Surge In Japan's Economy Pushes Futures Lower, But European GDP Miss Welcomed By Stocks

In this brave new centrally-planned world, where bad is good, very bad is very good, and everything is weather adjusted, Japan's blistering GDP report last night, printing at 5.9% on expectations of 4.3% was "bad" because it means less possibility for a boost in QE pushing futures lower, while the liquidity addicts were giddy with the GDP miss in Europe where everyone except Germany missed (as for the German beat, Goldman's crack theam of economic climatologists, said it was due to the weather), and the Eurozone as a whole came at 0.2%, half the forecast 0.4%, which in turn allowed futures to regain some of the lost ground.

Still, in spite of printing fresh contract high, Bunds have since come off the best levels, but remain in firm positive territory. In terms of the latest comments by ECB members: ECB's Mersch asked is rate cut a done deal, said that "we will do our analysis; I hope we are flexible and then get our conclusion": Also, says "you will see precise instruments after the June policy meeting"

The momentum in sovereign cash markets has continued overnight with a 3-5bp tightening in Asia-Pacific government bonds as they play catch up. The Australian 10yr bond yield is 5bp firmer, but the best performer is Indonesia where 10yr yields are 10bp firmer. Rupee forwards are poised to close weaker for the first time in over a week ahead of the official release of the Indian election results tomorrow that is expected to deliver power to the BJP’s Modi. A number of news articles are focusing on the challenge facing Modi in pushing through economic reforms while also promoting his party’s pro-Hindu agenda. Asian equities are mostly down today led by the Nikkei (-0.8%) where corporate earnings are again weighing on sentiment. The Japanese macro news is brighter, after the Q1 GDP report showed that Japan’s economy grew at a rate of 5.9% on an annualised SA QoQ basis. This beat expectations of 4.2% but the result was distorted by the pulling forward of economic activity ahead of the country’s April sales tax hike.

Turning to the day ahead, Yellen speaks later today at the US Chamber of Commerce and Small Business Administration. April CPI will be the major US data release which will be interesting in the context of yesterday’s PPI and bond moves. Other macro data releases today include industrial production, weekly jobless claims and NAHB housing index. On the survey side, the Philly Fed and Empire Manufacturing completes the excitement for the day. Most importantly, there is no POMO and we will find out whether Russia sold Treasurys in March and how much more bonds "Belgium" bought.

Bulletin Headline Summary from RanSquawk And Bloomberg

The release of somewhat mixed EU based GDP reports, downward revisions to inflation projections by Professional Forecasters reinforced expectations of further policy easing by the ECB in June, leading to bull flattening of the Euribor curve and broad based EUR weakness…
Focus turns to earnings by Wal-Mart, US CPI, Empire Manufacturing, weekly jobs and Philadelphia Fed survey
Treasuries steady in overnight trading amid rally that yesterday drove 10Y yields to lowest since October; 30Y yields 3.368%, near lowest since June.
Outperformance by bond sector since 4Q, which narrowed 5/30 curve spread to 170bps this month from 254bps in November, has been driven by outlook for Fed policy, low inflation globally and allocation into bonds from stocks, and exacerbated by short positioning
The euro area grew 0.2% in 1Q, half as much as economists expected, as France stalled and economies from Italy to the Netherlands shrank
While German expansion doubled to 0.8%, that wasn’t enough to offset renewed weakness across the region, including a 0.7% drop in Portugal
ECB said professional forecasters have revised longer-term inflation expectations lower on commodity prices, the euro, the weak economic situation and labor market conditions
Japan’s economy grew 5.9% in 1Q, fastest pace since 2011, as companies stepped up investment and consumers splurged before the first sales-tax rise in 17 years last month
Ukraine pushed on with an operation to dislodge separatists less than a day after Russia warned the violence could make it impossible to hold legitimate elections
Germany, France, Italy and Spain are all cutting back on defense just as a swath of countries on the EU’s eastern flank from the Baltic Sea to Romania ramp up arms spending, NATO figures show
Anti-China protests escalated in Vietnam as an attack on workers at the site of a Taiwanese steel mill in a central province left one dead and 128 people injured
France gave itself the power to block foreign takeovers in what it considers strategic industries amid General Electric Co.’s $17 billion bid for Alstom SA’s energy units and a possible competing Siemens AG offer
Sovereign yields decline amid global rally. Nikkei -0.8%, Shanghai -1.12%. European equity markets mostly lower, U.S. stock futures fall. WTI crude, gold and copper lower

