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Despite Weak Economic Data Overnight, Futures Slide On Rate Hike Concerns
The big news overnight was neither the Chinese manufacturing PMI miss nor the just as unpleasant (and important) German manufacturing and service PMI misses - the second consecutive monthly slowdown - but that speculation about a rate hike continues to grow louder despite the abysmal economic data lately, with the latest vote of support of a 25 bps rate increase coming from Goldman which overnight updated its "Fed staff model" and found surprisingly little slack in the economy suggesting that the recent push to blame reality for not complying with economist models (and hence the need for double seasonal adjustments) is gaining steam, and as we first suggested earlier this week, it may just be the case that the Fed completely ignores recent data (saying it was not adjusted enough), and pushes on to tighten conditions, if only to rerun the great Trichet experiment of the summer of 2011 when the smallest of rate hikes resulted in a double dip recession.
This may also be why equity futures this morning are a peculiar shade of green, one not seen in over a week, as the reality that a rate hike is coming finally trickles down to the smallest and slowest algorithm.
We will have more to say on the Goldman note shortly, but here are the main take-aways are: (1) potential growth has continued to recover (estimated at 1.8% year-over-year in 2015Q1); (2) the structural unemployment rate has remained low at 5%; (3) the cyclical gap in participation is very small; and (4) the output gap has continued to close (reaching -0.6% in 2015Q1). Goldman summarizes that "we broadly agree on the model's estimates for potential growth." In other words, a rate hike in the current slow-growth, un-double-seasonally adjusted environment may be just what the Econ Ph.Doctor ordered.
As for economic data overnight, it was again lousy, starting with China's May Mfg PMI which while improving slightly from April, up from 48.9 to 49.1, was still slightly below market expectation of 49.3, and the third consecutive contraction. The performances of the two most important sub-indices are mixed: Compared with April final readings, the production index went down to 48.4 from 50.0, while new orders index increased to 49.3 from 48.7 (despite the new export orders declining to 46.8 from 50.3). The employment index, which tends to lag the most, increased to 49 from 47.8. Suppliers’ delivery times decreased to 49.9 from 50.1. Raw material inventory increased to 49.1 from 47.6.

But it was Germany's (and Europe's) PMI miss that was even more disappointing: the Euro area flash composite PMI eased by 0.5pt to 53.4 in May, below consensus forecast of flat reading (Cons: 53.9). The 0.3pt improvement in the manufacturing PMI was more than offset by the 0.8 contraction in the services PMI. At the country level, the German composite PMI fell further, while the French composite PMI ticked up in May.
In addition to the Euro area aggregate PMI, Flash PMIs were released for Germany and France. The German composite PMI declined by 1.3pt to 52.8, below consensus expectations for a smaller contraction (Cons: 53.8). This was driven by a 1.1pt decline in the services PMI as well as a 0.8pt decrease in the manufacturing PMI. The German composite PMI has lost 2.6pt in the two first months of Q2.


In immediate reaction both Citi and JPM cut Germany's Q2 GDP forecast from 2.0% to 1.7%, and from 2.5% to 2.0%, respectively. Was that it for the great European economic recovery? Without further substantial weakening in the EUR, the answer may be yes.
Asian equities mostly rose led by the Shanghai Comp (+1.9%) after the latest Chinese HSBC flash Mfg PMI saw its 3rd
consecutive month of contraction (49.1 vs. Exp. 49.3), stoking further easing expectations. Nikkei 225 (+0.2%) once again
topped its 15-year highs, ahead of tomorrow’s BoJ monetary policy meeting, with reports suggesting the central bank could
upgrade its economic forecasts.
European equites (Euro Stoxx: -0.54%) trade in the red weighed on by the European PMI’s and the stronger EUR while the FTSE (-0.1%) outperforms after Australian Treasury Hockey stated that Australia will not be conducting an inquiry into the iron ore market, bolstering the materials sector with commodities complex also benefitting from the aforementioned USD weakness (-0.4%). The e-mini S&P has ebbed lower since the release of Fed minutes, amid little other fundamental news, while US earnings due out today include Hewlett-Packard, Intuit and Ross Stores, who all report after market.
