Japan goes to bed with another absolutely ridiculously volatile session in the books following a 5%, or 637 point move higher in the PenNIKKEIstock Market closing at over 13514, which if taking the futures action going heading to Sunday night into account was nearly 1000 points. With volatility like this who needs a central bank with price stability as its primary mandate. The driver, as usual, was the USDJPY, which moved several hundred pips on delayed reaction from Friday's NFP data as well as on a variety of upward historical revisions to Japanece economic data, but not the trade deficit, which came at the third highest and which continues to elude Abenomics. Fear not: one day soon consumers will just say no to Samsung TVs and buy Sony, or so the thinking goes.
Will rekindled Japan optimism be enough to offset what was an absolutely disastrous weekend of data from China remains to be seen.
Perhaps the most interesting news out of Asia was the spreading of FX vol tremors to a new participant India, which is the latest entrant into the currency wars, even if involuntarily, where the Rupee plunged to 58, the lowest ever against the dollar. The reason for this latest vol casualty - central banks of course. According to Standard Chartered, INR’s decline due to domestic growth disappointing paired with “stubbornly high” inflation, slowing portfolio capital and expectations of Fed ’tapering’ QE programme "sooner rather than later." Scotiabank’s Senior Currency Strategist Sacha Tihanyi added in an interview that the market is "getting spooked" by new USD/INR high, which could mean this INR depreciation “feeds on itself.”
The plunge led to the usual warning headlines from Bloomberg:
- INDIA’S MAYARAM SAYS GOVT WATCHING RUPEE SITUATION
- INDIA’S MAYARAM SAYS PANIC IN MARKETS ’UNWARRANTED’
- INDIA’S RAJAN: RBI DECIDES IF AND WHEN IT WANTS TO INTERVENE
- INDIA’S RAJAN SAYS GOVERNMENT WANTS RUPEE STABILITY
Just like the BOJ wants Yen stability.
There was little news out of Europe, where Italy reported Industrial Production which slid -0.3% on expectations of an unchanged number. The continent is focused on Germany where the top court will decide if the ECB's OMT program is constitutional. Expect lots of posturing and jawboning from Mario and his henchmen as they try to wiggle the OMT which still has no defined legal framework, into anything they want it to be so it passes with flying colors and, ironically, continues to not exist.
In the US the Monthly Budget will be disclosed on Wednesday followed by Retail sales and Jobless claims on Thursday. The preliminary June reading of the UofM Consumer Confidence on Friday should make an interesting read given the recent market volatility and weakness. US industrial production and PPI data hit on Friday. For the US bond market, focus will probably be on the $66bn in Treasury auctions across 3s, 10s, 30s on Tuesday, Wednesday and Thursday, respectively.
The remaining overnight news bullets via Bloomberg:
Treasuries little changed as JPY weakened against USD, Japanese stocks surged; BoJ 2-day meeting underway with board divided whether to extend maturity of liquidity provisions to market by up to 3yrs
Japanese GDP grew 4.1% in 1Q compared with preliminary 3.5% estimate; nominal GDP rose 0.6% vs revised 0.4%
China’s new leaders face a test of their resolve to forgo short-term stimulus for slower, more-sustainable growth after May trade, inflation and lending data trailed estimates, signaling weaker global and domestic demand
36 provincial and city governments in China owed 3.85 tln yuan in total at the end of 2012, the National Audit Office said in a statement today on its web site
Germany’s top court probably won’t intervene in the ECB’s plan to buy bonds of crisis-torn countries, in line with previous cases involving the country’s integration with the EU; Constitutional Court reviewing OMT and ESM this week
Sovereign yields mixed. Nikkei +4.9%; China closed for holiday. European stock markets, U.S. equity index futures gain. WTI crude, metals fall
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The main macro catalysts from SocGen
The US jobs report did not provide the Fed with any new information. Consequently, the Fed will not be prompted to speed up the end of its asset buying nor postpone it. However, the Fed’s monetary policy remains a major influence on financial markets. US 10Y Treasuries yields moved away from their peak of 2.23% reached on 29 May, pulling back to 2.10%. They should thus consolidate around the latter level until Thursday’s publication of retail sales.
The beginning of the week also looks to be calm in the eurozone, even if the economic calendar is slightly busier here. Today’s publication of industrial production data in France and Italy is not however expected to trigger any major change in trends. As a reminder, last week the ECB downgraded its GDP growth forecast for 2013 (from -0.5% to -0.6%). But that is still better than what SG expects (-0.8%). The question is when the trough will be hit in terms of eurozone activity and if the ECB will have to act again in the meantime.
Overall, the financial markets are expected to start the week by continuing to consolidate. The US 10Y rate trend remains a major determining factor, for eurozone rates as well as for the EUR/USD and USD/JPY. For 10Y rates, follow the support in the 2.00% zone for Treasuries and 1.45% for Bund. On the forex market, the EUR/USD should find a resistance zone around last week’s peaks, at 1.3307 in the short term, while the USD/JPY should encounter support in the 95 zone.
