To get a sense of the momentous volatility in Japan, consider that the Nikkei225 is more or less in the same numeric ballpark as the Dow Jones, and that each and every day now it continues to have intraday swings of more than 500 points! Last night was no different following swing from 13100 on the high side to 12548 on the low, or nearly 600 points, with all this ridiculous vol culminating in a close that was just red however for a simple reason that the rumor of the Japanese Pension Fund reallocation taking place hit shortly before the close sending the USDJPY higher by 200 pips... only for the news to emerge as an epic disappointment when it was revealed that the GPIF would raise its target allocation to domestic equities from 11% to... 12%. So much for the "Great Japanese Rotation."
As a reminder, the GPIF has JPY 112 trillion [28](and declining) in total assets and the resulting JPY1 trillion in incremental buying would be a drop in the ocean (and roughly the equivalent 1.5 months of Japanese QE), in terms of what is both required and what the market was expecting out of the GPIF. In short - a big dud as even the USDJPY promptly realized as is tanked right back to its day lows moments ago at 95.54 which in turn is a full-blown nightmare for the carry traders.
There was some marginal European economic data, with the Bundesbank cutting its German growth forecast further from 0.4% to 0.3% for 2013, (and from 1.9% to 1.5% for 2014), while various European trade balances came out slightly better than expected, German industiral production printed at 1.8% on Expectations of 0.0%, although how this fits in with yesterday's big Factory Orders miss remains unclear. Spain was a little bit better in its industrial production metrics, dropping only -1.8% on expectations of a -2.6% slide (compared to -0.8% in March) while the Portugal new orders index plunged 10.3% Y/Y compared to -9.4 in March. But following yesterday's disappointing Draghi conference, what happens in Europe stays in Europe and none of the news had any impact on risk.
Which brings us to today's main attraction: the noisy, seasonally adjusted, and soon to be majorly revised red flashing headline generator and hollow volatility creator - the Non-Farm Payroll number, which once again as so many times in the past four years, has been dubbed by the page view chasing media as the "most important ever." The Drama. Perhaps the only reason why today's NFP may be relevant is because it will finally clarify if, in this centrally-planned market, good news is now good news once more (and inversely bad news is bad), or if nothing has changed, and the worse the number for the economy, the better the market response (and if one thinks the S&P is doing well this year, just look at the the Caracas stock market: they may not have toilet paper but they sure have the wealth effect.
We will have a complete run down of the NFP shortly, but here are some thoughts from SocGen first.
Two observations before we consider the possible impact of today's US payrolls report: the market is less long USD and less short USTs than it was earlier in the week. These are in theory two powerful arguments for the USD and UST yields (and swaps) to bounce and resume their rally. But will it come to that, and are yesterday's brutal USD moves overcooked? The gyrations in USD/JPY, EUR/USD and GBP/USD are a case in point and we wonder whether perhaps there will be greater resistance as the ECB and BoE refuse to add EUR and GBP stimulus. Not because monetary policy is about to change, but because the data is turning and this makes participants more inclined to add EUR and GBP longs vs carry, commodity and emerging market currencies. S&Ps changed outlook on Brazil's sovereign ratings and another night of losses on Asian bourses shows how quick sentiment has turned in EM.
Before we turn to payrolls stats and how these disappointed in May, let's consider how the data casts a net around other asset markets. Convention would have it that a strong employment number, evidence of a solid economic recovery, would boost stocks and credit as the outlook for profit growth brightens. However, the way markets are obsessing over Fed tapering, a strong number is currently viewed as negative for risk assets. Reduced liquidity support from the Fed means reduced leverage and carry. A creator of cheap money since 2008, the playbook has not been written on how the Fed plans to wean markets off excess stimulus. The fog has not lifted and markets can no longer fly on auto pilot. Emerging markets and commodities have given us a vague idea of how things will pan out. As US real interest rates get set to turn positive, the allure of high yield diminishes and investors move back up the credit scale. Look at Italian BTPs and Spanish Bonos. Japan has repatriated Y3trn from overseas bonds over the last three weeks. Expect markets to react violently should the payrolls number deviate markedly from the 165k consensus (SG call 210k).
Now for the statistics. The anecdotes present a conflicting view. The two ISM reports have disappointed on employment and ADP employment fell too. But we have been there before without causing much collateral damage for payrolls. By contrast, continuing claims have continued to drop and Challenger job cuts plummeted 41% yoy last month. Final statistic: going back to 1998, payrolls have a record of missing consensus by 34,000. Payrolls have disappointed for the last three years in a row. Time for a snapback.