Fixed income markets have seen Bunds trend lower heading into the North American crossover, while bond auctions from both Spain and France easily absorbed, elsewhere today sees the only Treasury supply of the week in the form of a USD 13bln 10yr TIPS auction. T-Notes outperform Bunds today after Analysts at Citi and Goldman Sachs have revised higher their forecast for German 10Y yields for end of 2015 to 0.4% from 0.2% and 0.9% from 0.5% respectively, with the latter also raising their end of 2015 UST yield forecast to 2.75% from 2.5% and predicting a September Fed rate hike.
USD (-0.5%) has trended lower throughout the European session following yesterday’s Fed meeting minutes with a June rate hike now appearing unlikely. EUR/USD and GBP/USD have both gained on the back of the weak USD as the latter moves higher on the day by over 150 pips. As well as yesterday’s Fed minutes, this morning saw strong UK Retail Sales Ex Auto (1.2% vs Exp. 0.2%, Prev. 0.2%). Germany and the Eurozone released their May prelim PMI’s, with German figures weaker across the board and Eurozone printing mixed data.
The commodity complex has seen strength in energy amid light news flow as a consequence of USD weakness ahead of the EIA NatGas Storage change scheduled for 1530BST/0930EDT, which is expected to show a build of 96 after last week’s build of 111. Also of note, Indian April Gold imports reached 86.7 tons (Prev. 43.2 tons Y/Y), according to an Indian Finance Ministry official.
Looking ahead, today sees the release of ECB minutes, US weekly jobs numbers, manufacturing PMIs, Existing home sales and Philadelphia Fed Business Outlook as well as comments from BoE’s Weale (Soft Hawk) and Fed’s Fischer (Soft Dove, Voter).
In summary: European shares fall with the real estate and tech sectors underperforming and oil & gas, basic resources outperforming. Euro-area manufacturing PMI above estimates, services PMI below. German manufacturing and services PMI below estimates; French manufacturing PMI above. U.K. retail sales above market expectations. Earlier, China manufacturing PMI below estimates at 49.1. The Italian and German markets are the worst-performing larger bourses, the Swiss the best. The euro is stronger against the dollar. German 10yr bond yields rise; Japanese yields increase. Commodities gain, with nickel, zinc underperforming and WTI crude outperforming. U.S. jobless claims, continuing claims, Markit U.S. manufacturing PMI, Bloomberg consumer comfort, Bloomberg economic expectations, Philadelphia Fed index, Chicago Fed index, existing home sales, leading index, Kansas City Fed index due later.
Market Wrap
- S&P 500 futures down 0.2% to 2118.2
- Stoxx 600 down 0.2% to 405.6
- US 10Yr yield at 2.24%
- German 10Yr yield up 3bps to 0.66%
- MSCI Asia Pacific up 0.1% to 153
- Gold spot down 0.1% to $1208.7/oz
- 32.7% of Stoxx 600 members gain, 64.5% decline
- Eurostoxx 50 -0.6%, FTSE 100 -0.1%, CAC 40 -0.5%, DAX -0.5%, IBEX -0.4%, FTSEMIB -0.7%, SMI +0%
- Asian stocks little changed with the Shanghai Composite outperforming and the Kospi underperforming; MSCI Asia Pacific up 0.1% to 153
- Nikkei 225 up 0%, Hang Seng down 0.2%, Kospi down 0.8%, Shanghai Composite up 1.9%, ASX up 0.9%, Sensex down 0.1%
- Euro up 0.7% to $1.1172
- Dollar Index down 0.43% to 95.04
- Italian 10Yr yield up 2bps to 1.88%
- Spanish 10Yr yield up 1bps to 1.81%
- French 10Yr yield up 4bps to 0.95%
- S&P GSCI Index up 0.8% to 444.2
- Brent Futures up 1.2% to $65.8/bbl, WTI Futures up 1.2% to $59.7/bbl
- LME 3m Copper up 0.3% to $6239.5/MT
- LME 3m Nickel down 1.1% to $12970/MT
- Wheat futures up 0.7% to 516.5 USd/bu
Bulletin Headline Summary From Bloimberg and RanSquawk
- USD falls 0.5% following Fed meeting minutes while strong UK Retail Sales Ex Auto (1.2% vs Exp. 0.2%, Prev. 0.2%) sees GBP/USD trade higher by over 150 pips
- Bunds have weakened heading into the North American crossover after both Citi and Goldman Sachs revised higher there end of 2015 Bund yield forecasts
- Today sees the release of US weekly jobs numbers, manufacturing PMIs, Existing home sales and Philadelphia Fed Business Outlook as well as comments from Fed’s Fischer and BoE’s Weale
- Treasuries steady before jobless claims, TIPS auction; market activity may be muted today and tomorrow before long holiday weekend in U.S. and U.K.
