It took a precisely 0.1 beat in the Chinese Manufacturing PMI over the weekend (50.8 vs Exp. 50.7) for the USDJPY and the Nikkei to forget all about last week's abysmal Japanese economic data and to send the Nikkei soaring by 2.1% to its highest print in 5 months. Subsequent overnight weakness from Europe, where the Eurozone Final May Manufacturing PMI dropped again from 52.5 to 52.2, below the 52.5 expected, served simply to push bunds higher back over 147.00, if not do much to US equities which as usual continue their low volume "the music is still playing" melt-up completely dislocated from all newsflow and fundamentals (because just like over the past 5 years, "there is hope").
Looking at Asia, late on Friday, the State Council delivered one-half of that, with an announcement that it will expand its targeted RRR cuts to those financial institutions who have met certain lending ratios to the agricultural and small business sectors. This is the second tweak to reserve ratios since the PBOC cut the RRR for rural lenders in April. DB’s Chinese economist thinks that the expansion of this 'targeted' RRR cut should not be read as a prelude to a system-wide RRR cut, nor a drastic change in the stance of monetary policy. Li believes it simply reflects the government's intention to encourage more resources to be made available for areas which have difficulty accessing capital and facing a high cost of funding.
There has been some consternation after over the weekend the Telegraph's AEP noticed a hint in the CSJ that the PBOC may monetize debt, but there has really been no word yet on bond purchases following the China Securities Journal article last week suggesting that China Development Bank could issue below-market rate bonds which would be purchased by state-affiliated institutions.
Moving on to this Thursday’s ECB meeting, expectations appear to have been raised to very elevated levels. For credibility purposes the ECB would need to backstop SME lending for more than one year, but the bottom line is the size of what the ECB need to backstop to hit its objective of boosting lending to businesses and in particular SMEs is not that large. So we'll have to see whether they deliver enough to help sentiment. The reality is that the market now expects QE at some point and the success of the meeting might depend on whether Draghi leaves the door open for it in his press conference.
In terms of the wider market’s expectations, of the 50 economists surveyed by Bloomberg, 44 expect the ECB to become the first major central bank to take interest rates into negative territory by cutting its deposit rate. All but 2 of 58 respondents said the benchmark rate would also be reduced. Germany’s Spiegel suggested that the ECB is considering new longer-term LTROs although the type of rate and a number of variables are still being debated internally. The FT reported late on Friday that the Bundesbank’s Weidmann is planning to support the ECB’s proposals to ease lending constraints on smaller businesses but his vote for rate cuts is thought to be more finely balanced.
Since today's market volumes are lower than usual with China and Hong Kong closed, expect the equity levitation to proceed according to the central plan, even with the US Mfg ISM and construction spending on the table, which will serve to boost stocks whether it beats or misses.
Bulletin headline summary from RanSquawk and Bloomberg
- A low inflation reading out of Germany and mixed Eurozone PMIs saw European equities reverse opening gains and send Bunds back above 147.00.
- Treasuries ease in overnight trading after last week’s rally that pushed 7Y, 10Y and 30Y yields to new YTD lows; markets waiting for ECB Thursday amid expectations of additional accommodation, U.S. payrolls report Friday.
- From negative interest rates to conditional liquidity for banks, Draghi and colleagues have signaled all options are up for discussion when they meet on June 5
- Data tomorrow may reinforce the view that action is needed, with economists predicting a grim mixture of too-low inflation and unemployment near a record
- Obama will propose cutting greenhouse-gas emissions from the nation’s power plants by an average of 30% from 2005 levels; in a conference call yesterday, Obama dismissed complaints that the rule will drive up electricity prices, and told the Democrats listening: “Please go on offense”
- Obama’s administration defended itself against accusations that it made dangerous concessions to terrorists and failed to give Congress adequate notice of its initiative to secure the release of Army Sergeant Bowe Bergdahl from the Taliban
- Russia gave Ukraine an extra week to pay in advance for this month’s gas supplies or risk a cutoff, at the start of a week of international talks on the crisis in the former Soviet republic
- U.K. mortgage approvals fell more than economists forecast in April, dropping to the lowest in nine months as banks tightened lending rules
- In May 1646, King Charles I admitted defeat in the English Civil War and surrendered to Parliamentarian forces besieging Newark-on-Trent. This week, as the town prepares to elect a member of Parliament, a new insurgent force led by UKIP leader Nigel Farage is on the march
- Sovereign yields mixed. Nikkei +2.1%, leading Asia equity markets higher. European equity markets mostly higher. U.S. stock futures gain. WTI crude and copper higher, gold falls
US Event Calendar
- 9:45am: Markit US Manufacturing PMI, May final, est. 56.2 (prior 56.2)
- 10:00am: ISM Manufacturing, May, est. 55.5 (prior 54.9); ISM Prices Paid, May, est. 57 (prior 56.5)
- 10:00am: Construction Spending, April, est. 0.7% (prior 0.2%)
- 11:00am: Fed to purchase $350 MM - $600 MM in 2024-2031 sector
EU & UK HEADLINES
A lower inflation release from Germany (Saxony (Y/Y 0.8% vs. Prev. 1.3%) and mixed Eurozone PMIs have underpinned calls for further easing by the ECB at this week’s ECB rate decision. This follows weekend reports in Spiegel that said the ECB are to offer a new LTRO with a term of 4 years is being considered and to focus on lending more directly and not the bank buying government bonds. This morning also saw ECB sources say negative rate issues have been settled and are likely to be accompanied by liquidity measures.
