Another Month Of Record European Unemployment And Dropping Inflation Sets Up An ECB Rate Cut

The weakness in economic data (not to be confused with the centrally-planned anachronism known as the "markets") started overnight when despite a surge in Japanese consumer spending (up 5.2% on expectations of 1.6%, the most in nine years) by those with access to the stock market and mostly of the "richer" variety, did not quite jive with a miss in retail sales, which actually missed estimates of dropping "only" -0.8%, instead declining -1.4%. As the FT reported what we said five months ago, "Four-fifths of Japanese households have never held any securities, and 88 per cent have never invested in a mutual fund, according to a survey last year by the Japan Securities Dealers Association." In other words any transient strength will be on the back of the Japanese "1%" - those where the "wealth effect" has had an impact and whose stock gains have offset the impact of non-core inflation. In other words, once the Yen's impact on the Nikkei225 tapers off (which means the USDJPY stops soaring), that will be it for even the transitory effects of Abenomics. Confirming this was Japanese Industrial production which also missed, rising by only 0.2%, on expectations of a 0.4% increase.

Yet while the Japanese data was hardly a surprise, the biggest news of the night was European inflation data, which we got shortly after the German March retail sales data (in line with expectations of a -0.3% drop, following the February number which too was revised from +0.4% to -0.3% proving that attempts to stave off recession in Germany have failed) and following Spanish GDP which also came in line with expectations contracting at a -0.5% rate and current account which deteriorated from -€2.6 billion to -€3.9 billion. The April Eurozone CPI reading at 1.2% on expectations of a 1.6% number, and down from 1.7%, which has now pretty much convinced all the analysts that a 25 bps cut in the ECB refi rate, if not deposit, is now merely a formality and will be announced following a unanimous decision. Some, such as Credit Agricole, are even asking for "bolder" action than just the haircut. So will Europe force banks to pledge more assets in exchange for unnecessary money a la LTRO? Or will there be another indirect injection of cash? We will wait and see. In the meantime the EURUSD is where we left it off,

Finally, Eurozone unemployment for March hit yet another record high of 12.1%, up from 12.0%. This was in line with expectations and is hardly news for anyone.

Looking at the US session, we get quarterly employment costs, house prices, consumer confidence and the Chicago PMI. Another busy day.

The bulletin highlights from overnight via Bloomberg:

  • Euro-area unemployment increased to record 12.1% in March, with youth unemployment at 24%; German unemployment rose for a second month in March, with the number of jobless climbing 4k to 2.94m
  • Inflation in the euro area slowed to 1.2% in April, more than forecast, from 1.7% in March
  • Weak inflation data strengthens case for greater ECB action than current forecast of 25bps, according to Credit Agricole
  • Hedge funds including Paulson & Co. are pushing Congress to abandon plans to liquidate Fannie Mae and Freddie Mac as investors buy up preferred stock that has long been considered worthless, according to people with knowledge of the discussions
  • Japan’s jobless rate was 4.1% in March vs. est 4.2% and 4.3% in Feb.
  • Fast Retailing Co., Asia’s biggest apparel retailer, was responsible for almost 1/6th of Nikkei’s 49% advance in the last two years, according to  data compiled by Bloomberg
  • Global sovereign yields mostly lower, led by France, U.K. and Belgium. EU sovereign spreads to Germany tighten
  • Nikkei -0.2%; China closed for holiday. European equity markets decline, U.S. index futures mixed. WTI Crude little changed; gold, copper decline

SocGen recaps the key items in the macro outlook for today:

Ultra-benign inflation data from the US and Germany were published yesterday - both their key rates fell to 1.1% yoy in March - and even though their 10y benchmark yields are 40bp apart, this served a timely reminder that inflation should be the least of the worries of the two central bank meetings that are about to get underway. For the ECB in particular, where the balance sheet and excess liquidity have declined, the threat of fresh stimulus unmooring inflation expectations simply does not stack up. What's happened in Germany since last November is that with CPI having dropped from 2% to 1.1% and the ECB refi rate having stayed at 0.75%, real interest rates have tightened by 90bp. Over the same period, the EUR effective exchange rate has appreciated by 4%. A tightening in policy conditions which, with global demand looking more tepid, has caused momentum to slow. It is the trends since the March forecast updates and not since November that will be particularly relevant to the governing council, but even then the inflation backdrop has proved quite a bit more benign than probably pencilled in. With leading indicators flashing amber over the country's growth prospects, the case for the central bank to hold fire looks flimsy indeed. Keep an eye on the country's latest labour market stats this morning.

