP strength was driven by Germany, Spain and Netherlands offset be decline in France and Italy.
In additional economic news out of Europe, we saw April German and Spanish CPIs print right on top of expectations at 1.2% and 1.4%, respectively, and both unchanged from the previous month. Also today, Spain opened the books for another 10 year EUR bond at mid-swaps +278 bps, with demand (supposedly out of Japan and Spanish banks as usual), topping €14 billion.
Finally, in "sustainability" news, Italian debt rose to a record €2.035 trillion in March, up from €2.018 trillion in February.
Other notable news stories out of Europe:
- ECB Picks Fight With Germany on EU Plans for Failing Banks
- Banks on Verge of Collapse in Denmark Win Time in FSA Review
- Berlusconi Shows Italy No One Does It Better Maneuvering Political Rebound
- Spain Core Inflation Falls to Eight-Month Low as Slump Lingers
On the US docket we have NFIB small business confidence at 7:30; followed by US Import Prices, at 11 am we get an update of total Q1 student loan delinquencies when the NY Fed releases its quarterly household debt survey.
SocGen recaps the key macro catalysts for the day
The consensus forecast of 9.8 for the German ZEW this morning vs 9.2 last month looks very tepid against a background where the Dax has rallied over 10% over the last three weeks, and so the scepticism about the eurozone economy must to a large extent be blamed for the reticent mood among market participants. Unless they are wrong, and the actual outcome surprises by a considerable margin and the index returns to levels last seen in Q312. Whether that is enough to put a floor under EUR/USD is far from certain, but at least it should help to keep the gap between US/EU 10y swaps from widening. The spread reached 45bp yesterday in a knee-jerk reaction to the stronger US retail sales data, and rate lock-related paying interest in anticipation of new issuance this week should keep the spread in the ascendency regardless of the ZEW print. EUR/USD however is fighting tooth and nail to keep its head above 1.2950.
The assertion in the FT yesterday that hedge funds are turning bullish EUR (see article) strikes us as a tad exaggerated and in simple terms as another way of saying that the US is becoming expensive and Europe is cheap, and hopefully that gap will narrow. No longer seeing a break-up as ‘likely' does not constitute a bullish argument of course, and the fact that stock markets in Europe are cheap (Cac and Dax are vs Nasdaq and Nikkei, but not vs Dow or S&P) is a reflection of different growth paths and prospective returns, but it's not enough to make the EUR a hit. Indeed, the weekly CFTC positioning data show net EUR positions are still negative vs the USD, though short positions have been cut back by over 20% since early April. The ESM disbursed its first aid payment (EUR2bn) to Cyprus as planned yesterday and the Bank of France updated its Q2 GDP growth to 0.1%. We are moving along, but it is still a poor show compared to the mood across the Atlantic as Q2 hits full flow and momentum from Q1 is keeping growth at a faster clip than originally thought.
Aside from the ZEW, we also get EU industrial output and Swedish CPI today. Following the 3% rally in EUR/SEK on the Riksbank repo forecast change in April, the trading range has narrowed considerably with 8.55 being the main pivot. Weak CPI data and a stronger ZEW release could spur a fresh move back over 8.60, but a weekly close above that level has eluded the pair since 8 February.
A full overnight recap from DB's Jim Reid
On the data front, there was a fair bit of focus on the retail sales data in the US yesterday after the headline April sales managed to print at +0.1% mom (vs -0.3% expected). DB’s Joe Lavorgna noted the resiliency in the report’s details including upward revisions to retail control. This is the portion of retail sales that is a direct input into the consumption component of GDP and yesterday saw it improve by +0.5% in April (vs 0.3% expected) after March was revised up 0.3% to +0.1%, and February was revised up 0.2% to +0.5%. The result was positive enough for a number of economic forecasters to lift their Q2 GDP growth estimates. On a less positive note, yesterday’s set of Chinese data for April was described by DB’s Jun Ma as a bit of a mixed bag with IP accelerating to 9.3%yoy but slightly below expectations of 9.4%. Retail sales (+12.5%) and FAI (+20.6%) were largely in line with market expectations.
In overnight markets, Asian equities are generally trading firmer led by gains on the KOSPI (+0.8%), Nikkei (+0.1%) and the ASX200 (+0.2%). Chinese-related stocks are underperforming overnight after China’s 21st Century Business Herald reported that Beijing may tighten rules on the pre-sale of homes which is a significant source of funding for property developers. The Shanghai Composite (-1.6%) is on track for is largest one day loss in three weeks with all ten industry sectors trading in the red. This is also weighing on the Hang Seng (-0.1%). Asian credit is trading a touch wider this morning with the focus being on recent new issues.
On today’s data calendar we have European industrial production for March and the German ZEW Survey. The ECOFIN will be meeting in Brussels. In the US, the NFIB small business survey is the major data print with the NY Fed also releasing its household debt report. The Fed’s Plosser will be speaking on monetary policy in Sweden and the ECB board member Asmussen will be speaking in Berlin. In the UK, the Conservative Party is set to unveil a draft bill today to prepare for a referendum by the end of 2017 on Britain's European Union membership (Reuters).