So much for Europe's "recovery." In a quarter when the whisper was that some upside surprise would come out of Europe, the biggest overnight data releases, European standalone and consolidated GDPs were yet another flop, missing across the board from Germany (+0.1%, Exp. 0.3%), to France (-0.2%, Exp. 0.1%), to Italy (-0.5%, Exp. -0.4%), and to the entire Eurozone (-0.2%, Exp. 0.1%), As SocGen recapped, the first estimate of eurozone Q1 GDP comes in at -0.2% qoq, below consensus of a 0.1% drop. The economy shrank by 1.0% yoy, the worst rate since Dec-09. The decline of 0.5% qoq in Italy means that the economy has been in recession continuously since Q4-11. A 0.2% qoq drop in France means the economy has ‘double-dipped’, posting a second back-to-back drop in GDP since Q4-08. The increase of 0.1% qoq in Germany was disappointing and shows the economy is not in a position to support demand in the weaker member states (table below shows %q/q changes).
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And here is why the EUR has been declining progressively overnight: SocGen's conclusion is the same as that of all sellside desks and policy makers: "Annual growth rate is not improving, time for the ECB to stop its balance sheet from shrinking." Just as expected: after all very soon the BOJ effect will be nullified, and the BOE's launch of QE is to an extent priced in, which means only the ECB is the wildcard. And the worse the European economy gets, the more likely it will be the next entrant in the global outright unsterilized monetization race.
The data should have no immediate implications for the ECB after the refi rate cut to 0.50% earlier this month. However, the data will continue to fuel the debate over whether the central bank should cut the deposit rate into negative territory and speed up measures to restore the flow of credit (ABS purchases under consideration), and stop its balance sheet from contracting (see chart 2). In annual terms, the eurozone economy has been in decline for five consecutive quarters. The only consolation is that, overall, the quarterly rate of contraction is lessening vs the end of 2012. The timing of return to positive growth remains uncertain.
Sure enough, this explains why futures across the Atlantic are once again looking up and why the US stock market will have yet another record high close.
On the US docket today, meaningless as they may be in a world in which only central bank balance sheets matter, we have Empire Manufacturing industrial production and and update on Producer Prices.
A summary bulletin of the key overnight highlights from Bloomberg:
- Treasuries steady, holding near highest levels since March 25; EUR/USD falls to lowest in over a month as euro-area economy contracted 0.2% in 1Q, more than economists forecast.
- Germany expanded 0.1%, less than forecast; France slipped into a recession and Italy’s contraction exceeded estimates
- BoE raises 2Q growth forecast to 0.5% from 0.3% in 1Q; Governor Mervyn King says U.K. recovery is now “in sight”; says while negative rates are an “option on the table,” there are “good reasons” not to implement
- U.K. unemployment rose in the 1Q and the number of people in work fell as the pressure on wages increased, adding to signs that the labor market is slowing
- Nikkei closed above 15,000 for the first time since 2007 after JPY touched a 4-1/2-year low against the dollar
- BoJ’s stimulus is showing signs of success, even as the yen weakness it fueled is set to reverse and a stock rally risks forming an asset bubble, according to former Ministry of Finance official Eisuke Sakakibara
- Chinese Premier Li Keqiang signaled policy makers are reluctant to use stimulus to counter a slowdown in the world’s second-largest economy because the risks outweigh the benefits
- The Bank of France wants to help banks package loans to businesses into tradable securities with the creation of special-purpose vehicles, in what could become a template for the euro area
- Norway’s $740b sovereign wealth fund, the world’s biggest, said efforts by central banks and governments to manipulate exchange rates through excessive stimulus aren’t triggering a shift in its investment strategy
- HSBC Holdings Plc will eliminate as many as 14,000 more jobs as CEO Stuart Gulliver set out plans to cut an additional $3b of costs as he tries to revive profitability
- The widening inquiries into the IRS’s scrutiny of small-government groups is focusing more on agency executives who didn’t inform Congress earlier
- Several veterans of the Obama White House and the Clinton administration say Obama and his team are ill- equipped to quickly contain political damage from probes into the handling of the Benghazi attack, the IRS targeting of anti-tax nonprofits and the Justice Department’s subpoena of telephone records of AP reporters and editors
- Sovereign yields mostly higher; Greece 10Y yields tumble 88bps. Asian stocks gain, Shanghai +0.4%. European stocks and U.S. stock-index futures higher; WTI crude falls for fifth day; gold and copper lower
SocGen's recaps the main macro events:
AUD/USD has lost 4.6% so far this month, but the correction may not be over once the short-term consolidation has taken place. There are a number of precedents for this, going back to 2011 when a test of 0.9300 did not end there. Spot has extended its decline from that level by an average of around 3% on four occasions sinceOct-10, the maximum deviation being 5.5% to a 0.9388 low in Sep-11. Buying now risks catching a falling knife, especially with the vibes from Shanghai not giving a great sense of comfort these days. Moody's report yesterday on China's shadow banking system warned of asset bubbles and risks to financial stability. Separately, an article in the China Securities Journal yesterday pointed to the dilemma facing the PBoC: lower interest rates to curb capital inflows, or tighten monetary policy to keep the lid on the money supply? Going against the grain of the concerted global central bank easing, and with the Fed mapping an exit from QE3, China could test equity markets' effortless liquidity-fuelled push to new highs. China is a key destination for Australian exports, but for now AUD/USD is in the process of catching up with tighter AU/US 2y swaps. As our chart illustrates, the re-alignment has nearly run its course, but as there have been undershoots in the past, another one cannot be ruled out. The up-tick in AUD/USD vols (3mth to 9.40) comes off a low base and could have further to go if we compare it with the price action of May 2012.