Markit/HSBC’s China manufacturing gauge was at 49.1 for May, missing the median 49.3 estimate in a Bloomberg survey
- Germany’s economy stuttered again this month, with Markit’s composite PMI falling to 52.8 from 54.1 in April, second straight decline and the lowest level this year
- Markit’s euro zone composite PMI slipped to 53.4, lower than forecast, from 53.9
- ECB approved the smallest rise in emergency cash for Greek lenders since tensions re-emerged in February, according to people familiar; no decision was taken to alter the discounts applied to collateral pledged for the Bank of Greece loans, the people said
- Germany’s Schaeuble doesn’t rule out a Greek bankruptcy, saying in an interview that far too little progress has been make in talks and that he would “consider for a long time” before repeating 2012 comment that Greece wouldn’t go bankrupt
- U.K. retail sales rose 1.2% in April, more than forecast, as clothing demand rose the most in four years
- U.K. Prime Minister David Cameron will pledge on Thursday to reduce immigration as his Conservative administration prepares new laws to punish illegal workers, step up deportations and tag foreign criminals
- Islamic State militants seized control of Palmyra, a city in northern Syria that’s home to one of the region’s most renowned classical sites, according to the Syrian Observatory for Human Rights
- NATO must send more troops to Baltic countries for “quite some time” to counter increased threats from Russia, according to Estonia’s defense minister
- U.S. Senator Rand Paul held the Senate floor for more than 10 hours to protest legislation extending much of the National Security Agency’s spying program
- Sovereign bond yields mixed. Asian stocks mostly higher, European stocks, U.S. equity-index futures decline. Crude oil and copper higher, gold little changed
US Event Calendar
- 8:30am: Chicago Fed Nat Activity Index, April, est, 0.00 (prior -0.42)
- 8:30am: Initial Jobless Claims, May 16, est. 270k (prior 264K)
- Continuing Claims, May 9 est. 2.231k (prior 2.229m)
- 9:45am: Markit US Manufacturing PMI, May preliminary, est. 54.5 (prior 54.1)
- 9:45am: Bloomberg Consumer Comfort, May 17 (prior 43.5)
- Bloomberg Economic Expectations, May (prior 50.0)
- 10:00am: Philadelphia Fed Business Outlook, May, est. 8.0 (prior 7.5)
- 10:00am: Existing Home Sales, April, est. 5.23m (prior 5.19m)
- Existing Home sales m/m, April, est. 0.8% (prior 6.1%)
- 11:00am: Kansas City Fed Manf. Activity, May, est. -4.0 (prior -7)
- 11:00pm: Bank of Japan releases policy statement, Kuroda holds press conference
DB's Jim Reid concludes the overnight recap
It seems the Fed have moved closer to giving up on a June hike after the release of April's FOMC minutes last night. This pretty much confirms the market's expectation but it firmed it up more. Although a ‘few’ members anticipated that the US economy would be ready for a move in June, this was seemingly outweighed by the comment that ‘many’ participants ‘thought it unlikely that the data available in June would provide sufficient confirmation that the conditions for raising the target range for the federal funds rate had been satisfied’. The minutes did say that they ‘did not rule out this possibility’, but it’s hard to see the tone favouring a move in June now. Aside from this, there were more mentions in the minutes that officials expect ‘moderate’ growth to resume again after the weak Q1, while the committee touched on the transitory effects of that quarter including the severe winter weather and labour dispute at West Coast ports temporarily disrupting some supply chains. In terms of forward guidance, the committee once again noted that any decision will be made on a ‘meeting-by-meeting’ basis while there was some discussion on the merits of using post meeting statements to provide forward guidance, however this was ultimately rejected. Although the general consensus appeared to be that most still view the risks to the outlook for economic growth and the labour market as nearly balanced, there was some discussion on the strengthening Dollar being a factor restraining economic growth for some time, while the committee also touched on the slowdown in growth in China and problems in Greece as potential downside risks.
