Flat Equity Futures Prepare For Big Move Following Econ Data Avalanche

Once again, US equity futures are roughly unchanged (while Treasurys have seen a surprising overnight bid coming out of Asia) ahead of an avalanche of macroeconomic news both in Europe, where the ECB will deliver its monthly message, and in the US where we will shortly get jobless claims, ISM non-manufacturing, trade balance, nonfarm payrolls, unemployment, average earnings, Markit U.S. composite PMI, Markit U.S. services PMI due later. Of course the most important number is the June NFP payrolls and to a lesser extent the unemployment rate, which consensus expects at 215K and 6.3%, although the whisper number is about 30K higher following yesterday's massive ADP outlier. Nonetheless, keep in mind that a) ADP is a horrible predictor of NFP, with a 40K average absolute error rate and b) in December the initial ADP print was 151K higher than the nonfarms. Those watching inflation will be far more focused on hourly earnings, expected to rise 0.2% M/M and 1.9% Y/Y. Should wages continue to stagnate and decline on a real basis, expect to hear the "stagflation" word much more often in the coming weeks.

Asia is having a relatively subdued session this morning with many in wait-and-see mode for the events to come later today. The AUDUSD dropped around 40pips and Australian government bonds have rallied after the RBA governor warned that the market was underestimating the chance of an AUD decline and that the RBA has not contemplated policy tightening despite a rising housing market. The AUD has also come under pressure following a weak retail sales report (-0.5% mom vs unch expected). In China, the HSBC services PMI printed at the highest level in more than a year (53.1 vs 50.7 expected) which follows the stronger than expected official manufacturing PMI earlier this week. Equity markets are mixed with the Nikkei (-0.3%) underperforming despite a higher USDJPY (mainly due to a stronger USD than a weaker JPY). In Indonesia, ahead of next week’s presidential elections, the country’s debut EUR sovereign bond has attracted 7x the issue amount of EUR1bn, pricing at MS+195bp for 7-year money.

Perhaps the biggest news out of China has nothing to do with the actual economy and all to do with its banks, where Securities News reported that in June alons the 4 largest banks, Industrial & Commercial Bank of China Ltd., China Construction Bank Corp., Bank of China Ltd. and Agricultural Bank of China Ltd. surged to 2.2 trillion yuan in June. This is over almost 10 times the increase in May, when deposits rose by 278.2b yuan for the four banks.This is equivalent to $350 billion in dollar terms or about 4 months of the original $85 billion POMO combined! Just in case someone was curious who is providing all the liquidity on the margin these days...

Despite the looming risk events, stocks traded higher in Europe this morning, although gains were led by the more defensive sectors. Utilities was the only sector to trade in the red, where a number of large cap Spanish based companies traded ex-dividend. As a result, the Spanish IBEX-35 index underperformed its peers and traded lower in Europe. In terms of US specific news, President Obama said the banking industry is set to face further changes in order to limit excessive risk-taking beyond the changes written into the Dodd-Frank financial law, with changes potentially including bank restructuring. (WSJ)

U.S. jobless claims, ISM non-manufacturing, trade balance, nonfarm payrolls, unemployment, average earnings, Markit U.S. composite PMI, Markit U.S. services PMI due later.

Market Wrap

S&P 500 futures little changed at 1968.1
Stoxx 600 up 0.2% to 346.5
US 10Yr yield up 1bps to 2.63%
German 10Yr yield up 2bps to 1.31%
MSCI Asia Pacific down 0.1% to 147.3
Gold spot down 0.3% to $1322.4/oz

Bulletin headline summary from RanSquawk and Bloomberg

Treasuries little changed, 10Y yields near highest since June 20 before report forecast to show U.S. economy added 215k jobs in June with unemployment rate holding at 6.3%.
Stocks in Europe are seen broadly higher (Eurostoxx 50, +0.37%), though gains were led by the more defensive sectors given the looming risk events due to take place later today.
Apart from digest the release of the US monthly jobs report and ECB, today will also see the release of the weekly US jobs and Trade Balance reports ahead of a US holiday tomorrow.
ECB issues rate decision at 7:45am ET; Draghi press conference set for 8:30am, coinciding with U.S. jobs report for first time since 2008
Obama said in a radio interview to be aired today that an “unfinished piece of business” is to address banks that “take big risks because the profit incentive and the bonus incentive is there for them”
Airports including London Heathrow, Europe’s busiest, stepped up security checks with unspecified measures in response to U.S. warnings amid concern that a new generation of bombs could evade existing scans
Decheng Mining pledged the same metals stockpile three times over to obtain more than 2.7b yuan ($435m) of loans in China’s Qingdao port, a person briefed on the matter said, citing preliminary findings of an official investigation
The bloodshed in eastern Ukraine has reached a “dramatic climax” in the past few days, prompting Russia, Ukraine, France and Germany to pledge to work for a comprehensive cease-fire in another round of talks by July 5, according to Germany’s foreign minister
Hundreds of police cleared protesters from a sit-in that disrupted Hong Kong’s financial district yesterday, arresting 511 people who stayed on after a mass rally opposing China’s insistence to vet candidates for the city’s 2017 leadership election
Sweden’s central bank lowered its main interest rate by a more-than-estimated half a percentage point and predicted no increases until the end of next year to shield the largest Nordic economy from deflation
The Australian dollar headed toward its biggest two-day drop since January as RBA governor Stevens said investors were underestimating chances of a significant fall in the currency
Sovereign yields mostly higher. EU peripheral spreads narrow. Asian stocks mixed. European equities, U.S. stock futures gain. WTI crude, gold and copper fall

