It is May Day, which means half the world - the half where welfare contributions to one's standard of living are off the charts - celebrates labor, or rather the lack thereof, by taking the day off. Which means virtually all of Europe is closed, as are Eurex and Euronext futures, and most European markets expect the UK. In light of the non-existent volume, futures are relatively unchanged despite the latest Chinese Mfg PMI disappointment (50.4, below the 50.5, expected but just above the prior print of 50.3), and of course yesterday's US GDP debacle which helped push the DJIA to a record high. The good news is that with volume even more miserable than usual, the few momentum ignition algos that are operating will have a field day with the now standard low-volume levitation that happens like clockwork if the news is bad, and also happens just in case if the news is bad.
In Chana, as we reported last night and as SocGen followed up this morning, a 3.4% fall year-to-date in CNY against the USD and the fourth consecutive monthly drop has propelled USD/CNY to 6.2595, 1.6% above the PBoC fixing of 6.1580. This divergence is the largest in recent history (see chart) and is very close to the limit of the 2% trading band and so begs the question whether the PBoC will intervene by buying USD or adjusting the fixing higher to take pressure off the daily trading limit.
In the US oil majors COP and XOM report pre-market and, of note, AT&T has approached DirecTV about a possible acquisition which has pushed London listed Vodafone (-2.3%) lower as any take over by AT&T of Vodafone will have to be postponed. In other Telecom sector news Sprint are to push forward with a bid for T-Mobile after meeting with banks last month to make debt arrangements.
Elsewhere, stability in the RUB remains elusive as retaliatory measures to the sanctions are under consideration by Moscow. The IMF yesterday declared that Russia’s economy is already in recession and said capital outflows could reach $100bn.
Turning to the day today, the US ISM manufacturing index will be released as will the latest US consumer spending report with the PCE deflators. Initial jobless claims round out the data docket. Elsewhere Janet Yellen speaks at a Community Bankers of America meeting in Washington. Chancellor Merkel begins a two-day trip to Washington. Oil giants, Exxon Mobil and ConocoPhillips report earnings the same day.
Bulletin headlines from Bloomberg and RanSquawk
- FOMC USD 10bln taper failed to weigh on sentiment as the Fed say that the US economy has picked up pushed the DJIA to a new record close.
- Light volumes are seen in Europe with Continental European markets closed with the FTSE 100 (+0.2%) slightly higher on earnings.
- Chinese Manufacturing PMI came in slightly below expectations (50.4 vs Exp. 50.5) but failed to draw a market reaction given the majority of Asia-Pacific markets were closed today. Nikkei 225 traded with gains of 1.3% cushioned by a batch of positive earnings reports.
- UK Manufacturing PMI was significantly higher than expectations (57.3 vs Exp. 55.4) an eight-month high, pushing GBP/USD above 1.6900, hitting the highest levels since June 2009.
- Later will see Yellen, US jobs report, PCE and ISM Manufacturing.
- Treasuries lower, led by 5Y and 7Y, as market prepares for payrolls report tomorrow, est. 215k vs 192k with unemployment rate falling to 6.6% from 6.7%.
