Japanese Economic Collapse Dislodges USDJPY Tractor Beam, Pushes Futures Lower

Abe's honeymoon is over. Following nearly two years of having free reign to crush the Japanese economy with his idiotic monetary and fiscal policies - but, but the Nikkei is up - the market may have finally pulled its head out of its, well, sand, and after last night's abysmal economic data [40]from Japan which saw not only the highest (cost-push) inflation rate since 1982, in everything but wages (hence, zero demand-pull) - after wages dropped for 23 consecutive months, disposable income imploded - but a total collapse in household spending, the USDJPY appears to have finally been dislodged from its rigged resting place just around 102. As a result the 50 pip overnight drop to 101.4 was the biggest drop in over a month. And since the Nikkei is nothing but the USDJPY (same for the S&P), Japan stocks tumbled 1.4%, their biggest drop in weeks, as suddenly the days of the grand Keynesian ninja out of Tokyo appear numbered. Unless Nomura manages to stabilize USDJPY and push it higher, look for the USDJPY to slide back to double digits in the coming weeks.

European equities sit in minor positive territory, as core indices look to trim some of the losses of the week, but remain down 1.0-1.5% lower since Monday’s open. The periphery is slightly outperforming the core, as a series of positive broker moves for small- and mid-cap stocks lifts the FTSE-MIB and IBEX-35. Financials are faring better than yesterday’s poor performance, as the weight in Barclays and Standard Chartered after yesterday’s sell-off abates

The tone in overnight markets is soft with weakness across credit and equities. In equities, there is a clear risk-off tone led by the HSCEI (-0.8%). In credit, the Australian and Asian IG indices are quoted around 3bp wider and Chinese USD investment grade bonds are trading more than 5bp wider. USD weakness is a major theme in Asia as the impact of Bullard’s comments and US personal spending data washes through Asia. USDJPY is down 0.4%, taking the Nikkei (-1.05%) down with it. The other beneficiaries of the stronger dollar are KRW (+0.26%), MYR (+0.3%) and the AUD (+0.25%). Japan reported May CPI today (+3.7% YoY) which was in line with market consensus, but is the highest level since 1991. Adding to the weak sentiment, Bloomberg reports that another Chinese property developer (Yuehue) is facing funding pressure and has halted construction at one of its mixed use developments in Shanghai.

Commodities are mixed with natural gas, platinum outperforming, while gold, silver decline. French, German bond yields rise.

The only thing on the US docket is the UMich confidence index - the third confidence reading of the week, which we expect to track the Conference Board and soar, while ignoring the Gallup print, which had confidence tumble to the lowest in 2014. After all, if one is manipulating and fabricating economic "data", may as well go all in.

Market Wrap

S&P 500 futures down 0.2% to 1944.9
Stoxx 600 up 0.1% to 342.1
US 10Yr yield down 1bps to 2.52%
German 10Yr yield up 1bps to 1.25%
MSCI Asia Pacific down 0.3% to 145.1
Gold spot down 0.1% to $1315.1/oz