US Event Calendar

8:30am: Trade Balance, May, est. -$45b (prior -$47.2b)
8:30am: Change in Nonfarm Payrolls, June, est. 215k (prior 217k)
- Change in Private Payrolls, June, est. 215k (prior 216k)
- Change in Manufacturing Payrolls, June, est. 10k (prior 10k)
- Unemployment Rate, June, est. 6.3% (prior 6.3%)
- Average Hourly Earnings m/m, June, est. 0.2% (prior 0.2%)
- Average Hourly Earnings y/y, June, est. 1.9% (prior 2.1%)
- Average Weekly Hours All Employees, June, est. 34.5 (prior 34.5)
- Change in Household Employment, June (prior 145k)
- Underemployment Rate, June (prior 12.2%)
- Labor Force Participation Rate, June (prior 62.8%)
8:30am: Initial Jobless Claims, June 28, est. 313k (prior 312k)
Continuing Claims, June 21, est. 2.560m (prior 2.571m)
9:45am: Bloomberg Consumer Comfort, June 29 (prior 37.1)
9:45am: Markit US Services PMI, June final, est. 61 (prior 61.2)
Markit US Composite PMI, June final (prior 61.1)
10:00am: ISM Non-Manufacturing Composite, June., est. 56.3 (prior 56.3)
7:45am: ECB seen holding main refinancing rate at 0.150%, marginal lending facility at 0.400%, deposit facility rate at -0.100%
8:30am: ECB’s Draghi holds news conference in Frankfurt
9:00am: Start of Berlin event featuring Merkel, Draghi and others
No POMO

ASIAN MARKETS

Asian stocks fall with the ASX outperforming and the Kospi underperforming.
MSCI Asia Pacific down 0.1% to 147.3
Nikkei 225 down 0.1%, Hang Seng down 0.1%, Kospi down 0.2%, Shanghai Composite up 0.2%, ASX up 0.7%, Sensex up 0%

EUROPE

Absorption of supply from Spain and France, together with good size redemption/coupon related flow, failed to support Bunds. Instead, prices remained under pressure amid profit taking ahead of the upcoming ECB policy meeting and also after prices touched on contract highs yesterday. The ECB is widely expected to keep rates unchanged and Draghi will likely use the press conference to elaborate on the technicalities of the TLTRO operations. Focus will also be on the NFP, with expectations buoyed following the release of much better than expected ADP report yesterday. Of note, given the US holiday tomorrow, price action is expected to be exaggerated by consequent thin volumes.

16 out of 19 Stoxx 600 sectors rise; chemicals, tech outperform, utilities, construction underperform
72.5% of Stoxx 600 members gain, 24.2% decline
Eurostoxx 50 +0.3%, FTSE 100 +0.3%, CAC 40 +0.4%, DAX +0.4%, IBEX -0.3%, FTSEMIB +0.5%, SMI +0.5%

EQUITIES

GBP bucked the recent trend and underperformed EUR, following the release of lower than expected UK Services PMI. Elsewhere, AUD fell overnight after the governor of the RBA said that investors underestimate the chance of a ‘significant fall’ in the AUD, while EUR/SEK advanced to its highest level since 2011 this morning after the Swedish Riksbank cut interest rate by 50bps to 0.25% against expectations of a cut of 25bps. At the same time, the central bank also said that it sees repo rate averaging 0.29% in Q3 2014 vs. Prev. forecast 0.66%, 0.22% in Q4 vs. Prev. forecast 0.65%.

COMMODITIES

Spot gold traded lower overnight and in Europe this morning, as expectations for a better than expected NFP jobs report following the release of consensus beating ADP report continued to weigh on prices. Looking elsewhere, firmer USD and the recent re-opening of the Las Ranuf and Es Sider oil ports in Libya ensured that WTI and Brent crude futures traded lower, albeit marginally.

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As usual, DB's Jim Reid concludes the overnight recap

The US economy bulls certainly enjoyed the heat of the strong +281k ADP report yesterday (+205k expected) - the highest reading since November 2012. This hasn't changed DB's forecast of +225k today for both the headline and private payrolls though. DB also continues to expect a one-tenth decline in the unemployment rate to 6.2%. The market is at +215k and 6.3% respectively. In terms of renewed optimism, we've been here many times before in this cycle but given the weather distortions it was always inevitable that there would be a Q2 data spurt at some point. But will it be sustainable? The market might not put quite as much weight on data now as they will in say August/September when surely the weather impact will have been completely worked through by then.