* * *
All the overnight bulletin highlights that's fit to print via Bloomberg:
- Treasuries rise, JPY extends gains before report forecast to show U.S. economy added 165k jobs and unemployment rate held at 7.5% in May.
- Japan finance minister Aso said the government won’t intervene in the currency market for now; JPY yesterday surged 2.2% against USD, biggest gain in three years, amid a slide in stocks and volatility in bond markets
- Nikkei futures fell as Japan’s public pension fund said it plans to increase it local share weighting to 12% from 11% and cut its holdings of domestic bonds to 60% from 67%; will boost foreign stocks to 12% from 9%, foreign bonds to 11% from 8%
- The Fed will trim QE to $65b/month at its October meeting from current $85b level, according to the median estimate in a Bloomberg survey
- Lipper reported a record $4.63b outflow from high-yield mutual funds for the week ended June 5
- China’s overnight rate jumped the most in almost two years as shrinking capital inflows led to a cash squeeze before a three day holiday
- China’s record funding expansion this year may be overstated in part because of double-counting, say CS and BofAML analysts trying to reconcile the data with weaker economic growth
- German industrial production surged 1.8% in April, the most in more than a year, as construction activity surged after an unusually long winter damped output
- The news that Barack Obama continued the Bush administration’s domestic telephone surveillance program is sparking new doubts about a president who campaigned as a champion of civil liberties and greater transparency
- Sovereign yields mostly lower. Nikkei -0.2%, leading Asia equity markets lower; Shanghai Composite fell for seventh day, longest losing streak this year. European stock markets, U.S. equity index futures mixed. WTI crude gains, metals mixed
* * *
And now, a recap of the balance of overnight news from DB's Jim Reid
Returning to yesterday’s ECB meeting, the decision to keep policy rates unchanged this month probably didn’t surprise many. However Draghi’s post-meeting comments was seen as sufficiently ‘un-dovish’ to cause a late selloff in European equities (Stoxx600 - 1.2%) and a rally in EURUSD (+1.2%). As DB’s Gilles Moec writes, it was always going to be difficult for Draghi to live up to the expectations he had (maybe involuntarily) created at last month’s meeting. Indeed, on the topic of reviving the market for ABS and SME funding, Draghi described any progress as likely to be a “medium to long term proposition”. He also mentioned that other stimulus measures, such as a cut in the deposit rate are conditional on a material worsening of the dataflow, and as such are “on the shelf” for now. On balance, DB’s economists see increased risk to their baseline call for a refi cut in July or August. If the dataflow improves slightly more quickly than their general view, the ECB will refrain from changing its policy stance in their view.
Turning to overnight markets, the Nikkei (-0.7%) is once again leading Asian equities lower as yesterday’s yen strength weighs on sentiment. As we type, the Nikkei is now 18% down from its May peak, just a few points away from bear market territory. In overnight trading, the yen is a further 0.8% stronger with the move exacerbated on comments from Finance Minister Taro Aso that Japan will not intervene soon to halt the appreciation of the yen. Aso also commented that the government is not considering a corporate tax cut for the sake of stock prices which is putting a dampener on sentiment in Japanese equities. In other developments in Asia, shipping company STX Pan Ocean has filed for Court Receivership. Yonhap news reported that the Korean shipping company's largest creditor and potential buyer, Korea Development Bank decided not to acquire the company. The company has been facing liquidity challenges not helped by the sharp fall in bulk-shipping freight markets. The company said that oversupply in the industry and purchase of new vessels have led to mounting debt and continued net losses.
Overnight also saw S&P revise its outlook on Brazil’s BBB rating to Negative from Stable. The outlook change reflects a one in three probability that a rising government debt burden and erosion of macroeconomic stability could lead to a downgrade of Brazil rating over next two years, said the agency. S&P also noted that continued slow growth, weaker fiscal and external fundamentals and some loss in the credibility of economic policy given ambiguous policy signals could diminish the country's ability to manage an external shock. S&P now has the weakest rating versus Moody’s (Baa2/Pos) and Fitch (BBB/Stable) and this probably doesn’t help the ongoing wobbles in EM. Indeed the BRL has weakened close to 10% against the USD since early March. Petrobras’ and Electrobras’ BBB rating outlooks were also revised to Negative by S&P following the action on the sovereign.
Turning to the day ahead, we have a fair bit of data before the main event including German and Spanish industrial production; and trade reports for Germany, France and the UK. The US consumer credit report for April is due late today and China’s latest trade report is scheduled for Saturday. However all eyes will be on today’s US payrolls (1:30pm London time), which will set the tone for trading today and possibly that seen over the next few days and weeks.