The main overnight event, which we commented on previously, was China's trade data which was a disaster. March numbers turned out to be well below market consensus with exports falling 6.6% YoY (vs +4.8% expected) and imports falling 11.3% YoY (vs +3.9% expected). The underperformance of imports caused the trade balance to spike to $7.7bn (vs -$23bn in Feb).
And here comes the magic of spin: according to DB, "the market reaction has been muted perhaps because many have attributed today’s drop to distortions caused by last year’s over-invoicing issues.... the data quality issues from last year have caused a very high base for this year’s trade numbers." In the first quarter of last year, exports grew on average by 19% YoY, which was substantially higher than the growth rate in the adjacent months. This year, Q1 exports have shrunk by an average of 4.7%. It’s a similar story for imports, which averaged 9.5% growth during Q1 last year, significantly higher than months prior and after, and stronger than the average during Q1 this year of 2.9%. So it’s likely that there are some base-effects at play that partially explain the weakness in today’s numbers, even if Lunar New Year distortions have been removed.
In other words, everyone knew about last year's manipulated numbers, but nobody took them into consideration and now that the "reality" shocked everyone, it is time to goal seek the narrative, or, as it is better known in the US - "snow in the winter."
In yet other words, fabricated Chinese data should be ignored, but is made more credible because it compares to prior "really and truly" fabricated data. One can't make this up.
Elsewhere in Europe, initial upside by European stocks buoyed by dovish FOMC minutes - minute which said nothing that was unexpected and yet the "market" soared upon their release as if it was a revelation that Yellen was dovish (let's ignore the market surge after Yellen's two out of three ex-convicts can't get a job speech - in fact, every time it is revealed Yellen is an uberdove, the S&P should surge another 1%) was not sustained and stocks turned lower on no fundamental news, with good size block sale triggering stops in Eurostoxx 50 (-0.73%). Final pricing details on the Greek 5-year bond is due later today, with books over EUR 20bln.
Pricing on the Greek 5-year syndicated bond is due later today, with the final size of the bond boosted to EUR 3bln from EUR 2.5bln as order books exceed EUR 20bln (equating to a rough bid/cover ratio of over 6) as the final yield is set at 4.75% (well below the 5.3% finance ministry target and well above our "the world is a bunch of idiots managing other people's money" 3% target). Ireland sold EUR 1bln in 10y bonds, marking the third successful return to the bond market since the bailout. Also of note, this morning saw the release of lower than expected French CPI data, underpinning fears of potential deflation in the Eurozone.
Bulletin headline summary from RanSquawk and Bloomberg
- Treasuries gain with JPY, bund and gilt yields fall as European stocks decline. Week’s auctions conclude with $13b 30Y bonds, yield 3.555% in WI after drawing 3.63% in March.
- Yesteday benchmark yields at every tenor fell from session highs after FOMC minutes said some members expressed concern that that upward shift in fed funds projections might be misconstrued as suggesting a move to a less accommodative reaction function
- China’s exports and imports unexpectedly fell in March as Premier Li Keqiang said the nation will roll out more policies to support growth while avoiding stronger stimulus
- Greece is ending a four-year exile from international markets with a bond sale of at least EU3b, more than the government estimated; final yield 4.95%, coupon set at 4.75%
- Draghi will probably take action within two months against the threat of deflation, economists said, with 2/3 of respondents in a Bloomberg survey predicted the ECB will ease policy by June
- Just under half said he may implement multiple measures ranging from interest-rate cuts to asset purchases and long-term loans
- The Bank of Japan is likely to predict that inflation will remain around 2% in fiscal 2016 in its next economic outlook report on April 30, Nikkei newspaper reports, without attribution
- G-7 finance chiefs will discuss the crisis in Ukraine at talks in Washington as a standoff continued in the country’s eastern cities, where pro-Russian protesters faced off against police
- Vladimir Putin is more likely to sign a 30-year deal to supply pipeline gas to China next month after more than a decade of false starts as Russia looks for markets outside Europe
- Sovereign yields fall. Asian stocks gain, Shanghai +1.4%. European equity markets, U.S. stock futures decline. WTI crude, lower, gold and copper higher
US Event Calendar
- 8:30am: Initial Jobless Claims, April 5, est. 320k; Continuing Claims, March 29, est. 2.835m (prior 2.836m)
- 8:30am: Import Price Index m/m, March, est. 0.2% (prior 0.9%)
- 2:00pm: Monthly Budget Statement, March, est. -$36b (year ago -$106.5b)
- 7:00am: Bank of England seen holding bank rate at 0.5%
- 11:30am: Fed’s Evans speaks in Washington along with Reserve Bank of India’s Rajan, other central bankers Supply * 11:00am: U.S. to announce plans for auctions of 3M/6M bills,