Bulletin headline summary from Bloomberg and Ransquawk

Treasuries gain, 10Y and 30Y yields headed for biggest weekly declines since five days ended May 16 amid increasing Middle East violence and concern over Ukraine, weaker than forecast U.S. economic data.
The Fed is finally succeeding in their efforts to generate higher inflation. Now they must do the same for wages to prevent U.S. households from getting squeezed
Japan’s consumer prices climbed at the fastest pace in 32 years, boosted by higher utility charges and a sales-tax increase that contributed to the biggest slide in household spending since the March 2011 earthquake
U.K. Prime Minister David Cameron sharpened his attacks on Jean-Claude Juncker as unsuitable to run the EC, mounting a final push to convince fellow leaders in Europe to halt the former Luxembourg premier’s appointment
Spain will increase cash advances to regions by almost EUR3.9b, will create a tax on bank deposits, Budget Minister Cristobal Montoro told reporters in Madrid
U.S. Secretary of State John Kerry’s Mideast trip this week has been a lesson in the limits of U.S. power as Iraq PM Maliki rejected calls to step aside and the president of the semi-autonomous Kurdistan region told CNN that the time may have come to break with Baghdad and pursue independence
About 50,000 Christians have fled from towns near Mosul in the past two days, amid fighting in the region between Iraqi security forces and an al-Qaeda splinter group, the city’s senior cleric said
Obama asked Congress to approve $500m to arm and train“appropriately vetted elements of the moderate Syrian armed opposition” as the administration seeks to rein in the al-Qaeda splinter group whose fight has spilled into Iraq
The wave of children showing up on the U.S. southern border has caught Obama between his allies who want him to do more on immigration and critics who blame him for causing the sudden surge
A cease-fire called by Ukraine’s government in its fight against rebels in the east expires today, as European Union leaders prepare to sign a pact tying Ukraine closer to the bloc with President Petro Poroshenko
North Korean leader Kim Jong Un oversaw the test firing of new “ultra-precision” guided missiles, according to the official Korean Central News Agency
Sovereign yields mixed. EU peripheral spreads wider. Asian stocks mostly lower, European stocks gain. U.S. stock futures decline. WTI crude unchanged, gold falls, copper rises

US Event Calendar

9:55am: UofMich Consumer Sentiment, June final, est. 82 (prior 81.2)
NO POMO

EUROPE

11 out of 19 Stoxx 600 sectors rise; real estate outperforms, media underperforms
50.7% of Stoxx 600 members gain, 47.2% decline
Eurostoxx 50 +0.1%, FTSE 100 +0.1%, CAC 40 +0.2%, DAX +0.2%, IBEX +0.1%, FTSEMIB -0.1%, SMI +0.1%

ASIA

Asian stocks fall with the Nikkei underforming
MSCI Asia Pacific down 0.3% to 145.1
Nikkei 225 down 1.4%, Hang Seng up 0.1%, Kospi down 0.3%, Shanghai Composite down 0.1%, ASX down 0.4%, Sensex up 0.2%
1 out of 10 sectors rise with consumer, industrials, infotech underperforming

ASIAN HEADLINES

Asia-Pacific equities slumped overnight, with the Nikkei 225 falling 1.4% on a sharp decline in household spending data (-8% vs. exp. -2%) as April’s sales tax hike had a far larger impact that analysts initially expected. This, allied with the highest inflation rate since 1982 giving the BoJ less room to ease policy strengthened the JPY beyond the 200DMA against the USD – weighing on exporters. EUROPE German regional CPIs have confirmed expectations of a mild rise in CPI inflation over June, prepping for the national number to follow suit at 1300BST/0700CDT. Nonetheless, a sustained uptick in CPI is yet to be confirmed as higher crude prices suggest cost-push as opposed to demand-pull inflation. UK GDP was revised slightly lower by 0.1ppts to 3.0%, however total business investment climbed at the fastest rate in two years, suggesting the UK recovery is becoming more broad-based. BoE’s Carney was back on the wires, reiterating that markets can expect a rate hike from the BoE ‘either this year or next’, but providing little new information.

Prelim Barclays month end extensions show Pan-Euro Agg at +0.09y (Prev. +0.04y)

US HEADLINES

Newsflow out of the US remains light with attention now turning to the University of Michigan data due at 1455BST/0855CDT Exp. 82 vs. Prev. 81.2.

Prelim Barclays month end extensions show US Treasury at +0.08y (Prev. +0.12y)

EQUITIES

NZD/USD briefly touched the highest level since August 2011 following the largest trade surplus in 20 years, keeping the RBNZ on track to continue their rate-tightening cycle in 2014. Nonetheless, a spell of profit-taking has brought NZD off the best levels ahead of the US crossover.

COMMODITIES

Brent crude futures remain on track for their worst weekly performance since March as the gradual process of Libya bringing their production back online and the belief that ISIS action in Iraq will not affect Basra’s oil throughput. Elsewhere, gold’s recent resilience ebbed somewhat overnight, with physical demand remaining lacklustre in Asia as prices hold above USD 1,300/oz, however the week’s poor performance in equities has kept a floor under prices heading into the weekend.

