It has been a mostly quiet overnight session with Europe solidly green on another bout of Greek hope even as Bundesbank's Weidmann warned that Greek insolvency risks are rising [39]and Greece reporting that its unemployment rose once more from 26.1% to 26.6% in Q1, in which we got two more rate cuts by New Zealand [40](which sent the Kiwi crashing the most since 2011) and South Korea which used the Mers outbreak as a pretext [41] (the Won initially dipped only to rebound) but China stole the stage with its latest report on retail sales, industrial production, and fixed investment all of which showed a modest bounce from multi-year lows suggesting the PBOC's attempts to shock the economy into growth may be starting to work (which is bad news for the market).
However, while we expect the usual barrage of fake Greek optimistic rumors, today's main event will be the US retail sales report, which has missed in 4 of the past 5 months [42], which however will lead to nothing but market pain should it come solidly above the consensus estimate of 1.2%, as it would put a September rate hike further in the cross hairs.
A more detailed take from Goldman on China's key leading data reported overnight:
May activity data appears mixed but the most important - Industrial Production (IP) data - showed early signs of an acceleration to trend growth level. We believe sequential growth in IP is likely to show more signs of strength in the following months as policy loosening has turned more aggressive since the start of June.
This sequential IP growth rebound happened amid a combination of domestic loosening initiatives (monetary, fiscal and administrative), less seasonal drag from the heightened anti-corruption campaign (2Q seasonally generally has a smaller share of corruption related activities anyway), and stronger exports growth (less drag from RMB effective exchange rate as the USD has weakened modestly since April and the RMB has been very stable against it, and stronger global demand).
Policy makers are likely to view the activity data as mixed as they tend to attach more weight to FAI and retail sales data than we do. A breakdown by sector showed that despite manufacturing, FAI in all sectors decelerated on a ytd yoy basis.
As a result of this latest activity data, and other factors such as slow fiscal expenditure growth data in May (back to low single digit yoy growth), we believe policy makers will retain a clear loosening bias, at least in the near future. The recent release of central government inspection teams and the announced urge to accelerate fiscal expenditure growth have revealed this bias. These measures were key pillars of the “second phase” of more aggressive loosening in 1H 2014, although they occurred earlier in the year (in May instead of June this year) which led to the meaningful acceleration in sequential growth which peaked in June 2014. We expect to see a similar acceleration this year, although it may be less dramatic sequentially but potentially more long lasting as the loosening measures this year are more dependent on local government bond issuance (instead of frontloading of annual fiscal expenditure) and more fundamentally on the way fiscal deposits are managed.
Exhibit 1: Activity data summary
Exhibit 2: Fixed asset investment breakdown
Further proof that China's unprecedented easing steps are bearing fruit if only for the time being was China's M2 which rose 10.8% Y/Y in May, up from a multi year low of 10.1% last month, and above expectations of 10.4%.
[43]
Additionally total social financing was Rmb 1220 bn in May vs. consensus of Rmb 1132.5 bn and an April print of Rmb 1050 bn.
Should this trend continue, hopes of constant PBOC easing will soon be dashed, which in turn would lead to a huge market correction in China.
A quick look at markets around the globe starts in Asia where stocks mostly rose in tandem with the rebound across global equities which saw the S&P 500 close back above its 50 and 100 DMAs, and the DJIA finish above 18000. Consequently, the ASX 200 (+1.4%) and Nikkei 225 (+1.6%) trade near their best levels, with the latter posting its first gain in 5-days. Shanghai Comp (+0.4) closed higher with support stemming from the strong Industrial Production reading. Chinese Retail Sales (May) Y/Y 10.1% vs. Exp. 10.1% (Prev. 10.0%) Ind. Prod. (May) Y/Y 6.1% vs. Exp. 6.0% (Prev. 5.9%).
European equities take the lead from the strong closes seen across US and Asian equities, with Greek assets outperforming in Europe in the wake of yesterday's source comments which suggested that Germany may accept one of Greece's proposals in order to reach a staggered agreement on aid. Greek banks (National Bank of Greece +11.9%, Alphabank +10.5%) are seen outperforming in Europe and seemingly undeterred by the S&P downgrade of Greece’s sovereign credit rating to CCC from CCC+. Despite indications of a breakthrough in negotiations between Greece and its creditors, downbeat comments from ECB’s Weidmann cooled the short lived optimism after warning that time is of the essence and the risk of a default is increasing on a daily basis which sent a bid tone through Bunds.
