Overnight Sentiment: "No Horrible News Out Of Europe Is Great News"
As already noted, one piece of good news out of Europe - German GDP (ignore the huge ZEW miss) - was enough to make everyone forget the Italian bank downgrade, and that Greece is one election away from unwinding the EMU. Yet perhaps it is good to have a modest bounce from a market, which however not even Goldman says is oversold: after all the central planners need a day or two to regroup, and consider what currency to crush next to buy the global nominal stock market a few months of breathing room.
Below is a full summary of overnight festivities from BofA.
Market action: Better data offsets Greek political drama
Stronger European economic data is offsetting the ongoing political squabbling in Greece. After contracting 0.3% QoQ in Q4 2011, the Eurozone managed to follow up with a flat Q1 2012 against a consensus looking for another 0.2% decline. So, "zero" is the new positive. Italy, Spain and Portugal saw growth drop outright, France stalled at 0.0%, but Germany defied expectations posting a 0.5% QoQ increase.
However, German business sentiment took a hit, with the ZEW survey falling to 10.8 in May from 23.4 in April, implying moderating activity going forward. Moreover, our latest Global Fund Manager Survey (May) shows that investors are scaling back growth expectations: just 15% expect stronger growth over the next 12 months, down from 20% in April. And, 60% of investors are now expecting the ECB to engage in a more direct / large-scale QE before 2012 year-end.
Asian stocks were down 0.5% overnight, falling for a fifth day on the Greek political impasse - and, in China, April FDI moderated to 0.74% YoY, below consensus of +2.8%. However, European equity markets are rallying on the "less-bad" economic news, up 0.6% in the aggregate. In the US, futures are pointing to a stronger open across the major indices ahead of this morning's retail sales report, which could be significant.
As risk appetite makes a comeback, bonds are selling off. The 10-year Treasury note yield is rising 4bps, to 1.81%. Across Europe, German bunds are selling off 4bps, too, at 1.50%. In the periphery, 10-year notes are managing to stay flat. In the FX market, the euro is staging a modest rally against the dollar, up to 1.29 from yesterday's close of 1.28. Commodities are not confirming the rally in equities. Copper continues its slide, down 0.5%, to its lowest level since early January. WTI Crude Oil is off 10 cents, to $94.70 per barrel.
Today's events: Taking the sails out of retail sales
The main event today is April's retail sales report. We believe warm weather boosted sales in March, leading to a payback in April. Under our forecast, core retail sales advance just 0.1% MoM, the weakest one-month gain since last December. Moreover, consumer prices will likely decline 0.1% MoM in April, bringing the YoY to 2.2%, in line with the core inflation measure.