The focus this morning will be on the first estimate of eurozone Q1 GDP (SG call: -0.1% qoq, but with downside risk after weak French and German data) and the BoE Inflation Report. Data published earlier showed the French economy contracted by 0.2% qoq (vs -0.1% forecast) and Germany expanded by only 0.1% (vs 0.3% forecast). The data should have no immediate implications for ECB policy so soon after the refi rate cut to 0.50%, but it will add to the debate on negative deposit rate and ABS purchases. Italian numbers are due shortly. The BoE IR has been a frequent market mover for GBP in the past and could cause ripples again today knowing that this will be governor King's last before he steps down in July. He has not sidestepped occasions to talk down GBP in the past and could do so again before he departs, but how can that be reconciled with a less downbeat tone on the economy?
The complete overnight recap from DB's Jim Reid
I'm sure markets also used to be simpler than they are at the moment. Will the recent sharp bond sell-off stabilise soon or turn into something a little more worrying? Yesterday saw 10yr JGB yields rise for the sixth consecutive day to 0.86% which is a level that we have only traded above for brief periods over the last twelve months. The magnitude of the recent upward move has been significant. Indeed, over the last six sessions, yields have moved upwards by 30bp which is the largest move we’ve seen in such a short period since at least December 2006. The last time we saw a six-day selloff streak was in July 2010, and back then the back up in yields was just 10bp. At 0.86%, the 10-yr yield is now close to double the lows of 0.44% seen in the immediate aftermath of the BoJ’s unprecedented announcements in early April.
Outside of a general global bond sell-off, it seems that inflation expectations have contributed to the move in JGBs and allowed it to under-perform other markets. The Japanese 5yr breakeven rate (currently 1.86%) is now more than 50bp higher since the BoJ’s announcements in April and +130bp since the mid-2012 lows. The moves have also added steepening pressure on curves with the 2yr-30yr Japanese curve steepening by 50bp since April 4th. The selloff was also evident in other bond markets including USTs where 10yr yields added 5.5bp yesterday to move back into the low end of the 1.95% to 2.05% trading range that held for much of Q1. In Europe, UK, French and German yields were a touch wider.
At some point one has to wonder when higher yields will begin to concern the Japanese authorities. Overnight, Prime Minister Abe told a parliamentary session that the government was closely watching movements in the bond market to ensure that it could digest Japanese government bonds in a stable manner (Reuters). He added that he was confident that the BoJ would “respond appropriately” to market movements while keeping regular dialogue with market players. The headline helped JGBs pare overnight losses, with yields now broadly unchanged as we type. Abe’s comments come after Japan’s economy minister Amari said yesterday that "Spikes in Japanese government bond yields would affect interest payments, which would impact fiscal reconstruction’. Thus far, the movement in JGBs doesn’t seem to be affecting sentiment in equities with the Nikkei adding another 2% overnight to take the index above 15,000 for the first time since early 2008. A number of outsized moves in notable corporates including Isuzu Motors (+20%) and Sony (+11%) is helping domestic risk sentiment. The USDJPY is weaker at 102.2 as we type.
Elsewhere in Asia, the ASX200 is trading 0.7% lower, and the AUDUSD fell 0.3% from the overnight highs on comments from Chinese Premier Li Keqiang. These were made on Monday at the State Council but were posted on their website today. Mr Li said that the Chinese economy faces downward pressure but warned that there is little room for stimulus or official investment. Li added that the economic situation remains "complicated" and said market forces will be needed to support growth. Chinese-related risk assets largely shrugged off the headlines though with copper (+0.1%) and the Hang Seng (+0.5%) firmer in overnight trading.
Returning to yesterday’s markets, credit continued its recent run of underperformance against equities. In the past week, the European iTraxx and CDX IG indices have widened 5bp and 4bp respectively. During the same time period, the Eurostoxx and S&P500 indices have added 11pts and 18pts respectively. Strength in US equities yesterday was broadbased with all ten industry sectors closing higher, led by financials and oil and gas stocks. The USD index added 0.4%, with the dollar’s strength evident against major currencies for the fourth straight session. It was a quiet day in terms of data yesterday, with a disappointing German ZEW survey (36.4 vs 40 expected) setting a weaker tone early in the European session. In the US, the NFIB small business optimism index printed at its highest level (92.1 vs 90.3 expected) since October 2012.
In other news, the European debate continued over the details of a Euroarea banking union and bank resolution. The ECB’s Asmussen stated that progress needed to be made on banking union negotiations and a framework on the distribution of losses are needed in the event of future bank failures. He reaffirmed that deposits of up to EUR100k must be protected from losses in the event of bank failure. Asmussen called for creating a central agency and an industry-funded common backstop for handling failing banks by "the summer of next year," when the ECB takes up new supervisory duties. Those views were seemingly in conflict with German FM Schaeuble, who has said the next step should be the coordination of national schemes to wind down problem banks, rather than a system with shared euro zone risk.
Today sees the release of advance GDP estimates for the euroarea as well as individual countries such as Germany, France, Italy and the Netherlands. Expectations are for a upward tick in GDP growth across the board. In the UK, the Bank of England’s quarterly inflation report and jobless data are scheduled. Across the Atlantic, a number of important updates including Empire Manufacturing industrial production and producer prices could drive sentiment during the US session.