Officials in Brussels have warned that the ECB could raise collateral requirements for Greek banks, unless Greece comes up with a clear prospect of an agreement with its creditors. An official said the deadline is next week and without an agreement, the ECB will have to take the decision on Wednesday. Greek banking sources fear that collateral could be raised from approx. 30% to 40%, which could cut at least EUR 12bln from cash available to Greek banks. (Times)
The USD-index (+0.5%) has halted its three day losing streak at the expense of the major pairs with EUR/USD breaking back below 1.1300 and GBP/USD beneath its 1.5500 handle. NZD was the session’s laggard after the RBNZ unexpectedly cut its OCR by 25bps to 3.25% and hinting future easing by saying the 90-day bank bill track implied one more cut to the OCR. NZD/USD tumbled after being marked down by spot dealers, to decline by as much as 183pips, after tripping interbank market stop-loss orders. Conversely, AUD outperformed after the May employment report topped expectations (Employment
Change 42.0k vs. Exp. 15.0k (Prev. -2.9k, Rev. -13.7k). Further AUD strength was stymied as the statistics bureau flagged ome issues with the data.
The resurgence in the greenback has placed weight on the commodity complex with WTI and Brent crude futures sitting in mild negative territory. The IAE upgraded their global oil demand forecast by 320k to 94mln bpd and also upgraded their non-OPEC supply forecast by 195k to 58mln bpd. In precious metals markets, Spot gold has trend lower amid the stronger greenback and the subsequent strength in global equities.
In summary: China’s industrial output rises. Merkel says Tsipras agreed to step up efforts on creditor talks. Weidmann says bund tantrum shows markets can handle volatility. The Dutch and German markets are the best-performing larger bourses, Swedish the worst. The euro is weaker against the dollar. Japanese 10yr bond yields rise; Irish yields decline. Commodities decline, with copper, nickel underperforming and corn outperforming. U.S. jobless claims, continuing claims, Bloomberg consumer comfort, retail sales, import price index, business inventories, household change in net worth due later.
Market Wrap
- S&P 500 futures down 0.1% to 2105.2
- Stoxx 600 up 0.5% to 392.7
- US 10Yr yield up 1bps to 2.49%
- German 10Yr yield up 1bps to 0.99%
- MSCI Asia Pacific up 0.4% to 147.6
- Gold spot down 0.5% to $1179.8/oz
- 18 out of 19 Stoxx 600 sectors rise; real estate, oil & gas outperform, telcos, basic resources underperform
Asian stocks rise with the Nikkei outperforming and the Sensex underperforming; MSCI Asia Pacific up 0.4% to 147.6 - Nikkei 225 up 1.7%, Hang Seng up 0.8%, Kospi up 0.3%, Shanghai Composite up 0.3%, ASX up 1.4%, Sensex down 1.7%
- 8 out of 10 sectors rise with telcos, consumer outperforming and energy, utilities underperforming
- Euro down 0.48% to $1.127
- Dollar Index up 0.4% to 95.03
- Italian 10Yr yield up 2bps to 2.26%
- Spanish 10Yr yield up 1bps to 2.25%
- French 10Yr yield up 2bps to 1.33%
- S&P GSCI Index down 0.6% to 444.8
- Brent Futures down 0.6% to $65.3/bbl, WTI Futures down 0.9% to $60.9/bbl
- LME 3m Copper down 1.8% to $5922.5/MT
- LME 3m Nickel down 1.1% to $13445/MT
- Wheat futures down 0.8% to 509.3 USd/bu
Bulletin headline summary from Bloomberg and RanSquawk:
- A muted morning so far with EU equities trading higher despite downbeat Weidmann comments draining optimism from Greek negotiations
- The USD-index has been granted some reprieve halting a three day losing streak and subsequently pressuring major pairs
- Looking ahead provides a relatively light economic calendar with highlights coming in the form of US retail sales, weekly jobs data and Business Inventories
- Treasuries decline with EGBs, 10Y yield just below 2.50% as week’s auctions set to conclude with $13b 30Y bonds; WI yield 3.22%, highest since Sept., vs 3.044% in May.