Meanwhile in G10 currencies, it is the NZD and NOK which are charging ahead carrying on where they left on Friday, whilst EUR and GBP are consolidating ahead of the FOMC tomorrow. The NOK has recovered partly from a bad spell vs the EUR after the pre-hedging of bond redemption flows on May 15 (6.5% 2013 benchmark, NOK66.5bn worth). Roughly 60% is reportedly in foreign hands. Briefly trading back below 7.60 yesterday, speculation of ECB easing on Thursday may keep the pair on the back foot unless this morning's Norwegian retail sales data disappoint.

In the US today we get quarterly employment costs, house prices, consumer confidence and the Chicago PMI. Rising house prices and an upward revision to the Michigan consumer survey paint good odds of a bounce back in the consumer confidence report, though it's the labour component that will garner most interest ahead of Friday's payrolls report.

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Confirming that "low inflation" has given the central banks a green light to do even more, comes from the overnight summary of DB's Jim Reid who also touches on the remaining key events.

Expectations of a prolonged period of (or more) central bank liquidity was lifted higher by the combination of lower inflation and softer data yesterday. In Europe, German inflation rose less than expected in April (+1.2% vs +1.4%) which was met by a near handful of disappointing sentiment surveys. On the other side of the pond, the latest core PCE deflator is showing renewed downward momentum although this is not evident in the core CPI series. Our economists noted that the gap between the two now at nearly 80bps (widest since May 2002) but since core PCE deflator is the Fed’s preferred inflation metric the latest readings give the FOMC more ammunition to stick with its current policy. US activity data also remains soft. The Dallas Fed manufacturing report headline index fell by 22.8pts to -15.6, making it the worst reading since July 2012. Details were also weak with new orders down to its lowest read since November 2011. All eyes will be on the Chicago PMI today ahead of the ISM manufacturing tomorrow. US housing continues to offer some hope though with the latest pending home sales in March surprising to the upside (+1.5% mom v +1.0% expected).

So all in all yesterday was a good day for risk assets with equities on both sides of the Atlantic rallying higher. The S&P 500 added +0.72%% to close at another fresh high but volumes were lighter than usual. Gains were led by broad based gains across all sectors with IT (+1.64%) and Materials (+1.51%) enjoying the best of the day’s gains. Credit markets followed with US HY index closing ½ point higher and IG spreads nearly 2bp tighter on the day. In Europe, Crossover and Main were 21bps and 5bps tighter, respectively. It was a solid day for commodities with the CRB index, WTI, Gold and Silver up +1.4%, +1.6%, +1.0% and +2.3%, on the day.

It was somewhat telling to see the muted reaction in core rates despite a broad based rally in various risk assets. The 10-year US Treasury yield pretty much finished the day virtually unchanged at 1.67%. Renewed interest in fixed income assets is broadly consistent with recent fund flow trends. In their latest fund flow report, our equity strategists highlighted a reversal in recent trends with inflows into bond funds outgained equity funds. All major categories of debt funds saw good inflows mainly led by US bond funds and International bond funds.

Company earnings wise it was a quiet start to the week. We saw less than a dozen S&P 500 firms report and the number of beats and misses for both EPS and sales were broadly balanced in halves. In Europe we saw 10 corporate results yesterday and the beat:miss ratios were 70%:30% for sales but 45%:55% for EPS. We except reporting activity to pick up again today with 38 S&P 500 and 20 Stoxx600 firms scheduled for today.

Asian equities are taken higher by the positive US sentiment overnight. Chinese markets remained closed while the Hang Seng and KOSPI are +0.8% and +1.2% respectively. Credit spreads are edging tighter led by a strong European and US session yesterday. The Asia iTraxx index is 3bp tighter overnight. New issues remain the main focus for Asian investors with YTD volumes in EM Asia already running at 20% more than the same period last year.

Back to Europe, Enrico Letta will make his first official visit to Berlin today as Italy’s Prime Minister. PM Letta will meet with Mrs Merkel today and a joint press conference is expected at 6pm Berlin time. This is then followed by a dinner meeting so we’ll see if we get any interesting headlines this evening. PM Letta yesterday said that Italy will find strategies to boost growth without compromising the necessary process of restructuring public finances. The new government is seeking to delay a scheduled increase in VAT and suspend the collection of the controversial property tax. PM Letta is also proposed lowering payroll taxes to boost employment.

In terms of today we have a rather eventful data calendar in Europe. Spanish GDP, Eurozone inflation and unemployment stats for the Eurozone and Germany are the key ones of note. We also have retail sales data from Germany and France. In the US, the FOMC will start its two-day policy meeting today while data wise Chicago PMI and the Conference Board Consumer Confidence will be the highlights. All of these ahead of a Labour Day break for main markets (eg. Hong Kong, Singapore, Germany) tomorrow.


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