US HEADLINES
Fed-Watcher Hilsenrath said mix of views among hawks suggests pressure is not building at the Fed for rate increases before next year. (WSJ)
Fed’s Plosser (voter, hawk) has called on the Fed to adjust its forward guidance by providing more information on the likely future path of interest rates and explain its policy decisions in the context of those forecasts. (RTRS/BBG) Over the weekend, Fed’s Williams and Lacker (both non-voters) spoke at the same conference but said nothing of great importance.
EQUITIES
European equities initially opened higher following the positive Asia-Pacific session, however, the German Saxony CPI release (Y/Y 0.8% vs. Prev. 1.3%) reversed these opening gains and sent equities lower (Euro Stoxx 50 +0.1%) as Eurozone inflation concerns continue to be a key topic. In stock specific news, the CAC is the sessions underperformer with Alcatel-Lucent who are trading ex-div and BNP Paribas are seen lower amid continued litigation concerns, while basic materials outperform following the Chinese data.
FX
EUR/USD has ebbed lower and moved back below the 1.3600 handle following the weak inflation data, while AUD is also seen lower after Australian Building Approvals failed to meet expectations. Elsewhere, GBP is stronger following broad-based EUR weakness and encouraging M4 data (3 months annualised showed - fastest rate of growth since November last year)
SNB’s Jordan says the SNB is unwavering in its stance of defending its currency cap against EUR, with SNB Jordan suggesting that any further monetary easing by the ECB would not force the SNB to alter its policy. (RTRS)
COMMODITIES
In the metals complex, spot gold continues to weaken and trades at its lowest level since Feb. 3rd with Chinese buyers away from market. WTI and Brent crude futures trade positively after China’s Manufacturing PMI exceeded expectations to mark the highest reading since January. Nonetheless, the energy complex has come off the best levels ahead of the NYMEX open as the USD-index gained 0.2% on a weaker EUR as markets continue to price in easing from the central bank.
* * *
DB's Jim Reid concludes the overnight market recap
Over the weekend, China’s latest official manufacturing PMI was released, with the index rising to a five month high of 50.8. This is slightly higher than the 50.7 consensus expectation and is the third straight month of increase since the index bottomed at 50.2 in Q1. Looking into the sub-indexes, improvement was seen in production (+0.3ppts), new orders (+1.1ppts), purchases (+1.7ppts), purchasing price index (+1.7ppts) and new export orders (+0.2ppts) in May. Probably a more important story from a macro perspective is the small tweaks being made to China’s monetary policy. Last week we pointed out that domestic media were expecting more targeted RRR cuts and potentially a Chinese-style QE/bond purchase program. Late on Friday, the State Council delivered one-half of that, with an announcement that it will expand its targeted RRR cuts to those financial institutions who have met certain lending ratios to the agricultural and small business sectors. This is the second tweak to reserve ratios since the PBOC cut the RRR for rural lenders in April. DB’s Chinese economist thinks that the expansion of this 'targeted' RRR cut should not be read as a prelude to a system-wide RRR cut, nor a drastic change in the stance of monetary policy. Li believes it simply reflects the government's intention to encourage more resources to be made available for areas which have difficulty accessing capital and facing a high cost of funding.
No word yet on bond purchases following the China Securities Journal article last week suggesting that China Development Bank could issue below-market rate bonds which would be purchased by state-affiliated institutions.
Overall it’s been a positive start to the week and month, with Asian markets trading with a solid tone following the China data. Volumes are generally on the low side with Hong Kong, China and Taiwan closed for public holidays. The Nikkei is once again leading the region’s gains (+2.1%), hitting two month highs, partly in response to the Chinese data and a 0.3% rise in dollar-yen. The Japanese equity index is still one of the worst performing in the region though (-5.4% YTD), and holds the rank of the second worst performing bourse in Asia after the Shanghai Composite (-6.5% YTD), despite the Nikkei’s strong catchup performance over the past couple of weeks. The sentiment is more subdued in Australia (ASX200 +0.2%) where mining stocks (-0.9%) are struggling following a 4% drop to Chinese import iron ore prices on Friday. The AUD is down 0.5% against the greenback following sharply lower than expected building approvals data.