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DB's Jim Reid concludes the overnight Summary

Those looking for volatility got a brief taste of that with the S&P 500’s drop of about 0.8% almost immediately after the opening bell yesterday. The index recovered to close at -0.12% on the day but many were struggling to explain what caused the brief dip. There was talk of a big month-end portfolio reallocation but some also highlighted the hawkish comments from St Louis Fed President Bullard. Bullard remarked that a first rate hike at the end of Q1 2015 would be appropriate and that it has become “more and more difficult to argue that credit markets remain in a state of disrepair, and thus harder and harder to justify continued low real rates”. Bullard also said that he thought the market, and perhaps also the FOMC, had not fully grasped how close the Fed is to achieving its mandate, in his opinion. As we’ve noted in the past, this is a turnaround since the June 2013 FOMC when Bullard dissented to policy because he thought that "a more prudent approach would be to wait for more tangible signs that the economy was strengthening and inflation was on a path to return toward target".

The dip in equities also came just after the release of the US personal income and spending report. Consumer spending grew at +0.2%, which was lower than the +0.4% expected, while the savings rate rose to an eight month high. Partly because of this, a number of Street forecasters downgraded their expectations for Q2 GDP growth, which comes a day after markets digested the sharp downgrade to Q1 GDP growth. In terms of the inflation indicators, the headline and core PCE deflators both rose +0.2% in the month. In year-on-year terms, the PCE deflator rose 1.8% (vs 1.6% in April) and the core PCE posted a gain of 1.5% (1.4% in May). We wrote yesterday that the PCE data would feed the next hawks vs doves debate and it appeared that the data leant itself more to the doves, though the PCE indices came largely in line with expectations. UST yields rallied 4bp following the data and 10yr closed 3bp lower on the day at 2.53%. The combination of relatively benign PCE data and lower UST yields created a fairly supportive environment for LATAM EM sovereign cash which tightened 3-5bp in yield.

In Europe, we should note the underperformance of bank risk yesterday. Banks were (-1.05%) were one of the worst performing sectors in the Stoxx600 (-0.02%). This was largely driven by the headlines surrounding Barclays, with the bank’s senior bonds widening by about 5bp yesterday and its stock losing 6.5%. This dragged the iTraxx Senior financials credit index wider by around 3bp and weighing on iTraxx Main (+1bp) in the process. There was more detail on potential restrictions that may imposed by the US Dept of Justice on BNP Paribas. Bloomberg reported that in addition to fines, the bank could face restrictions on the ability to clear US dollar transactions for as long as a year. However the bans might only affect specific business lines, such as oil and gas transactions, and certain offices, such as Geneva, according to the Bloomberg article, therefore limiting the risk of wider market disruptions. Beyond the broader weak sentiment, core European bonds were supported by a report that the ECB may not have reached the lower bound on key rates, but that the central bank will wait at least 6 months to assess the impact of its latest policy measures.

Elsewhere on the micro side, Lennar Corp the largest US homebuilder by market cap reported earnings which beat Street estimates and it was paired with some fairly upbeat housing market commentary. The company said that the homebuilding recovery was continuing at a “slow and steady pace” and fundamentals are being driven by high affordability while demand continues to outstrip supply. The company’s orderbook climbed 8% in Q2 in terms of volume and 21% in terms of value. After the market closed, Nike reported Q4 EPS of 0.78 vs 0.75 expected and there were some positive trends in the company’s North American sales.

Looking at the day ahead, it will be worth watching the preliminary June CPI data for Germany and Spain in the context of the ECB’s recent policy announcements. According to Bloomberg Ukraine’s President Poroshenko is expected to sign a controversial free trade agreement with the EU. The final estimates of French and UK GDP are due today. The ONS is expected to revise its original 0.8% growth estimate up to around 0.9%, after recent construction data turned out better than expected. Across the Atlantic, a light data docket with the University of Michigan confidence index being the only data point of focus.