- During two hours of talks with Merkel and Hollande, Greek PM Tsipras said his government will work with “higher intensity” to find a deal, a German government spokesman said in an e-mailed statement
- Tsipras and EC president Juncker have “re-established” personal ties and will meet today to explore a path toward a resolution, an EC spokesman said
- “Contagion effects” from Greek insolvency scenarios “are certainly better contained than they were in the past, though they should not be underestimated,” Bundesbank’s Jens Weidmann said in speech in London
- The kiwi headed for its biggest slide since September 2011 after the Reserve Bank of New Zealand unexpectedly cut its benchmark rate to 3.25% and signaled another reduction may be appropriate
- Deeply ingrained sectarian tensions and doubts about U.S. resolve make Obama’s plan to counter Islamic State by training Sunni tribes to fight along Shiite-led military a heavy lift
- “The patient may be too far gone to save it at this point,” said Ali Khedery, who served as an adviser to five U.S. ambassadors and three heads of U.S. CentCom in Iraq
- Pimco sold about $18b of Total Return’s assets to other Pimco funds and accounts between October and March, helping it meet more than $100b of redemptions that followed Bill Gross’s surprise exit
- OPEC’s biggest members are pumping record amounts of crude and this year’s rally in prices is under threat, the IEA said, with Saudi Arabia, Iraq and the UAE each producing at records last month
- Sovereign 10Y bond yields mostly higher. Asian stocks gain, European stocks, U.S. equity-index futures higher. Crude oil, copper and gold lower
US Event Calendar
- 8:30am: Retail Sales Advance, May, est. 1.2% (prior 0%)
- Retail Sales Ex Auto, May, est. 0.8% (prior 0.1%)
- Retail Sales Ex Auto and Gas, May, est. 0.5% (prior 0.2%)
- Retail Sales Control Group, May, est. 0.5% (prior 0%)
- 8:30am: Import Price Index m/m, May, est. 0.8% (prior -0.3%)
- Import Price Index y/y, May, est. -10% (prior -10.7%)
- 8:30am: Initial Jobless Claims, June 6, est. 275k (prior 276k)
- Continuing Claims, May 30, est. 2.190m (prior 2.196m)
- 8:45am: Bloomberg June U.S. Economic Survey
- 9:45am: Bloomberg Consumer Comfort, June 7 (prior 40.5)
- 10:00am: Business Inventories, April, est. 0.2% (prior 0.1%)
- 12:00pm: Household Change in Net Worth, 1Q (prior $1.517b)
- 1:00pm: U.S. to sell $13b 30Y bonds in reopening
DB's Jim Reid concludes the overnight event wrap
Next Wednesday sees the latest FOMC meeting which will likely give us the best clues yet as to probabilities of a hike in September. Today's retail sales number is an important one as this number has missed in 4 out of the last 5 months. DB's Joe LaVorgna thinks we're due a bounce not least because the average of the last 3 month auto sales are running at 10-year highs which he doesn't think would happen if consumers didn't have the confidence to spend. So an important data point. A personal view is that they won't hike in September but it’s very data dependent so expect the intensity of the argument to build over the summer.
Outside of the usual array of Greek headlines which net net helped sentiment yesterday, the highlight over the last 24 hours was seeing 10 year bund yields climb above 1% intra-day for the first time since September 24th last year (closed 0.978%, still +3.1bps higher in yield on the day). Before we have to ask for the smelling salts to stir us from the shock of a 1-handle on bunds, it’s worth highlighting that since our data starts in 1807 yields have been higher than 1% on 99.6% of monthly observations. Elsewhere Treasuries extended their sell off ahead of today’s data with heavy supply continuing to weigh on the market. The benchmark 10y finished more or less at its highs for the day at 2.485% (+4.5bps), extending the roughly 9 month high. It was much of the same story elsewhere with similar moves in other core bond markets. Peripherals were the notable outperformer however as Italy (-4.4bps), Spain (-4.2bps) and Portugal (-1.1bps) all closed tighter with the slightly better sentiment around Greece yesterday. Greek 10y yields in fact bucked four consecutive sessions of higher yields, finishing 3.6bps tighter at 11.621%.