Moving on to this Thursday’s ECB meeting, expectations appear to have been raised to very elevated levels. DB’s Wall and Moec expect a package of policy easing to be announced. They argue that the easier options for the ECB are extending full allotment, cutting the refi rate and ending SMP sterilization. Given Draghi & Co’s recent tone, they think the Council will go further and in addition implement a negative deposit rate and a targeted LTRO. The policy they expect the ECB to most pin its hopes on to impress the markets is the targeted LTRO. They expect a modest, SME loan-oriented LTRO. The worry is that the design could be complex and the market might feel underwhelmed. Indeed, Wall and Moec do not expect the targeted LTRO to be large. They estimate the non-financial corporate sector net borrowing requirement in 2015 to be cE70bn, of which a portion relates to SMEs. For credibility purposes the ECB would need to backstop SME lending for more than one year, but the bottom line is the size of what the ECB need to backstop to hit its objective of boosting lending to businesses and in particular SMEs is not that large. So we'll have to see whether they deliver enough to help sentiment. The reality is that the market now expects QE at some point and the success of the meeting might depend on whether Draghi leaves the door open for it in his press conference. Our economists continue to expect private debt QE later this year.
In terms of the wider market’s expectations, of the 50 economists surveyed by Bloomberg, 44 expect the ECB to become the first major central bank to take interest rates into negative territory by cutting its deposit rate. All but 2 of 58 respondents said the benchmark rate would also be reduced. Germany’s Spiegel suggested that the ECB is considering new longer-term LTROs although the type of rate and a number of variables are still being debated internally. The FT reported late on Friday that the Bundesbank’s Weidmann is planning to support the ECB’s proposals to ease lending constraints on smaller businesses but his vote for rate cuts is thought to be more finely balanced.
Turning to the week ahead, a busy calendar starts off with today’s global PMIs and ISMs. On Tuesday, President Obama begins a four day European trip ahead of the G7 meeting which starts on Wednesday. This G7 meeting is replacing the G8 meeting that was originally scheduled in Sochi but was cancelled after Russia’s annexation of Crimea. Tuesday’s data docket is important with Euroarea data releases including inflation and unemployment expected to further cement the ECB’s resolve in easing policy come Thursday. The Reserve Bank of India meets on Tuesday where rates are expected to remain on hold in the first RBI meeting since the new government took office.
Wednesday features the global services ISMs and PMIs. Other data releases scheduled for that day includes the ADP employment report, which will provide an important preview to Friday’s NFP, and US trade. The Fed releases its Beige Book on Wednesday too and the second estimates of Euroarea GDP will be published on Wednesday as well.
Apart from the ECB on Thursday, we also have the BoE policy meeting. Elsewhere in the UK there will be a by-election held in the seat of Newark, central England – this will be interesting to see whether the recent successes of the UK Independence Party can translate to the party winning its first ever House of Commons seat. The Conservatives currently hold that seat. Datawise, we have US jobless claims, Euroarea retail sales and German factory orders. Friday sees the release of US payrolls where consensus is expecting gains of around +200k in the headline. The unemployment rate is expected to pick up 0.1ppt to 6.4% due to rising participation. Moody’s updates sovereign ratings for the EFSF and ESM while S&P will update its rating view on Italy.
Reviewing some headlines before we take a look at the May performance review, the Spanish PM announced over the weekend that his government will be looking to boost the country’s tentative economic recovery with a EUR6.3bn stimulus package which includes a lowering of the highest corporate tax rate to 25% from 30%. He said the details would be revealed at a cabinet meeting on Friday (FT). Elsewhere in the periphery, Portgual’s constitutional court said that government cuts to public sector pay were in contravention of the rights of citizens as outlined in the country’s constitution. The court’s ruling apparently creates a fiscal gap of EUR700m for the rest of the year, and also rules out cuts to pensions and unemployment benefits. The court’s ruling will not be retroactive, and would come into effect in June. There was also further chatter over the weekend regarding the political pressure on the central bank of Turkey from various corners of the Turkish government. The government has been criticising the central bank recently, whose main mandate has been price stability, saying that economic growth targets should also be considered. Turkey reports its May inflation numbers tomorrow, and consensus is expecting CPI to accelerate to a fresh two year highs of 9.9%.