- 11:00am POMO: Fed to purchase $2.75b-$3.5b notes in 2018 sector
- 1:00pm: U.S. to sell $13b 30Y bonds in reopening
Asian Headlines
The Nikkei 225 pulled off the opening gains after poor Chinese Trade Balance (7.7bln vs. Exp. 1.80bln (Prev. -22.99bln) as a higher than expected surplus was countered by exports (-6.6% vs. Exp. 4.8%) and imports (-11.3% vs. Exp. 3.9%) falling well below expectations. As such, the Nikkei 225 steadily pared all of those gains throughout the session to close flat. Chinese equities shrugged off the trade data as sentiment benefited from reports that the Shanghai and Hong Kong exchanges are to be intrinsically linked, allowing capital to flow between the Shanghai Composite (+1.4%) and Hang Seng Index (+1.5%) with ease. Chinese stocks also benefited from the first net injection of liquidity for 9 weeks (injection of CNY 55bln vs. a drain of CNY 62bln last week). (RANsquawk)
US Headlines
Fed's Evans (non-voter, dove) sees at least 6 months between the end of QE and first rate rise, and sees first rate rise most likely in late 2015. (BBG/RTRS)
PIMCO total return funds cuts US government related holdings to 41% in March from 43% in February. (RTRS)
Equities
Stocks in Europe failed to sustain the initial upside buoyed by dovish FOMC meeting minutes and turned lower on no fundamental news, as the weakness in the Eurostoxx50 pulled the other indices lower (around 20k sold), which in turn flushed out stops. As a result, heading into the North American open, the more defensive health care sectors stands on top of leader board.
FX
Dovish FOMC minutes inspired weakness (USD index -0.1%), saw USD/JPY trend lower overnight in Asia and in Europe this morning, in turn provided some degree of support for EUR/USD, which in spite of risk reversal in sentiment remained in the green.
Commodities
Precious metal prices were supported by the dovish FOMC minutes release, with gold moving back above the 50DMA and spot silver moving above the 100DMA level.
In conclusion, here is Jim Reid's overnight recap
We start off today’s EMR looking at the Chinese trade report for March which was released overnight. There was a high level of anticipation leading up to today’s report given that it’s the first set of trade numbers following the Jan-Feb distortions caused by the timing of the Lunar New Year which fell on the first month of this year and the second month of last year. Today’s March numbers turned out to be well below market consensus with exports falling 6.6% YoY (vs +4.8% expected) and imports falling 11.3% YoY (vs +3.9% expected). The underperformance of imports caused the trade balance to spike to $7.7bn (vs -$23bn in Feb). The market reaction has been muted perhaps because many have attributed today’s drop to distortions caused by last year’s over-invoicing issues. Indeed, the data quality issues from last year have caused a very high base for this year’s trade numbers. In the first quarter of last year, exports grew on average by 19% YoY, which was substantially higher than the growth rate in the adjacent months. This year, Q1 exports have shrunk by an average of 4.7%. It’s a similar story for imports, which averaged 9.5% growth during Q1 last year, significantly higher than months prior and after, and stronger than the average during Q1 this year of 2.9%. So it’s likely that there are some base-effects at play that partially explain the weakness in today’s numbers, even if Lunar New Year distortions have been removed.
China’s Customs Department said today that the Q1 trade drop was partly due to 2013’s inflated data (Bloomberg) and it seems we may need to wait for another few months before the data distortions clear up. By geography, the worst major export market was Hong Kong which was a major source of overinvoicing activity last year. Exports to HK fell 43% yoy in March (-31% YTD) which was much worse than exports to the EU (+10%).
For the moment, the stronger sentiment from last night's FOMC minutes (discussed below) have partly compensated for the below-consensus Chinese trade numbers. Equities are mixed with China weaker offset by stronger price action in Japan (Nikkei +0.05%). The Australian dollar is up 0.2%, rallying strongly after a strong set of Australian employment numbers but giving up some of those gains after the Chinese data. Copper is down 0.4%. Sentiment has been supported by comments from Chinese Premier Li who pledged further economic reforms and tax breaks to support small-mid size companies. The Nikkei gapped higher at the open but gains have been pared back as USDJPY continues to fall, now below 102, driven by a weaker USD. In Indonesia, the latest results from parliamentary elections have resulted in some risk taken off the table after a 15% rally in Indonesian equities and 7% rally in the rupiah this year. Unofficial exit polls suggest that presidential frontrunner Joko Widodo’s PDIP party has only managed to secure 19.7% of the vote, likely leaving his party in search for coalition partners to form a government. Instead of a coalition focused largely around the pro-reform PDIP, the country faces the prospect of a fragmented multi-party government. The Jakarta Composite is down 3.1% today and the Rupiah is 0.6% weaker against the USD.