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Deutsche's Jim Reid summarizes the main events over the weekend and sentiment
Expect the will they/wont they tapering debate to continue to ebb and flow for the next few days/weeks. On Friday there was relief that the number was relatively healthy but not one that forces the Fed's hands. The S&P 500 closed +1.28%. However the number was firm enough to push 10yr UST 10bp higher to 2.17%. Interestingly the recent rise in 10yr yields has coincided with declining inflation expectations (as measured by US 10yr breakeven rates). The combination of higher nominal yields and lower inflation expectation has seen real yields risen sharply in the recent weeks to close in positive territory (0.0195%) for the first time since January last year. The success of financial repression relies heavily on keeping bond yields below inflation and nominal growth so this recent move is a worry. Things like this and the fact that the recovery is still only steady, means that we think the Fed will have to keep QE going for longer than current expectations suggest even if they do reduce purchases. However this realisation will take a fairly long-time to materialise and the debate will continue to rage on for some time over future Fed policy.
It’s also difficult for them to act in a vacuum and this weekend's Chinese data was interesting and generally weaker-than-expected. If China is slowing it is possible that the Fed may have to do more heavy lifting than they would like. In terms of the weekend data, Chinese exports in May only grew 1% yoy versus consensus of 7.4% and down sharply from the controversial +14.7% reading in April which was reportedly driven up by artificial invoicing. Indeed DB’s Jun Ma believes that this sharp deceleration reflects largely the impact of the government crackdown on hot money inflows via fake trade activities, and the underlying export growth, after adjusting for the base effect, remains steady at around 8-9% yoy in May. Imports also shrank 0.3% in May versus a year ago, whilst the market was expecting a +6.6% increase. Some disinflationary pressure was also evident in China. The latest May CPI rose 2.1% yoy vs 2.4% in April and consensus of 2.5%. Similarly, PPI fell more than expected at -2.9% vs consensus of -2.5%. Jun Ma thinks the weaker inflation suggests that monetary policy should stay relaxed. IP growth also decelerated marginally to 9.2% yoy in May from 9.3% in Apr, and was a tad lower than market expectation of 9.4% and DB's forecast of 9.3%. FAI growth slowed by 0.2ppts to 20.4% yoy and marginally below consensus of 20.5% but retail sales was in line with market estimates at 12.9% yoy.
The other major global story at the moment is clearly Japan and tomorrow wraps up an important BoJ policy meeting which will be followed by a media conference by Kuroda. Interestingly Kuroda's post-meeting conference in May marked the recent peak on the Nikkei (15,627) and the index is now just over 14% off those highs! The market will be looking for a bit more confidence and clearer communication from Kuroda this time. His comments last month where he played down the rise in JGB yields, and bond market volatility, probably spooked a market that were of the understanding that BoJ QE was aimed at keeping yields low.
Elsewhere, PM Abe’s cabinet is said to be likely to approve the growth strategy that is the final piece of his three-part plan on Friday so there's plenty to keep Yen and Nikkei watchers going this week. Overnight Asian equities are following Friday's positive US lead to trade mostly higher as we type. The Nikkei is nearly 4% higher on the day while the Hang Seng is up 0.4%. An upward revision to Japan’s Q1 GDP (to 4.1% from 3.5% previously) is offering a boost to sentiment and perhaps cushioning some of the disappointing weekend data from China. In credit markets, Asian IG CDS spreads are about 6bp tighter and outperforming bonds as cash credit continues to trade on a heavy note. Elsewhere, the UST 10yr yield is steady at 2.171% while the Dollar index is slightly stronger.
Moving on to Europe, the Der Spiegel reported over the weekend that the IMF is increasing its pressure on Eurozone member states to get a further haircut on Greece's sovereign debt underway this year (source: MNI). The IMF believes that without a haircut, Greece’s funding gap of EU4.6bn next year cannot be closed which complicates the IMF’s participation as the fund can only be involved in rescues where there is financing certainty over the next 12 months. This follows IMF’s admission of its ‘errors’ around Greece’s first bailout programme in relation to its over optimistic economic projections.
Taking a look at the week ahead we have the usual post-payrolls data lull in the US. Indeed it won't be until Wednesday before we get the Monthly Budget followed by Retail sales and Jobless claims on Thursday. The preliminary June reading of the UofM Consumer Confidence on Friday should make an interesting read given the recent market volatility and weakness. We’ll also get US industrial production and PPI data on Friday. For the US bond market, focus will probably be on the $66bn in Treasury auctions across 3s, 10s, 30s on Tuesday, Wednesday and Thursday, respectively.
On the other side of the pond, we will get industrial production data across various Euro countries during the first half of the week followed by the Euroland CPI report on Friday. Elsewhere, the German Constitutional Court is scheduled to hold hearings on the ESM and ECB’s OMT on Tuesday and Wednesday. Our European economists noted that the Court’s line of questioning could be revealing and if the ECB has overstepped its competencies, the case could be referred to the European Court of Justice. In their view, the ECJ would most likely be supportive of the ECB. In Japan all eyes will be on monetary and government policies this week. In other parts of Asia, Chinese markets will be closed from Monday to Wednesday for the Dragon Boat Festival while Hong Kong markets will be shut on Wednesday.