So all-in-all a fairly neutral tone which probably leaned towards the doves at the margin if you had to pick a side. In terms of price action, having traded modestly lower for most of the session pre-minutes, the S&P 500 initially rose +0.3% immediately following the release, however this proved to be short lived with the gains then pared into the close and the index finishing -0.09%. There was little change in the pre and post FOMC levels for Treasuries either, with the 10y benchmark eventually closing at 2.249%, a -4.1bps move down on the day. The Dollar had a slightly stronger day meanwhile, with the DXY +0.34% while Gold finished +0.16% at $1210/oz. Credit markets were mostly flat. Aside from the minutes, newsflow was fairly limited. The Chicago Fed’s Evans was in focus again, reiterating his 2016 timeframe but suggesting that ‘substantially stronger and sustained nominal wage growth would be a very important harbinger of rising inflation pressures or improvements in the economy’, which in turn could change his mind on the potential path of rates. Looking at the follow up in markets in Asia, bourses are generally mixed this morning after somewhat divergent flash PMI
manufacturing readings in China and Japan. For the latter, the 50.9 (vs. 50.3 expected) print came in above market and a point higher on last month’s reading. The same can’t be said for China’s reading however. Despite a 0.2pt increase on April, the 49.1 reading came in below market forecasts of 49.3 to mark the third consecutive month of sub-50 prints. The China MNI business indicator print for May made for modestly better reading however, rising 0.9pts to 49.7 for its first monthly gain since December. Both the Shanghai Comp (+1.12%) and CSI 300 (+1.30%) are higher despite the data, perhaps reflecting the hope that more easing is in the air. The Nikkei (+0.56%) and Topix (+0.75%) have both firmed on the data, while the Hang Seng (-0.04%) and Kospi (-0.72%) are lower as we type. Credit markets have been fairly unmoved.
Moving on, aside from further Greek headlines it was a quiet session in Europe on the whole. As technical talks between Greece and its creditors continued, the ECB raised the ELA facility ceiling yesterday by €200m - the smallest increase since February. At the same time, there were no announced changes to haircuts on Greek collateral despite concerns that the ECB had drafted a plan to do such. For now, focus turns to the 2-day European leaders summit in Riga today where PM Tsipras and German Chancellor Merkel are expected to meet on the sidelines in what looks set to be more of a political confidence boost than anything else. Comments continue to pour in from both sides of progress being made however in reality the outstanding (and more concrete) issues surrounding pension and labour reforms in particular still remain. In the meantime, it’s looking increasingly likely that the IMF payment due on June 5th will unlikely be made without any release of funds – which is unlikely to be a surprise to most. This was confirmed by a SYRIZA spokesman yesterday who was quoted on Greek TV (ANT1) as saying that ‘if there is no deal by then that will address the current funding problem, they won’t get any money’. With the clock ticking away, the situation continues to be a daily affair for markets with the various outcomes still far from certain.
Aside from the DAX (-0.04%), it was a better day on the whole for European equities as the Stoxx 600 (+0.41%), CAC (+0.31%), IBEX (+0.66%) and FTSE MIB (+0.25%) all closed higher. In bond markets yields moved higher in the afternoon with 10y Bunds closing 3.7bps higher at 0.630% and yields in the periphery widening 5-7bps. It was a quiet day on the data front meanwhile with just a slightly softer than expected German PPI reading (+0.1% mom vs. +0.2% expected) for April to digest.
