The overnight macroeconomic news started early with China where the second, HSBC Manufacturing PMI declined from 51.6 to 50.4, below estimates of 50.5, yet another signal of a slowdown in the country (where one can argue the collapse in copper prices is having a far greater impact), and where the Composite closed down 0.17% after its Mayday holiday. China wasn't the only one: India dropped to 51.0 from 52.0 in March, and Taiwan dipped to 50.7 from 51.2, offset however by the bounce in South Korean PMI from 52.0 to 52.6, the best in two years (a number set to tumble as Abenomics steal SK's export thunder).
The focus then shifted to Europe, where virtually everyone was once again in contraction mode, as German Mfg PMI declined from 49.0 to 48.1, the lowest since December, if a slight beat to expectations (while VDMA industry body said March Machine orders dropped 15% Y/Y so little optimism on the horizon), France rose modestly to 44.4 from already depressed levels of 44.0, Spain PMI also rose from 44.2 to 44.7, Italy PMI at 45.5 from 44.5, Poland at 46.9 from 48.0, a 45-month low. At least Greece seems to be doing "better" with the Mfg PMI "rising" to 45.0 from 42.1. Across the reports, the biggest decline was in input prices following the recent clobbering in commodities, which in turn is translating into price deflation.
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It is this deflation that the ECB will try in an hour to offset by any means possible, although it most likely will engage in a cosmetic 25 bps cut in the refinancing, if not deposit, rate at least according to the vast majority of analysts. That such a cut will have no impact on the actual economy is so obvious, there is no point in even discussing it.
Needless to say, the abovementioned countries' bonds no longer reflect the economic reality, and all merely anticipate future monetizations by various global central banks, once again dropping to record, or near-record lows.
For the most part, the Fed, the BOJ and the BOE monetizations are all priced in. The next big catalyst will be the ECB, which however will unlikely engage in broad credit creation - a key driver needed for "growth", meaning Europe will continue to be stuck in economic depression even as its bonds rapidly approach the zero bound yield barrier.
A quick run through European markets:
- Spanish 10Y yield down 5bps to 4.1%
- Italian 10Y yield down 5bps to 3.85%
- U.K. 10Y yield up 2bps to 1.67%
- German 10Y yield up 1bps to 1.21%
- Bund future down 0.08% to 146.46
- BTP future up 0.28% to 116.27
- Euro down 0.1% to $1.3167
- Dollar Index up 0.26% to 81.69
- Sterling spot up 0.07% to $1.5566
- 1Y euro cross currency basis swap down 1bps to -22bps
- Stoxx 600 down 0.14% to 296.5
SocGen's summary of the main macro events:
We set the scene earlier in the week and discussed the possible permutations across markets from the decision that the ECB governing council will take or not take today (ECB will they or won't they). Though EUR crosses squeezed higher yesterday and 10y swaps edged off their 1.445% low, but light flows like shallow rivers can sometimes mask different underlying and treacherous cross currents. The market has moved on from April and is pretty gung-ho about lower rates and/or an expansion of non-standard measures (read ECB balance sheet) so either investors are confident that ECB measures will help to boost growth, or markets are in the process of re-thinking their tactics on the USD and the Fed. The risk of disappointment is however not negligible today and a forceful ECB rebuff against the dovish rates herd would leave a sour taste for risk assets.
Credit and stock markets have continued to defy the sequence of weak US data in quite a remarkable fashion but even if the Fed and BoJ carry on greasing the risk on wheels with $160bn in liquidity each month, there must be a tipping point when even the ECB, or a soft US payrolls report, triggers some form of reality check as the S&P approaches 1,600pts.
ECB governing council meetings are twice yearly held on the road (today's one takes place in Bratislava, capital of Slovakia), but these occasions have rarely turned out to be meetings where policy changes have been agreed. Protocol, PR duties and generally greater time constraints allows for less thorough discussion compared to the routine of meetings at the ECB tower in Frankfurt. In addition, the shift in the fiscal landscape promoted very vocally by the EU and immediately shared by countries like Italy and France, may not go down well with the fiscal hawks whose fears are that further stimulus will simply lead to delay in deficit reduction.
The merits of fresh policy easing will then be discussed against a background of a principally weakening landscape in Germany, five months before the federal election, and the fragmented borrowing landscape across EU member states. But with periphery bond spreads still tightening, some council members may choose to postpone action to another day. Disappointment is certain to reverse the short squeeze which carried EUR/USD above 1.3200 yesterday for the first time in two weeks.
Finally, DB's Jim Reid summarizes the overnight events as usual
markets finally responded to some disappointing data yesterday ahead of today's ECB meeting, the holiday delayed final European PMIs and tomorrow's payrolls. The number of economists predicting a 25bps ECB cut has grown over the week from just over half to 44 out of the 70 polled by Bloomberg. 25 are expecting no change and 1 is looking for a 50bps cut! DB are looking for a 25bp cut and an additional quarter point in the summer. Our economists think that improving bank credit supply relative to demand favour a conventional monetary policy response over a new unconventional policy response for now although if the capacity for conventional easing declines the pressure to turn to unconventional policy will return.
Staying on this theme, the FOMC statement last night offered few changes but DB’s Peter Hooper pointed out that one important sentence was added which reads “The Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes”. This tells us that if the recent softer tone in the data turns into a more serious economic slowdown (or a more serious drop in inflation), the next shift in policy could easily be an expansion rather than a tapering of QE. The UST 10-year yield fell 4bps to 1.629% overnight to the lowest level since the 10th of December 2012.
In terms of markets, a sell-off in the commodity complex was also a main reason behind the softer risk tone yesterday. The S&P 500 (-0.93%) fell for the first time this week, led by declines in Materials (-1.75%) and Energy (-1.64%). Brent, Copper and Gold closed -2.4%, -3.4% and -1.3% lower respectively. Oil in particular suffered from an EIA report which noted that inventories are at an 82-year high. The broader S&PGSCI index posted its second worst performance in 2013 with a -2.1% decline on the day. Credit spreads also widened with the CDX IG moving +2 ¾ bps to nearly erase its earlier gains for the week. It was a relatively quiet session in Europe given the holidays across the region. The better than-expected UK PMI (49.8 v 48.5) gave the FTSE an early boost but much of that was later offset by the commodity weakness.
The overnight session is mixed with main bourses in Japan (-0.5%), Australia (-0.6%) and Korea (-0.3%) all in negative territory. Gold continues to fall and the weakness in commodities is also not helping the AUD. The tone is equally soft in Asian credit with IG spreads modestly wider across benchmarks. New issues remain the new focus with China largest offshore oil and gas producer in the market for a $4bn bond deal.
Moving on to data matters, US data prints were still generally on the soft side yesterday. The ISM manufacturing headline (50.7 v 50.5 expected) was not as bad as feared although the report still highlighted weakness in labour market conditions given the 4pt drop in the employment index. Indeed the ADP private payroll report for April fell short of market expectations (119k v 150k expected) and probably suggests some downside risks to tomorrow’s payrolls. Auto sales also disappointed with the latest April volumes (at 14.92m v 15.22m saar expected) running below 15m saar for the first time since October last year.
Elsewhere, S&P doesn’t seem to agree with Moody’s call in downgrading Slovenia to sub-investment grade. S&P yesterday affirmed Slovenia’s A- rating with a Stable outlook and said it does not expect Slovenia to use the ESM to meet funding needs. Let’s see if this will restart the bond sale process for Slovenia.
In terms of today, initial claims and the trade balance will be the main US release on top of European PMIs. All eyes though will be on the ECB and Draghi.