- Unsure of Putin’s intentions, the Obama administration is attempting to warn the Kremlin not to test the U.S. commitment to defend its allies in eastern and central Europe
- Ukraine’s east is slipping out of the government’s grasp as separatists expand their takeovers of official buildings and the U.S. and its allies warn of additional sanctions
- The confidence Bank of Japan officials are demonstrating in achieving their inflation target is lowering the chances of additional monetary easing this year even as the economy weakens
- Bonds from the Americas to Asia and Europe are generating their best returns through the first four months of a year on record, as slower-than-forecast growth and declining inflation vindicate the bulls
- Sovereign yields mixed. Nikkei +1.3% while Shanghai little changed. European equity markets mixed, U.S. stock futures decline. WTI crude and gold lower, copper steady
US Event Calendar
- 7:30am: Challenger Job Cuts y/y, April (prior -30.2%)
- 8:30am: Initial Jobless Claims, April 26, est. 320k (prior 329k); Continuing Claims, April 19, est. 2.7m (prior 2.680m)
- 8:30am: Personal Income, March, est. 0.4% (prior 0.3%)
- Personal Spending, March, est. 0.6% (prior 0.3%)
- 8:30am: PCE Deflator m/m, March, est. 0.2% (prior 0.1%); PCE Deflator y/y, March, est. 1.1% (prior 0.9%)
- 9:45am: Bloomberg Consumer Comfort, April 27 (prior -25.4)
- 9:45am: Markit US Manufacturing PMI, April final est. 55.4 (prior 55.4)
- 10:00am: ISM Manufacturing, April, est. 54.3 (prior 53.7); ISM Prices Paid, April, est. 59.5 (prior 59)
- 10:00am: Construction Spending m/m, March, est. 0.5% (prior 0.1%)
- Domestic Vehicle Sales, April, est. 12.8m (prior 12.78m)
- Total Vehicle Sales, April, est. 16.2m (prior 16.33m) Central Banks
- 8:30am: Fed’s Yellen speaks in Washington Supply
- 11:00: POMO - Fed buys $0.95-$1.10 billion in bonds with a 02/15/2036 - 02/15/2044 maturity range
Equities
With European markets closed the focus was on positive UK earnings, notably Lloyds (+4.7%) and BG Group (+4%). In the US oil majors COP and XOM report pre-market and, of note, AT&T has approached DirecTV about a possible acquisition which has pushed London listed Vodafone (-2.3%) lower as any take over by AT&T of Vodafone will have to be postponed. In other Telecom sector news Sprint are to push forward with a bid for T-Mobile after meeting with banks last month to make debt arrangements.
FX
USD/CNY traded at its highest level in over 18 months overnight, with analysts at Morgan Stanley noting that as the CNY approaches the lower end of PBOC’s permissible daily trading range, anticipated intervention to defend band could put other currencies under selling pressure.
Commodities
WTI (USD -0.51) extends the decline below USD 100/bbl as disappointing Chinese PMI overnight compounds the weakness seen after US GDP yesterday and now trades at the lowest levels since April 2014. Notably US capacity has ramped up recently, coupled with Libyan ports re-opening, has been weighing on the energy complex.
Palladium (USD 4.10) is seen out-performing its peers as concerns on further sanctions against Russia, the world largest producer of the metal, supports prices. Gold (USD -5.80) is under pressure after the continuing of Fed tapering announced last night and the weak Chinese PMI.
* * *
In conclusion DB's Jim Reid completes the overnight recap
The start of the new month is likely to be quiet with the May Day holiday observed in many places around the world today. Even with the holiday China has kicked off what will be a stuttered 2-day series of international manufacturing PMI releases. Their official reading came in at 50.4 overnight which is one-tenth of a point below analyst estimates, but slightly improved from March’s reading of 50.3. This is the second straight month where the PMI has increased (though the rate of increase has been minimal), providing some hope to China bulls that activity may have bottomed out in Q1. The Chinese premier was quoted by state-media as saying that “arduous effort” is needed. just to meet the 2014 target for trade growth. There has been a very muted reaction to the data with most major Asian markets shut today. Copper is down about 0.1% this morning, following a 1.5% fall yesterday and S&P500 futures are flat. The Nikkei is up 1.1% off the back of a number of positive earnings announcements
Yesterday was a disappointing day for backward looking data but encouraging for those looking forward. Although the surprise 0.1% Q1 US GDP can be excused for now due to the weather it does show that in a low era for growth, shocks can push you close to negative GDP. Fortunately this was a relatively brief weather
shock but it shows how vulnerable things would be to a more serious outside shock. There's not much of a cushion anywhere in the world at the moment. The other worry was that a lot of the miss was due to weak exports. This clearly could get revised and is counter to some recent survey evidence but at face value it’s slightly concerning that global activity hasn't helped the US in Q1. Having said all this, other US data was decent yesterday. Even within the GDP report, personal consumption rose 3%, which added 2% to the headline number. Consumption was driven by services, which rose 4.4% in the quarter—the largest drivers were health care which added +1.1%, the fastest rate since 1947, though this may have been affected by Obamacare. Housing/utilities (which added +0.7%) was also a bright spot. Elsewhere, ADP employment rose +220k in April, slightly ahead of the +210k expected, after the prior month was revised up +18k to +209k. Hiring was led by small businesses (+82k vs. +81k) and medium-sized businesses (+82k vs. +56k), while the pace of large business hiring fell modestly (+57k vs. +71k). Most forecasters have left their April non-farm payrolls estimates unchanged including DB’s Joe Lavorgna who is keeping his call for a +240k headline and two-tenths drop in the unemployment rate to 6.5% tomorrow. The Chicago PMI rose a better than expected 7.1 points to 63.0 driven by sizable gains in production (70.5 vs. 61.7), new orders (68.7 vs. 58.8), and employment (57.8 vs. 50.0).