Yesterday’s Bank of England minutes appeared to reaffirm the expectation that inflation will pick up ‘notably’ as the year moves on. Despite a unanimous vote to keep rates on hold for now, the decision was ‘finely balanced’ for two MPC members, potentially pointing towards a return towards split decisions in the near term. The minutes also estimated that the level of slack in the economic was about 0.5% of GDP and that this is ‘likely to be fully absorbed within a year’. Sterling ended the day +0.15% higher versus the Dollar and +0.68% versus the Euro.
Focus will quickly shift from yesterday’s FOMC minutes to what is a busy day for data today as well as more Central Bank attention as we get the ECB minutes from the April 14th/15th meeting around midday. This morning’s data releases will be highlighted by the May flash manufacturing, services and composite prints for the Euro area and also regionally in Germany and France. Euro-area consumer confidence will also be due while in the UK, April’s retail sales are due out. There is plenty of data to get through in the US this afternoon and we there might get quite a few Q2 clues as a result. We kick off with the Chicago Fed national activity index, followed closely by initial jobless claims. The flash manufacturing PMI will follow this, before we get the May reading for the Philadelphia Fed business outlook, existing home sales, the conference board’s leading indicators and finally the Kansas City Fed manufacturing activity print. As well as this, Fed Vice-Chair Fischer is due to speak. A busy day ahead.
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Live by lies and statistics; Die by lies and statistics.
No surprise Goldman actually WANTS the market to crash now.
Cause they know there's no more Muppets left to rape
They're prolly short as hell
"Cause they know there's no more Muppets left to rape"
Well, there's always taxpayers to rape if the short bets go wrong or the counterparties don't pay out...
It's known as "Too joo to fail"
Dammit, don't make us raise rates.
Stop, or the dummy gets it.
the rich get wealthier via first touch of print, the middle class shrinks via outsourcing to lowest common denominator, and trickle barely a trickle, moar like a drip. the crumble ensues. econ for dummies. no need to read the book...
econ for dummies, chapter two: capitol controls as the crumble ensues and the ptb get desparate.
chapter three gets moar exciting as society starts to rumble from the crumble...
Rates will not rise...ever again until after the so called RESET.
Go Long Bonds!
So the recovery continues apace, then.
I luvs me some recovery!
I luvs me a ham sammich.
Market will rally into the weekend
elite yet?? well heres one that controls much of our media.. 2 sluts at 92 watta man.
"on May 27, Sumner Redstone will turn 92 — an event that will be celebrated by a select circle at the Vibrato Grill Jazz, a restaurant in Bel Air. The party, with a guest list that includes entertainer Tony Bennett and former financier and philanthropist Michael Milken, will take place as a recent flurry of media activity has shined a spotlight, once again, on the fitness and mortality of the man who controls both CBS and Viacom.
Originally, a bigger event was planned to take place on Viacom's Paramount studio lot, but sources say this tribute to Redstone and his "passion to party," as the invitation puts it, was moved to a venue closer to the frail mogul's Beverly Park home — partly because both his live-in girlfriend, Sydney Holland, 43, and his still-close ex-girlfriend, Manuela Herzer, 50, were nervous about the number of people who might try to get close to him. That concern seems to have come from them rather than from Redstone's daughter, Shari. Sources say neither Shari Redstone, 61, nor her three children (including Brandon Korff, with whom Sumner has been close) were invited to the event."
Rate hike...stop it ...you're killing me. LOL
Rate hike concerns.... lol. How many times do we have to listen to that old chestnut?
rate hike to what 1/2 percent from 1/4. wow i'm in awe, totally awesome dude, like hey man they gotta plan. cause like the econ is hitting on all cyclinders, hey looky at unemployment, never mind 90 million joining the fsa and keeping a treasury first touch primary dealer monopoly alive and vibrant. seriously, how long can this go on?
Yes sheep, we are back to what works best, the higher interest rate lie. Works everytime even if we never have higher rates!
"After another hard day of spewing absolute and total bulllshit and getting paid for it always feels good for the World Wide Web to call your day " busy.""