Futures Fail To Rally Despite Weak Overnight Data

Considering that both key overnight news reports: the Chinese HSBC PMI (printing at 49.4, vs 49.7 expected) and the Eurozone CPI print from a few hours ago (print of 0.5%, down from 0.7% and below the 0.6% expected), we find it odd that futures are red: after all this is precisely that kind of negative data that has pushed the market to record highs over the past five years. And speaking of odd, considering the ongoing non-dis-deflation in Europe, the fact that Bunds and TSYs are being sold off today makes perfect sense in a New Normal bizarro world.

The recurring theme of record highs in equities continues with the S&P500 (+0.07%) notching up its third straight record close, and the fifth record high of the last six sessions, to take the YTD tally to +4.14%. The index is up almost 11% since the January lows. One equity index that hasn’t done so well this year is the Nikkei (-7.5% YTD in local currency terms) but it’s been playing catch up over the last fortnight. Indeed, the Nikkei (+0.76% today) is poised to close stronger for the ninth time in the last 11 sessions amid some anecdotal reports that the economy has weathered the consumption tax hike and as the focus turns to expectations of structural reforms.

The topic of Japan’s structural reforms came up in a Reuters article today which detailed a draft of Prime Minister Abe’s upcoming policy paper, titled “Japan Industrial Revival Plan”. According to the article, the current draft of the government’s growth strategy provides little detail on how and if the government will cut the corporate tax rate, nor does it detail plans to overhaul the public pension fund, GPIF. These have been two of the potential measures being closely watched by investors. The draft also does not detail whether the Abe government will push to legalise casinos in Japan. The draft plan was compiled by government ministries and will form the basis of Abe's "third arrow" reform update due to be announced later this month (Reuters).
Nevertheless, Japanese stocks are pushing higher today, buoyed by the momentum of USDJPY which rose the most in two months yesterday (+0.60% and unchanged today). On the topic of the GPIF, the Nikkei newspaper quoted the head of GPIF’s investment committee as saying that increasing the public pension fund’s weighting to domestic stocks to 20% (from the current level of 12%) would not be too high. The BoJ’s Kuroda was also on the newswires overnight, saying to the Japanese parliament that it is too early to discuss the BoJ’s exit strategy at the moment – this was partly in response to reports that the central bank was beginning early planning on how to withdraw from its current policy stance.

Turning to the day ahead, the focus will be on the Euroarea CPI report for May, which as noted came in below expectations, down from the prior month’s 0.7%, and in line with the cyclical low of 0.5%. This likely means that the ECB will introduce a package of easing options on Thursday. In the US, monthly vehicle sales and factory orders data will be released today: we wonder how many seasonal revisions the data will sustain before the Fed is happy with its impact on stocks. President Obama begins his European trip with meetings Poland to discuss security issues regarding Russia. Obama is also expected to meet with the Ukrainian president-elect Petro Poroshenko.

Bulletin headline summary

The Nikkei 225 (+0.7%) opened above the 15,000 handle for the first time since April 3 underpinned by possible GPIF reforms and a prospective future cut in the corporate tax rate, while Chinese PMIs further supported equity markets.
Chinese HSBC Manufacturing PMI (May) M/M 49.4 vs. Exp. 49.7 (Prev. 49.7) 4-month high; Non-Manufacturing PMI (May) M/M 55.5 (Prev. 54.8) 6-month high.
Treasuries lower, extending yesterday’s decline that pushed 10Y yield to highest since May 27; traders waiting for ECB Thursday as inflation in euro area slipped more than forecast; U.S. payrolls Friday.
The euro area’s inflation rate fell to 0.5% from 0.7% in April, below 0.6% median in Bloomberg survey. The rate has been less than half the ECB’s target for eight months
The Reserve Bank of Australia kept its benchmark cash rate at a record low 2.5% as fiscal consolidation adds to a mining investment slowdown as a brake on growth
Clashes continued in eastern Ukraine between pro-Russian separatists and the armed forces, with the authorities reporting deaths among the insurgents
Barclays Plc will start cutting hundreds of jobs across its investment bank this week, according to people with knowledge of the matter
As Obama and Hollande prepare to meet on a Normandy beach this week to mark the 70th anniversary of D-Day, the relationship between the countries is getting chillier, with France selling weapons to Russia in defiance of American efforts to isolate Putin and the U.S. preparing to slap BNP with a $10b fine
Obama, arriving in Poland today, announced a $1 billion fund to help boost defensive capabilities of European allies shaken by Russia’s annexation of the Crimean peninsula from Ukraine
Sovereign yields higher. Nikkei +0.7%, leading most Asia equity markets higher; Chinese indexes little changed. European equity markets lower. U.S. stock futures fall. WTI crude and copper lower, gold gains