US Economic Calendar

7:30am: Empire Manufacturing, May, est. 6 (prior 1.29)
8:30am: Consumer Price Index, April, est. 0.3% (prior 0.2%)
- CPI Ex Food and Energy, April, est. 0.1% (prior 0.2%)
- CPI y/y, April, est. 2.0% (prior 1.5%)
- CPI Ex Food and Energy y/y, April, est. 1.7% (prior 1.7%)
- CPI Core Index SA, April, est. 236.914 (prior 236.604)
- CPI Index NSA, April, est. 237.095 (prior 236.293)
8:30am: Initial Jobless Claims, May 10, est. 320k (prior 319k)
- Continuing Claims, May 3, est. 2.690m (prior 2.685m)
9:00am: Net Long-term TIC Flows, March est. $40b (prior $85.7b)
- Total Net TIC Flows, March (prior $167.7b)
9:15am: Industrial Production, April, est. 0.0% (prior 0.7%)
- Capacity Utilization, April, est. 79.1% (prior 79.2%)
10:00am: Philadelphia Fed Business Outlook, May, est. 14.0 (prior 16.6)
10:00am: MBA Mortgage Delinquencies, 1Q (prior 6.39%); Mortgage Foreclosures, 1Q (prior 2.86%)
10:00am: NAHB Housing Market Index, May, est. 49 (prior 47)
8:30am: Fed’s Dudley speaks in New York
6:10pm: Fed’s Yellen speaks in Washington Supply
11:00am: U.S. to announce plans for auction of 3M/6M bills, 10Y TIPS
No POMO Today

EU & UK Headlines

Expectations of more policy easing by the ECB in June was reinforced further this morning following the release of the latest Survey of Professional Forecasters by the ECB pointed to lower inflation in the jointcurrency bloc. As a result, money market rates continued to collapse and the Euribor curve bull flattened further as speculation that the central bank will enforce negative deposit rates gathered momentum. This morning also saw the release of advanced GDP reports for various EU states (Germany beat and France missed expectations) which further underpinned the view that more stimulative measures are required to kick-start the stagnating Eurozone economy. Still, in spite of printing fresh contract high, Bunds have since come off the best levels, but remain in firm positive territory. In terms of the latest comments by ECB members: ECB's Mersch asked is rate cut a done deal, said that "we will do our analysis; I hope we are flexible and then get our conclusion": Also, says "you will see precise instruments after the June policy meeting"

Equities

Similarly to yesterday, stocks failed to benefit from the growing consensus view that the ECB will turn to negative deposit rates, as it seeks to repair the transmission mechanism which continues to hinder access to capital by SMEs, as market participants remained vary of potential adverse implications for Euro-area based banks. As a result, financials were among the worst performing sectors this morning, with particular under performance by the smaller Italian banks which resulted in the FTSE-MIB under performing, while the more defensive sectors such as health care outperformed. As a reminder, Cisco shares surged 3.5% in after-market hours after the company reported better than expected EPS and revenue numbers. In terms of earnings on tap for today's session, the focus will be on Wal-Mart, due to report at 1202BST

Further bond yield curve flattening in Europe ensured that EUR/USD remained on a downward bias, consolidating the recent move below the 100DMA line and moving ever so close towards the 200DMA line at 1.3626. At the same time, divergence in EU/UK rates ensured that in spite of a stronger USD, together with dip buying following yesterday's Carney inspired sell off, saw GBP/USD recover early losses to trade little changed.