Indeed, it was headlines on Bloomberg suggesting that German Chancellor Merkel’s government would consider endorsing a partial aid disbursement in return for the commitment of one reform from the Creditor’s list that gave markets a lift into the close. The claim was actually rejected later by a government spokesman who denied that Germany is considering such a plan, before then saying that the German government would only accept proposals made by the three institutions representing the Creditors (ECB, IMF and European Commission). In any case, a staggered deal of some sort would still require an upfront commitment from Greece in a Staff Level Agreement which is ultimately the binding constraint. Meanwhile, there appeared to be much hope placed on the meeting last night between Greek PM Tsipras, German Chancellor Merkel and French President Hollande. Ultimately however, the meeting concluded with something of a recurring theme of late, with the leaders agreeing to intensify talks and noting that the overall tone was constructive.
Elsewhere, a report in Greek press Ekathimerini caught the eye with the article noting a Greek official as saying that Athens would consider an extension on the current programme until March 2016. The official stated that this would be considered should lenders also agree to provide funds from the European Stability Mechanism and purchase the Greek bonds that the ECB bought through its SMP scheme (and so therefore seen as reducing its funding needs over the coming months). Meanwhile, the ECB yesterday raised the ceiling on the ELA facility by the most since early February (€2.3bn). Concluding a busy day for Greece, S&P downgraded the sovereign rating further into junk territory (one notch to CCC).
The initial hope that we might see some progress on Greece yesterday certainly helped support a decent bid for risk assets. The Stoxx 600 (+1.80%), DAX (+2.40%) and CAC (+1.75%) all finished higher in the European session, while the S&P 500 (+1.20%) and Dow (+1.33%) shrugged off the rejection from the German government spokesman later in the day, supported by a stronger day for financials (on the back of the moves in rates) and tech stocks. It was also a much stronger day for credit markets as Xover (-16bps) and CDX IG (-1.5bps) both closed tighter. It was another decent day for oil markets meanwhile as WTI and Brent closed +2.14% and +1.26% respectively, although they pared higher gains intraday. The Dollar suffered its third consecutive day of losses however as the DXY ended -0.55%. The stronger Yen (+1.34%) and Euro (+0.36%) playing their part.
Looking at the follow up in Asia this morning, with the exception of the Shanghai Comp (-0.19%), bourses are largely following the lead from the US overnight and trading up. Indeed, the Hang Seng (+0.89%), Nikkei (+1.28) and ASX (+1.35%) are all higher as we go to print. China's monthly data dump comes out just after we go to print this morning so expect this to be a focus in early trading. Elsewhere there’s been some Central Bank action earlier in the session where the Bank of Korea has lowered the 7-day repurchase rate to 1.5%, the fourth move since August last year. Over in NZ meanwhile, there was some early focus on the RBNZ after the Central Bank cut rates 25bps to 3.25% (against the marginal split in favour of rates being left on hold) and left open the potential for further easing. The NZD fell some 2.5% following the move. The move means we’ve now seen easing in 2015 from 51 different Central Banks so far (assuming the ECB counts as 19). Most bond markets in Asia this morning are following the move higher in global yields yesterday and trading 2-3bps wider. 10y Treasuries are 1.1bps lower in yield however at 2.473%.
Wrapping up yesterday’s news flow, the World Bank joined the IMF in suggesting that the Fed should wait until next year to lift rates, noting in particular the uneven recovery in the US and also the potential risks to emerging markets of tightening rates too soon. The World Bank also joined the IMF in lowering the US growth forecast this year, downgrading to 2.7% from the initial 3.2% estimate in January, while lowering the 2016 forecast to 2.8% from 3.0%. It was a quiet day on the data front with just a lower than expected budget deficit in the US ($82.4bn vs. $97bn expected) for May. In France we saw notable misses for both industrial (-0.9% mom vs. +0.4% expected) and manufacturing (-1.0% mom vs. +0.2% expected) production while in Italy we also saw a miss versus consensus for industrial production (-0.3% mom vs. +0.3% expected). It was a mixed bag in the UK meanwhile. Industrial production (+0.4% mom vs. +0.1% expected) was a beat, while manufacturing (-0.4% mom vs. +0.1% expected) disappointed to the downside.
Looking at today’s calendar now, it’s a fairly quiet this morning in Europe with just French CPI data due. In the US this afternoon, retail sales data for May will of course be of much focus while initial jobless claims and business inventories are also expected.