US event calendar

9:45am: ISM New York, May (prior 50.6)
10:00am: Factory Orders, April, est. 0.5% (prior 1.1%, revision 0.9%)
10:00am: IBD/TIPP Economic Optimism, June, est. 46.8 (prior 45.8)
TBA: Domestic Vehicle Sales, May, est. 12.7m (prior 12.65m)
Total Vehicle Sales, May, est. 16.1m (prior 15.98m) Central Banks
11:00am POMO: Fed to purchase $1.5b-$2b notes in 2020-2021 sector

ASIAN HEADLINES

The Nikkei 225 (+0.7%) opened above the 15,000 handle for the first time since April 3 underpinned by possible GPIF reforms and a prospective future cut in the corporate tax rate, while Chinese PMIs further supported equity markets.

Chinese HSBC Manufacturing PMI (May) M/M 49.4 vs. Exp. 49.7 (Prev. 49.7) 4-month high; Non-Manufacturing PMI (May) M/M 55.5 (Prev. 54.8) 6-month high.

EU & UK HEADLINES

Ahead of the upcoming ECB rate decision all eyes this morning were on the Eurozone CPI Estimate (0.5% vs. Exp. 0.6%), which although did reveal a lower than expected headline, was not as low as some participants had anticipated following yesterday’s much lower than previous CPI readings across the German states. As such, EUR/USD spiked higher to pare earlier losses and Bunds extended on their earlier losses stemming from lower Gilts amid upcoming supply and positioning ahead of a shake up to UK pensions, with the German 10yr yield rising to its highest level since 28th May. The aggressive move lower on good volume (7,000 June-14 contracts were traded on the break of 146.40) also saw Bunds break below the 50% fib retracement of the late May rally with the yield on USTs now at levels not seen since May 22nd and therefore retracing all of the recent move lower in yields.

US HEADLINES

Newsflow out of the US remains light with attention now turning to factory orders and durable goods revisions.

EQUITIES

European equities have failed to react to another slew of positive Chinese PMI releases (Euro Stoxx 50 -0.1%) as positioning ahead of key risk events dominated the price action.

GBP/USD is currently trading in positive territory and in close proximity to its 50DMA despite paring some of its earlier gains after the lowest UK Construction PMI reading since October 2013. Elsewhere, AUD/USD is higher following Chinese & Australia data and after the RBA stood pat on its monetary policy (Cash Rate Target unchanged at 2.50%), repeating that it sees likely period of interest-rate stability.

COMMODITIES

Gold has now fallen for a sixth straight session, its longest losing streak in seven months on mixed macroeconomic data and ongoing erosion of risk premium surrounding Ukraine. However reports that Gazprom has delayed a threatened disruptions of gas supplies to Ukraine, to allow more time for talks, has ensured that spot gold prices traded steady overnight.

WTI and Brent crude futures trade slightly softer amid thin volumes as traders eye the API inventories after-market today as focus remains on Cushing OK stockpiles as analysts suggest a sustained period of low Cushing stocks could be apparent.

