With another listless macro day in the offing, the main event was the previously mentioned Bank of Korea 25 bps rate cut, which coming at a time when everyone else in the world is easing was not too surprising, but was somewhat unexpected in light of persistent inflationary pressures. Either way, the gauntlet at Abenomics has been thrown and any temporary Japanese Yen-driven export gains will likely not persist as it is the quality of products perception (sorry 20th century Toshiba and Sony), that is the primary determinant of end demand, not transitory, FX-driven prices. And now that Korea is set on once again matching Japan in competitiveness, the final piece of the Abenomics unwind puzzle has finally clicked into place.
Elsewhere overnight, China reported consumer price inflation increasing by 2.4%, on expectations of a 2.3% rise, driven by a 4% jump in food costs: hardly the thing of Politburo dreams. Or perhaps the PBOC can just print more pigs, soy and birdflu-free chickens? On the other hand, PPI dropped 2.6% in April, on estimates of a 2.3% decline, as China telegraphs it has the capacity, if needed, to stimulate the economy. This is ironic considering its inflation pressures are externally-driven, and come from the Fed and the BOJ, and soon the BOE and ECB. And thus its economy stagnates while prices are driven higher by hot money flows. What to do?
Looking quickly at Europe, we got Spanish Industrial Production data of very questionably quality, with the March print dropping only -0.6% following a downward revised 6.9% collapse in February, and far above expectations. Needless to say, we very much doubt this number is even remotely accurate especially with the complete lack of any credit creation in the country. In other European news, U.K. industrial production rose 0.7% in March from February's 0.9% rise. From a year earlier, output dropped 1.4% The European Central Bank said low inflation in the euro area allowed policy makers to cut interest rates last week. The decision was “consistent with low underlying price pressure over the medium term,” according to its monthly bulletin. Inflation expectations are “firmly anchored” and lower borrowing costs “should contribute to support prospects for a recovery later in the year."
Looking at US data, initial jobless claims will be the only key release, although there will be much Fed chatter. Plosser will first speak
with Bloomberg TV at 12.30pm London time today before a 6.15pm
appearance at a NYC conference in which he will speak about monetary
policy. Lacker will also give a speech on “Ending TBTF is going to be
hard work” today at 1pm London. The main speech this week of course will
be from Bernanke’s himself at the Chicago Fed Conference tomorrow.
Other highlights via Bloomberg's First World bulletin breakdown:
- U.K. March industrial production +0.7% vs Feb. +0.9%, est. 0.2%; cold weather boosted demand for gas and electricity
- Greece could return to markets end-2014, Finance Minister Yannis said in TV interview
- ECB will leave its main refinancing rate at a record-low 0.5% until end-2014, according to the median of 18 forecasts in the monthly Bloomberg survey of economists; 27 of 32 economists predict no cut in the benchmark by end-2013; 5 see a reduction to 0.25%
- ECB said low inflation in the 17-nation euro area allowed policy makers to cut interest rates last week, as economists lowered forecasts for consumer prices and economic growth
- Spain beat its maximum target at a bond auction today, borrowing costs fell after ECB rate cut fueled rally in debt from distressed euro countries; country has covered 47.9% of mid- and long-term 2013 issuance plan
- China’s yuan rose to 19-year high as central bank boosted currency’s reference rate to a record amid signs of increasing capital inflows
- China’s CPI rose 2.4% Y/y in April vs 2.1% in March, est. 2.3%; mainly due to vegetable price increases; PPI -2.6% Y/y, est. -2.3%
- Bank of Korea cuts key interest rate to 2.5% from 2.75%; median expectation no change; Korean won drops most in three weeks, bonds advance
- JPMorgan Chase & Co. and Bank of America Corp. had perfect trading records in the first quarter, making money on every day of the period, as Morgan Stanley posted losses in eight sessions; Goldman Sachs lost money in two days
- Citigroup Inc. cut Deutsche Bank AG’s lead as the biggest currency trader in a Euromoney Institutional Investor Plc poll, boosted by its larger share of emerging-market transactions
- Fundraising by Europe’s riskiest companies is accelerating as issuers take advantage of record-low borrowing costs and investor appetite for high-yielding assets
- BofAML Corporate Master Index OAS unchanged at 143bps, new tight for 2013, as $19b priced yesterday. Markit IG at 69.1bps. High Yield Master II OAS unchanged at 424bps, tightest since 2007, as $2.815b priced. CDX High Yield closed at 107.37, new record
- Sovereign yields mostly lower; Spanish yields rise after auctions; bund yields decline. Asian stocks end lower; Nikkei -0.6%, Shanghai -0.6% after CPI data. European stocks lower U.S. stock-index futures slide; WTI crude, gold, metals lower
SocGen recaps the key macro points
The BoE meeting is not expected to deliver any fireworks today, with both Bank Rate and the Asset Purchase Facility forecast to stay unchanged at 0.50% and £375bn respectively. We will probably have to wait at least another week till the release of the Inflation Report to find out if the chances of more QE are receding now that output growth and leading indicators have started to surprise to the upside. Lending data have also started to improve and the FTSE is trading within 5.5% of all-time highs, which all counts towards a more neutral MPC posture. Whether that's enough for the three doves on the committee to pull their call for an immediate expansion of the APF will only be clear in two weeks when the minutes of today's meeting are published.