Nevertheless the bond market reacted hawkishly yesterday with a 6-7bp selloff in 10yrs immediately after the ADP data. The weaker-than-expected US factory orders (-0.5% vs -0.3% expected) and a dovish Yellen speech didn't do much more than slow the pace of the selloff. 10yrs closed at 2.626% (+6.2bp on the day) and the 2s/30s curve steepened by about 5bp. While treasuries had their largest sell-off in a month, the reaction in other asset classes was more nuanced. US equities traded in a narrow range, and though futures dipped shortly after the data release, they quickly retraced lost ground and the S&P 500 closed at +0.07%. Also an interesting reaction was seen in spot gold, which recovered well following the ADP print to be virtually unchanged on the day – perhaps helped by the soothing words from the Fed chair. The US dollar index gained 0.15% which hurt a number of EM currencies such as the Mexican Peso (-0.4%) and the Brazilian Real (-1.0%).

So as touched upon above, Yellen’s IMF lecture proved again to be dovish with the Fed chair downplaying the role of monetary policy as a tool to promote financial stability and highlighting that using rate policy to tackle asset price inflation may come a cost to the Fed’s inflation and unemployment mandates. For the second time in less than a month though, Yellen has brought up the signs of excess in credit markets. Recall that at her post-FOMC press conference she highlighted that was certainly watching developments in the lower-grade corporate bonds and the high yield market. Yesterday she again noted corporate bond spreads have fallen to low levels, suggesting “that some investors may under-appreciate the potential for losses and volatility going forward”. Yellen also noted that credit terms of leveraged loans have eased significantly but that overall measures do not suggest that non-financial borrowers are taking on excessive debt. Despite this core message, by our reading Yellen left the door slightly ajar by noting that “there may be times when an adjustment in monetary policy may be appropriate to ameliorate emerging risks to financial stability”. Indeed the Fed Chair cited the experience of the mid-2000s where perhaps policymakers should have reacted to the growing house price bubble. But she again reiterated that monetary policy was and is a very blunt tool to tackle house price inflation and one that would likely leave large costs in terms of increases in unemployment. Her comments were consistent with those from the BoE’s chief economist Andy Haldane who said yesterday who said that monetary policy is sometimes “the last line of defence” against financial stability risks.

One market that has benefited from the benign rate environment this year, especially since February, has been EM. DB’s GEM equity strategist John-Paul Smith is sticking with his bearish 2014 view on the back of China and dollar concerns. On the first of these concerns, he notes that despite the continual stream of downgrades to Chinese GDP estimates, investors are unlikely to regain confidence until expectations begin to bottom out which will not happen until there are clear signs of productivity growth. From a micro perspective, there is little indication that the much vaunted Chinese reform program is having much impact, while there are growing signs that parts of the industrial and materials sectors are starting to succumb to a debt trap. On the second concern, JP continues to believe that the ongoing contraction in economic growth rates across most of the EM universe will help to underpin low US Treasury yields but will also lead to a major dollar rally at some point in H2 2014, which is the most likely catalyst for a correction in EM assets. JP is maintaining his forecast for a -10% fall in the MSCI EM compared with flat DM.

Aside from payrolls today we have the monthly ECB meeting which should be a relatively quiet affair given last months major policy announcements. There will be some interest in how dovish Draghi sounds and whether he opens the door for more action at a later date if necessary. There might be more questioning around the ECB’s plans for ABS purchases especially after the FT article we mentioned yesterday suggested that progress on hammering out the details has been slow so far. EURUSD has softened for the past two days, but this came after sizeable gains on Monday and Friday.

In terms of European data, the services PMIs are the initial focus where consensus is looking for a small uptick in Spain and Italy. Euroarea retail sales for May are released shortly afterwards. The ECB releases its policy statement at 12:45pm LDN and this will be followed by Draghi’s press conference 45 minutes later. It will be a hectic few minutes with Draghi’s press conference due to start at the same time as US non-farm payrolls, the May trade report and jobless claims are released. Expect the ECB press conference journos to be distracted for a few minutes as Draghi starts. The non-mfg ISM rounds out today’s busy calendar.

Back stateside it’s worth expanding on the US trade report which is expected to show a deficit of -$45.0bn in May. Recall that much of the disappointment in Q1 GDP (and subsequent downward revisions) came from weaker trade. Indeed net exports previously subtracted subtracted -153bps from Q1 growth.

Before we signoff today, we should note the growing chatter around a potential government shutdown when the current government funding bill reaches its end in September. Given the proximity to midterm elections in November, there could be elements of both the Democrats and Republicans who could use the looming government funding deadline as a chance to score political points. DB’s Head of Government Affairs Frank Kelly hosted a call yesterday on this topic. His overall view was that it’s unlikely that we will see a shutdown come September given what’s at stake, particularly for Republicans, in the mid-term elections but there will certainly be headline risks over the course of July-September. These headline risks will encompass what Congress plans with respect to Exim Bank whose charter expires at the end of September. A number of more conservative Republicans want the Exim Bank’s charter to either expire or continue subject to reforms. The US highway trust fund, which is running low on funds, is also a point of contention and there is still significant disagreement between Republicans and Democrats on how to fund it.

So look forward to more US political noise as we approach mid-terms!!!