Yesterday session was largely dictated by the reaction to the FOMC minutes. Having gone through the minutes, and judging by the market reaction following its release, it now seems markets might have misunderstood Yellen’s post-FOMC press conference or at least over-interpreted the “dot plot” and “six months” comment. Following its release last night, the US treasury curve steepened driven almost exclusively by the front end (3-6bp lower) while 10yr yields were basically unchanged. The USD index dropped by 0.35% and EURUSD popped back above 1.385 which will likely be of some frustration to European policy makers. The S&P500 closed at the highs of +1.1% with a strong showing by tech stocks which finished 1.5% higher. EM had a somewhat mixed day, but the hour or so of LATAM trading post-minutes saw a strong rally in the Brazilian Real and Mexican Peso as markets sold down the US dollar.
Looking at the minutes in more detail, the key points that the market picked up on was the Fed’s discussion on the “dots” and what it meant in terms of how market participants would interpret the future path of rates. The minutes said that “A number of participants noted the overall upward shift since December in participants’ projections....with some expressing concern that this component of the (projections) could be misconstrued as indicating a move by the Committee to a less accommodative reaction function”. Also, several participants noted “that the increase in the median projection overstated the shift in the projections”. The Committee seems to have resolved the discussion by agreeing on providing an explicit indication in the policy statement that the new forward guidance “did not imply a change in the Committee’s policy intentions, on the grounds that such an indication could help forestall misinterpretation of the new forward guidance”. Adding to the dovish sentiment, the minutes said that softer growth in Q1 was “likely only in part because of the temporary effects“ of the weather.
In terms of inflation, the staff forecast was unchanged from the previous meetings and a couple of participants expressed concern that inflation might not return to target in the next few years and questioned “whether the Committee was providing an appropriate degree of monetary accommodation”. The minutes also revealed that the Committee had actually met before the FOMC itself, via video conference on March 4th (some two
weeks before the actual FOMC on March 18-19th). The video conference was used to discuss possible changes in forward guidance but apparently no policy decisions were made at the time. In an interesting comment, the minutes revealed that staff have “lowered slightly the assumed pace of potential output growth in recent years and over the projection period” and that over the next few years “real GDP growth would exceed the growth rate of potential output”. We’re unsure what to make of this comment but perhaps there are some at the Fed who believe that the output gap in the US economy is lower than previously thought.
Away from the Fed headlines, there were some interesting snippets from yesterday’s bi-annual IMF Global Financial Stability report. The report warned of rising debt levels, and said that the “scaling back of certain extraordinary policy supports has not been accompanied by adequate preparations for a new environment of normalised, self-sustaining growth”. The IMF also said that “Undue delay (in removing easing policy) could lead to a further build-up of financial stability risks, and too rapid an exit could jeopardise the economic recovery and exacerbate still-elevated debt burdens in some segments of the economy”. Indeed, this “Bubble-Taper Tightrope” is something we argued that policy makers would face when we wrote our Credit Outlook for this year. The IMF report also urged China’s banking authorities to remove the implicit guarantee around shadow banking products, but to do so without triggering broad-based financial system stress.
In Japan, the Nikkei is reporting that Japan's Government Pension Investment Fund, the world’s largest pension fund, is considering investing in emerging market bonds and may also invest in low-rated, high-yield bonds and inflation-linked government securities. According to Reuters, this would be the first time the public fund has expanded its foreign bond investment beyond conventional bonds. The GPIF plans to choose asset managers for foreign bonds by the end of this fiscal year. This comes after a Welfare Ministry panel had earlier proposed that the GPIF diversify its portfolio by shifting away from its heavy focus on low-risk, low-return domestic bonds (Nikkei).
Turning to the day ahead, the focus in Europe will be on Greece’s return to the bond markets. The G20 finance ministers and central bank governors meet today in DC, timed to coincide with the IMF/World Bank meetings which start tomorrow. The G7 finance ministers will also convene today to discuss possibly ratcheting up sanctions against Russia (Reuters). The data docket will be pretty light with industrial production updates from various Euroarea countries and US jobless claims. The BoE wraps up its April policy meeting today. Oh and we have the Masters from Augusta! A lovely way to wrap up the day!