Commodities

Heading into the North American open, WTI and Brent crude futures are seen lower, weighed on by a firmer USD. Despite the slight downside seen this morning, crude remains in positive territory on the week as Cushing inventories continue to deplete, with a draw of 592kbbl yesterday, noting 14 out of the last 15 weeks have shown a drawdown in stockpiles. Meanwhile, Nickel continued to pare back from the 27 month highs printed on Tuesday as analysts cite a degree of profit taking in a metal that has risen some 50% YTD

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DB's Jim Reid concludes the overnight recap

Inflation up, bond yields down. That was the story of yesterday. As US PPI inflation exceeded expectation, the global bond market was in the midst of a major rally yesterday as expectations of ECB action increased, the BoE ended up being relatively dovish and expectations of imminent Chinese action lingered from the overnight session.

Looking at the extent of some of the moves yesterday, Bund yields fell 5bp to 1.368% and closed at their lowest level since May 2013 and we’re now not too far away from the all time lows that we saw in mid-2012. Gilts closed at 2.583%, which is the lowest level since October 2013. US treasury yields were 10bp lower yesterday at one stage before settling at 2.54% which was still 6.6bp firmer on the day. Overall, US treasury yields are back at their October 2013 lows, before yields began rising in Q4 on the back of expectations that the Fed would begin to taper.

The rally in rates came despite US producer prices (+0.6%) posting their largest increase in 18 months in April, beating economists’ expectations of a +0.2% gain. Core PPI rose +0.5% versus consensus expectations of +0.2%. Bond yields were already heading down before the data, but the higher than expected PPI did little to slow them down. Another theme worth highlighting is yesterday’s bull flattening in bond curves, particularly in the UST curve which effectively wiped out the curve steepening that we’ve seen since April’s US payrolls. By the US close, the US 2s/30s and 2s/10s curve had tightened by around 6bp and 5bp respectively. After much debate in recent days about a potential shift higher in the Fed’s terminal rate, the discourse yesterday shifted to the possibility that the Fed’s neutral policy rate may indeed be lower than previously thought, amid talk of declining supply of bonds and pension fund demand for longer-duration assets. We are firmly in the lower yields for longer camp but the scale of yesterday's moves was still a bit of a surprise in its timing.

Despite all the talk about a potential rate cut at the June ECB meeting, the EUR was remarkably resilient against the USD yesterday, managing to close a little firmer at 1.372. Though we should point out that this came after 5 days of declines stemming from last week’s ECB meeting, so perhaps a day of consolidation was overdue. The EUR may have also been supported by comments from Weidmann suggesting that asset purchases are not the policy tool of choice for the time being. Weidmann also clarified that the Bundesbank had not agreed to any policy action as of yet, despite the flurry of articles in recent days suggesting that the Bundesbank was indeed on board with a rate cut and potential ABS purchases to fight low inflation. Meanwhile, Carney appeared to play down the possibility of rate hikes, saying that “amidst the excitement that output is close to regaining its pre-crisis level, we should not forget that the economy has only just begun to head back towards normal”. GBPEUR lost 0.4% and gold (+0.95%) was a major beneficiary of all the central bank talk.

Equities and credit took a back seat to the action in rates, with both closing a little weaker. The S&P500 (-0.47%) was hit after another dip in sentiment in small cap and consumer retail stocks. Utilities (+0.4%) and telcos (+0.48%) predictably outperformed on a day when investors were reaching for yield. In a similar vein, US REITs (+0.17%) also had a solid session. Surprisingly US homebuilders (-3.0%) sold off despite the prospect of lower rates, taking the sector to 18% below its 52-week highs. The iShares US Home Construction ETF lost 2.2%. Cash credit was basically unchanged to slightly wider but was well supported with rates crunching lower. Emerging markets performed strongly and the MSCI EM index (+0.96%) has now closed stronger in 8 of the last 10 sessions.

Turning to the day ahead, we have an extensive data docket today starting with Q1 GDP for the Euroarea, France, Germany and Netherlands. The final Euroarea CPI will also be released today. Moving to the US, Yellen speaks later today at the US Chamber of Commerce and Small Business Administration. April CPI will be the major US data release which will be interesting in the context of yesterday’s PPI and bond moves. Other macro data releases today include industrial production, weekly jobless claims and NAHB housing index. On the survey side, the Philly Fed and Empire Manufacturing completes the excitement for the day.