Nothing like a solid dose of schizophrenia to start the week, following Chinese PMI news which showed that once again the Chinese economy was both contracting and expanding at the same time. Sure, one can justify it by saying HSBC looks at smaller companies while the official data tracks larger SMEs but the reality is that just like in the US, so China has learned when all else fails, baffle with BS is the best strategy. As a result the media is attributing he drop in European stocks to the weaker than expected China PMI, while the green prints in US futures are due to... stronger than expected China PMI.
There were no split-personalities in Japan, however, where Mrs. Watanable's revulsion with recent euphoria led the Nikkei to tumble over 500 points, to closed down another 3.72%, and is now on the verge from a 20% bear market from its May 23 multi-year highs. The fact that the USDJPY reached within 3 pips of the Abenomics "fail" zone of USDJPY 100 didn't help overnight sentiment.
Following Friday's last minute plunge, US futures are pointing solidly higher for the time being: we can only assume Stevie Cohen hasn't started liquidating yet. Some point to stronger than expected European PMI as the reason for US strength, and sure enough, virtually across the board as if by magic Europe reported stronger than expected manufacturing PMIs. As Markit reports [30], "at a 15-month high of 48.3 in May, up from April’s four-month low of 46.7, the seasonally adjusted Markit Eurozone Manufacturing PMI indicated the slowest pace of contraction since February 2012. Business conditions still deteriorated overall, however, with the current downturn extended to a twenty-second month."
Broken down by nation, Here is hope this 15 month 48.3 Mfg PMI was calculated:
- Germany 49.4 (flash 49.0) 3-month high, Last 49.0
- Netherlands 48.7 3-month high,
- Austria 48.2 3-month high,
- Spain 48.1 24-month high, Last 44.7
- Italy 47.3 4-month high, Exp. 46.2
- France 46.4 (flash 45.5) 13-month high, Last 45.5
- Greece 45.3 23-month high, Last 45.0
And visually:
[31]
Also, let's not forget that Spain PM has essentially assured his economic data will be fudged going forward, promising stronger unemployment figures [32] in the days to come, which one can only assume means the BLS "strategic truth department" has opened a Madrid office. We can only hope that when fudging its labor data, Spain remembers to also adjust its matching NPL data accordingly.
This is just the start of a very busy week. As Deutsche recaps, stand by for a bumper couple of days as markets get ready for an eventful week of US data. Indeed we’ll kick off with today’s ISM report and finish it all off with Friday’s payrolls print. We also have a handful of Fed speeches throughout the week as well as the latest Beige Book on Wednesday. Given the rise in rates volatility and focus on the US government bond market these will clearly be closely watched as potential tone-setters of any Fed “taper on, taper off” discussions. Across the Atlantic, the focus will be on the ECB and BoE policy meetings. Markets are expecting no policy changes from either central bank and a negative deposit rate is not DB economists’ base case. That said there will still be particular attention paid to Draghi's post-meeting press conference for any mention of nonstandard policies. Notably, the BoE meeting will be the last for Governor Mervyn King before he retires at the end of June. We’ll preview more of the week ahead below together with our usual Asset Performance Review for the month of May.
The balance of highlights in bulletin format courtesy of Bloomberg:
European markets drop led by Swiss, Irish stocks; utilities, telecom and insurance shares underperform. German, U.S. bond yields rise. Commodities up led by nickel. U.S. PMI, construction spending, ISM manufacturing data are released later today. Apple e-books antitrust trial begins today.
- Today: U.S. ISM factory index, no change expected; Fed’s Williams speaks in Stockholm
- Euro-zone final May manufacturing PMI rises to 48.3 vs initial release of 47.8
- ECB President Draghi says he still expects gradual recovery in latter part of year though economic outlook in euro area is “challenging”
- U.K. May manufacturing PMI beats est. to hit 14-mo. high, rising to 51.3 vs est. 50.3 and previously revised 50.2 in April
- Bank of England Governor King says economic recovery in U.K. appears underway, advises successor Carney to “be himself”
- China’s HSBC manufacturing PMI falls to 49.2 in May vs est. 49.6; that contrasts with official PMI released June 1 (50.8 vs est. 50), which focuses on larger companies
- South Korean Finance Minister Hyun says weakening yen is hurting economy; BOK Governor Kim calls for coordination on QE exit
- SNB President Jordan says franc remains strong even after recent weakness, and pressure to appreciate may return, Schweiz am Sonntag reported, citing interview
- Turkish PM Erdogan says protests organized by “extreme elements,” unlike Arab Spring
MARKETS
- S&P 500 futures up 0.2% to 1632.8
- Stoxx 600 down 0.4% to 299.6
- US 10Yr yield up 3bps to 2.16%
- German 10Yr yield up 5bps to 1.55%
- MSCI Asia Pacific down 1.5% to 132.9
- Gold spot up 0.7% to $1397.2/oz
- Dollar Index declines before today’s ISM Manufacturing index, forecast to stay at 50.7 in May; USD/JPY drops to 100.03 low in Europe as JGB yields ease and Nikkei declines 3.7%
- EUR/USD extends gain after euro-zone final May manufacturing PMI beat initial est., adding to Draghi’s comments
- AUD/USD up most in more than a week
- Treasuries fall for second day; 10Y yield +3bps to 2.157% before May non-farm payrolls this week, est. 165K vs previous 165K
- Asia stocks drop for 3rd straight day, led by Nikkei, as improving U.S. data adds to concern of Fed scaling back QE
SocGen covers today's macro highlights:
The month of June in 2011 and 2012 proved a vintage one for the EUR as it logged tidy gains vs most of its principal counterparts including the USD, but the likelihood of a ‘three-peat' will not come across much support and belief from the fx community this time around, we suspect.