The FOMC proved to be fairly uneventful with very little reaction from rates, equity or credit. Indeed, yesterday’s Euroarea CPI (0.7% vs 0.8% expected) appeared to generate much more of a reaction in EURUSD which gained 0.4% on the day, perhaps in relief that the European inflation had bounced back from multi-year lows. There was some talk that perhaps the US GDP number, which was released before the FOMC statement, would cause the FOMC to be a little more dovish in its statement this month. However this was not the case and the official Fed policy statement was essentially little changed on the prior month. The Fed acknowledged the economic weakness in Q1 but also said that other indicators such as household spending were picking up “more quickly”. So a rather straightforward FOMC this month, while we wait for next week’s JEC testimony from Yellen and the June 17th/18th FOMC (which will have updated dot plot forecasts) to get our next cues on the Fed’s policy path.
Though markets tried to look through the backward looking GDP data, UST yields rallied 6bp following the data release as it headed back down towards the bottom of the 2.60% to 2.80% trading range that has held for most of 2014. Rallying rates helped equity and credit markets grind back towards their respective post-crisis highs and tights. Indeed, the USD iBoxx credit index is now less than a basis point away from the cyclical tights in spread terms and the S&P500 (+0.3%) is just 7pts away from all time highs (the Dow hit a record high yesterday). High momentum stocks continue to languish for the time being, with the US biotech index still more than 10% from the Feb peaks.
M&A fever has certainly helped the sentiment in equities and this was further heightened after the US market close when Bloomberg reported that US telco Sprint Corp is pushing forward with plans to bid for T-Mobile US Inc which would results in the combination of the third and fourth largest wireless carriers. According to the report, Sprint management is currently in readying funding with a number of banks. Shares in Sprint and T-Mobile were up 5% and 11% respectively in afterhours trading. The shares of Sprint’s parent, Softbank in Japan, are up 1.5% overnight. As we go to print, the WSJ is reporting that another telco AT&T has approached DirectTV about an acquisition.
The combination of lower US rates and a weaker dollar set the stage for a constructive session for EM assets. In currencies, the ZAR (+0.33%), PLN (+0.16%) and MXN (+0.17%) gained against the dollar, and a number of EM equity markets recorded gains above 1%. LATAM rates traded about 3-7bp tighter in sympathy with the rally in US treasuries, and we should note here that Italian and Spanish yields also performed strongly (down 5-6bp apiece) as the bid for duration and spread continues. Sentiment in Russia, though still fragile, improved with Russian CDS gapping in more than 10bp, but the newsflow suggested that the Ukraine crisis remains far from over after pro-Moscow separatists seized government offices in several more eastern towns yesterday (Interfax-Ukraine). On a slightly more positive note, the IMF yesterday signed on a US$17bn loan to Ukraine with an immediate payment of $3.2bn to settle back payments to
Gazprom for natural gas and to prepay for future imports.
Turning to the day ahead, much of continental Europe will be shut for Labour Day holidays and those markets that are open, including London, may see lower volumes with a looming long weekend ahead. The US ISM manufacturing index will be released but our economists warn that there are two technical factors that are impacting the ISM headline which are simply delayed reactions to recent weather events. These are occurring in the employment and supplier delivery subcomponents. The latest US consumer spending report will be published together with the PCE deflators. Initial jobless claims round out the data docket. Elsewhere Janet Yellen speaks at a Community Bankers of America meeting in Washington. Chancellor Merkel begins a two-day trip to Washington. Oil giants, Exxon Mobil and ConocoPhillips report earnings the same day.