Gazprom has delayed a threatened disruption of gas supplies to Ukraine to allow more time for talks to resolve the simmering dispute between Ukraine and Russia. This comes in the background of fighting breaking out in Ukraine’s easternmost Lugansk Province. (FT)

* * *

We conclude with Deutsche's Jim Reid summary of key overnight events:

Outside of Japan, Hong Kong and mainland Chinese markets have returned from public holidays trading firmer as they react to the weekend’s Chinese manufacturing PMI. There was a further two Chinese data points released today, and the overall tone was fairly mixed. The official Chinese nonmanufacturing PMI for May showed a 0.7pt month-on-month improvement (55.5 vs 54.8 prior). Meanwhile, the final HSBC manufacturing PMI printed at 49.4, which is up 1.3pts from the April reading, though it was down slightly from the flash reading of 49.7. On a more positive note, the HSBC manufacturing PMI is at a four month high. The Hang Seng and HSCEI is trading at +0.66% and 0.98% respectively as we type. In Asian EM currencies, there is a slightly weaker tone overnight with INR (-0.12%), IDR (-0.4%) and MYR (-0.01%) all trading lower against the USD, largely in a continuation of the EM weakness that we saw in LATAM and EMEA yesterday. In Australia, the RBA left rates and policy largely unchanged. The AUD is 0.1% higher overnight.

Returning to yesterday, much of the focus was on the US ISM (and subsequent revisions) and this resulted in a bit of intraday volatility in an otherwise straightforward session. The US ISM was originally reported at 53.2, lower than expectations for 55.5 which caused a brief wobble in risk. This sent equities and yields to intraday lows with the S&P500 reaching a low of 1916 and 10yr UST yields rallying 2.5bp to 2.485% shortly after the data release. However, markets quickly began to fade the move with chatter about incorrect seasonal factors being applied to the May data. Indeed, the ISM subsequently revised the index to 56, and another revision saw the ISM corrected to 55.4 which was broadly in line with consensus and a 0.5pt improvement on April’s number. From a post-data low, yields gradually ticked up to close above 2.52%, a level last seen in the early part of last week. In terms of other data, US construction spending for April was up +0.2%, lower than the 0.6% expected, but this was after substantial upward revisions to February (+0.6%) and March (+0.4%). Credit had a marginally positive session with continued tightening in European and US cash credit. The European Crossover (254.125bp, +0.125bp) and Main (65.2bp, -0.625bp) indices recovered into the European close to be unchanged to marginally tighter while US IG (62.1bp, - 0.1bp) was also unchanged

In the lead up to ECB Thursday, the European data was uninspiring with the Euro-zone PMI manufacturing for May came in at 52.2, 0.3 points weaker than the flash reading and 1.2 points down on the month. Our economists note that the subdued level of the employment PMI indices is a clear sign that the outlook for the expected slow and modest increase in inflation remains fragile. On that note, German CPI was weaker than expected at 0.9% (vs 1.1% expected) and the EUR fell 0.3%. The ECB’s Nowotny commented that Euroarea inflation is well below ECB targets and that the market cannot over estimate the value of monetary policy. The combination of the weaker PMIs and German CPI increase the probability that the ECB eases policy on Thursday.

Turning to the day ahead, the focus will be on the Euroarea CPI report for May, which is expected to come in at just 0.6% y/y, down from the prior month’s 0.7%, and just a touch above the cyclical low of 0.5%. The data may reinforce the view that the ECB will introduce a package of easing options on Thursday. Consensus expects the core reading to drop to 0.8% y/y (vs 1.0% prior) which is also marginally above the all time lows of 0.7% recorded in December 2013. Also due out this morning is the Spanish, Italian and Euroarea employment reports. Across the Atlantic, the monthly vehicle sales and factory orders data will be released today. President Obama begins his European trip with meetings Poland to discuss security issues regarding Russia. Obama is also expected to meet with the Ukrainian president-elect Petro Poroshenko. In the UK, an update will be provided on house prices. In EM, Turkey’s closely watched CPI will be reported today while the RBI is expected to keep rates on hold.