We don't think the ECB is up to something at this week's council meeting, but there is no escaping from the dovish headlines, with the latest coming from Mr Visco who reaffirmed on Friday that the ECB is ready to do what is necessary. If anything, the data has improved a tad since the May meeting and the extension of deficit deadlines for EU member states and lifting of the EDP may not count on the full support of Frankfurt. The central bank has made fiscal consolidation a focal point of its communication strategy over the last decade and may not be too impressed at how the EC has yielded to EU governments. At the margin this makes the ECB less inclined to send a particularly dovish message (inflation crept up too in May for the first time in eight months), and so the EUR continues to be well placed to consolidate its positions vs carry currencies like the AUD and NZD. The flip side of the coin is that excess liquidity in the eurozone continues to diminish after the latest combined LTRO1 and two repayments of EUR3.081bn are taken into account, but no matter what the ECB says on Thursday, of course US payrolls and the Fed are the big elephants in this week's room. Peripheral bond yields are putting in a tentative bottom whilst EU swaps closed the week on Friday near two month-highs.
A strong manufacturing PMI from the US today will set the tone for the week and could heap more pressure on bonds (and EM FX), prompting perhaps a less violent but steady return towards last week's lows (yield and swap highs). Technically the picture continues to look ominous for yields (Chart Alert), and confirmation that last week's spike was not a flash in the pan should put the Dollar index (DXY) back in the ascendency and end two consecutive weeks of losses. The DXY has not declined for three weeks in succession since September last year.
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Finally, the full overnight summary from Deutsche's Jim Reid
Turning to markets firstly, the far-from-constructive end to the US session on Friday (S&P 500 -1.43%) is providing a somewhat mixed backdrop for risk assets
overnight. The Nikkei is leading the region’s losses (--2.9%) and currently stands about 13% lower than its mid-May cyclical peak. On a more positive note, the
Shanghai Composite (+0.3%) and Hang Seng (+0.3%) are both trading a touch firmer helped by the weekend’s surprisingly robust official manufacturing PMI reading in China (50.8 in May vs 50.0 expected). The data comes after a sub-50 HSBC flash Chinese manufacturing PMI reading published on 23rd May, which declined from 50.4 in April to 49.6 (and which has subsequently been revised down to 49.2 overnight). Nevertheless, DB’s Chief China economist notes the sampling differences between the official and HSBC survey and believes that the better-than-expected official manufacturing PMI points to an end of recent inventory destocking. He reiterates his GDP growth forecast of 7.7% yoy in Q2 before recovering to 7.8% in Q3 and 8.2% in Q4. In the fixed income space, Asian IG credit is generally trading about 2-3bp wider, continuing the theme of EM weakness which saw the South African Rand and Polish Zloty lose 0.5% and 0.4% on Friday. Relative to the big intraday move in UST yields on Friday (range: 2.064%-2.146%), the 10-year yield is relatively steady overnight at 2.145% or nearly 2bp higher.
In terms of weekend news flow, the headlines were relatively thin, though comments from Draghi overnight have garnered some attention. In a text of speech prepared for the IMF Conference held today in Shanghai, the ECB president defended the OMT programme by saying that “virtually all economic agents, including corporations, banks and households” were benefitting from the calm that had returned to financial markets since August 2012. He also deflected criticism that OMT had replaced the need for fiscal consolidation or would reintroduce excessive compression of Euro area bond yield spreads. Draghi added that OMTs are designed to keep government bond yields just below ‘panic’ levels, not to bring them down to levels that would somehow help government solvency. These comments come ahead of a court hearing which will hear objections to the OMT on June 11-12, to be held in Germany's Constitutional Court in Karlsruhe.
Taking a slightly closer look at this week’s data flow, the market consensus for US payrolls is for a +165k and +175k gain in the headline and private payrolls respectively. The unemployment rate is expected to hold steady at 7.5%. Outside of payrolls, markets are also expecting the ISM manufacturing headline to remain unchanged at 50.7. Elsewhere we also have April’s US trade report on Tuesday, factory orders and ADP employment report both on Wednesday. In Euroland, May’s PMI manufacturing reports will be the main highlight today. The final revisions to the Euroarea reading as well as the first breakdown of Spain’s and Italy’s print will be the focus. That aside we also have Spanish unemployment on Tuesday, Euroarea Q1 GDP revisions, retail sales and services PMIs on Wednesday, German factory orders on Thursday, and German/French trade reports on Friday. In Asia, Japan's PM is likely to outline his structural reform policies in a speech on Wednesday. China's May trade report is scheduled for Saturday. On the political front, President Obama will be hosting two days of talks with Chinese President Xi Jinping in California on Friday – trade, North Korea and Asian regional security are expected to top the agenda.