GBP is the second-worst performer year-to-date in the G10 after the JPY, but the clouds have started to dissipate since the start of Q2, with GBP trimming losses vs the AUD and USD. For GBP/USD, a move up to 1.58 this month is a realistic objective if the BoE communicates a less downbeat message on the economy in next week's Inflation Report. For EUR/GBP, as with most EUR crosses, the tide has turned since ECB president Draghi's comment in Rome on Monday. A run of strong German industry data, Portugal's successful syndicated 10y issue and the EU agreement to disburse aid payments to Cyprus and Greece is putting EUR/USD on track for the first weekly close above 1.3150 since 22 February. US initial claims should not derail this week's move and a successful Spanish bond sale this morning should add momentum for a push towards 1.3228. The EUR gains this week have mostly come against the safe havens like the JPY and CHF, and the NZD after the RBNZ revealed it is capable of intervening again to weaken the currency after having done so last month. With most central banks pulling out all the stops to impede their currencies from strengthening and reports circulating that the ECB is studying the purchase of ABS securities to boost the flow of credit, EUR/JPY and EUR/CHF look set to carry on strengthening.
DB's Jim Reid summarizes the balance
Markets are a bit dull at the moment with most risk assets grinding higher/tighter on the weight of money. Volatility is clearly pretty low across most assets again due to liquidity. Yesterday saw the S&P 500 (+0.41%) closing at an all-time high for the fifth consecutive time and the index has rallied in 12 out of the last 14 trading sessions. Gains were also seen across the European equities complex with the Stoxx600 and the DAX up +0.64% and +0.83% respectively. The stronger-thanexpected German IP (+1.2% MoM v -0.15 expected) was encouraging, which dovetails with the positive German factory orders on Tuesday. Credit underperformed equities in relative terms with the CDX IG finishing 1/4bp wider on the day. Interestingly core government bond yields also fell despite the risk rally. The 10-year UST and Bund yields fell 1bp and 3bp to close at 1.766% and 1.269% respectively on the day.
Overnight markets are mixed as we have the Hang Seng (-0.3%), the Shanghai Composite (-0.6%) and the Nikkei (-0.6%) in the red, and Kospi (+0.7%) are in the green. Korea’s unexpected rate cut (by 25bps), which follows on from the RBA rate cut two days ago, is perhaps lifting the Kospi. Chinese stocks are weaker on the back of a softer-than-expected PPI for April (-2.6% v -2.3%) although CPI headline came in a tad above expectations (+2.4% v +2.3%). Treasuries are a little softer overnight with the 10-year creeping up to 1.809% as we type. Asian IG credit spreads are a touch wider and the focus remains on the primary pipeline. In other developments, ECB’s Asmussen yesterday said that the ECB has discussed buying asset-backed securities (ABS) to support lending to SME firms. He said that policy makers have an open mind to look at all things within their mandate but warned that while the ECB is looking at all possible options to rekindle the ABS market policy makers are far from reaching any conclusion.
In terms of today, the final BoE meeting under the governorship of Mervyn King will be the main event in the UK. The market is not expecting any changes to rates and its QE program in part due to the recent better-than-expected UK data-flow. We will also get UK and Spanish IP reports today. Initial jobless claims will be the main release in the US but we will also pay close attention to Fed speak today. Plosser will first speak with Bloomberg TV at 12.30pm London time today before a 6.15pm appearance at a NYC conference in which he will speak about monetary policy. Lacker will also give a speech on “Ending TBTF is going to be hard work” today at 1pm London. The main speech this week of course will be from Bernanke’s himself at the Chicago Fed Conference tomorrow.