That deep red premarket color on your terminal means it must be a non-Tuesday. Just kidding.
Anyone expecting Abe to announce definitive, material growth reform instead of vague promises to slay a "deflation monster" last night was sorely disappointed. The country's PM, who may once again be reaching for the Immodium more and more frequently, said the government aims for 3% average growth over the next decade and 2% real growth, raising per capita income by JPY 1.5 million. The market laughed outright in the face of this IMF-type silly vagueness (as well as the amusing assumption that Abe will be still around in 7 years), which left untouched the most critical aspect of Abenomics: energy, and nuclear energy to be specific, and sent the USDJPY plummeting well below the 100 support line, printing 99.55 at last check. But more importantly, after surging briefly at the opening of the second half of trading to mask a feeble attempt at telegraphing the "all is well", it rolled over with a savage ferocity plunging 700 points from an intraday high of 13,711 to just above 13,000 at the lows: yet another 5% intraday swing in a market which is now flatly laughing at the BOJ's "price stability" mandate. Tonight's drop has extended the plunge from May 23 to 18.4% meaning just 1.6% lower and Japan officially enters a bear market.
Europe, clearly secondary to yet another night of Japanese fireworks, reported a second estimate of GDP at -0.2%, same as the previous and same as expected: sorry folks, the recession is going on, despite Rajoy's obvious attempts to put the upward thumb on Spanish economic data, with Spain's Service PMI coming at a laughable 47.3 from 44.4 previously, the highest in 23 months. Other Service PMI readings were largely weaker than expected (Germany 49.7, Exo. 49.8, Italy 46.5, Exp. 47.5, France 44.3, Exp. 44.3), leading to the broader Eurozone Service PMI number printing at 47.2 vs Exp. 47.5. Most importantly, and proving there is no recovery on the European horizon as long as the lending machinery remains clogged up was Eurozone retail sales, which plunge from a -0.2% change in March to -0.5% in April. However, none of the above will matter once the Japanese carry trade dynamics change as Abenomics begins to be faded much more more aggressively in the coming weeks, resulting in a first slow then fast blow out in peripheral yields. Then the real "post-fauxterity" fun begins.
Summarizing the news in bulletin format via Bloomberg:
- Dollar Index little changed as markets await further clues ahead of tomorrow’s ECB meeting and U.S. nonfarm payrolls Fri. USD/JPY declines on disappointment over Abe’s speech while GBP/USD gains on better than est. U.K. PMI services.
- Today: U.S. ADP employment change for May due, est. 165,000; April factory orders est. +1.5% M/m; Fed Beige Book released
- Euro-zone 1Q final GDP showed -0.2% contraction; euro-zone final services; composite PMIs remained unchanged at 47.7 in May
- U.K. PMI Services index rose to highest since March 2012; making it less likely BoE further actions are needed, ING says
- Abe vowed to “slay deflation monster” with fiscal, monetary policy; USD/JPY fell to weakest in 2 days on comments
- Fed’s Fisher (non-FOMC voter) says he sees end of 30-yr bond-market rally while calling for reduction in QE
- Japan to target 2% annual growth through FY22, Nikkei says, to be discussed at tomorrow’s meeting of economic council
- Australian 1Q GDP grew 2.5% Y/y vs est. 2.7%; AUD weakened, odds of Aug. rate cut rose to 58% in OIS pricing vs 49% pre- GDP
- Brazil will scrap tax on foreign investment as it seeks to arrest decline in the real
- Treasuries gain; 10-yr yield -2bps to 2.13%
- Nikkei -3.8%
- MSCI Asia-Pacific -1.8%
- Euro Stoxx 600 -0.7%
- Oil higher, gold and silver reverse Asian gains
SocGen covers the macro highlights:
A rise in the correlation of EUR crosses with commodities and equities has been noted this week, and not only has it changed the dynamics somewhat it is giving participants something else to think about as we wait for today's US ADP employment and non-manufacturing PMIs and ISM. If the manufacturing PMIs are any guide, then firmer European data are likely to play out and will diminish the arguments for a very dovish ECB message tomorrow (to the extent that a reining back in was not planned already). Eonia rates have been edging higher ever so gradually from the May lows as we have moved into June, with Eonia for the December meeting having more than doubled to 0.08%. Stronger data today will keep up the tendency to pay up, even though no one is ready to totally discard the idea of further stimulus yet.
The inverse correlations for EUR/USD (and EUR/CAD, EUR/NOK, EUR/PLN) vs Eurostoxx are in contrast to the positive correlation of EUR/JPY with Eurostoxx, and this shows how the EUR is considered a risk-sensitive currency these days, whilst the JPY remains the favourite defensive play when risk aversion sets in. The influence of rate differentials has ebbed somewhat, especially for EUR/USD even as EU swaps try to narrow the gap with the US, but this is more relevant for crosses like EUR/JPY and EUR/GBP. Whilst we see evidence of stronger Q2 economic momentum in the UK, the fact that short-term rates in the eurozone and the UK are not going anywhere justifies the narrowest of ranges we have observed so far this month. If Draghi tomorrow puts his weight behind the article published in the FT yesterday (ECB backs away from using bazooka), then psychologically this will force markets to reel in the dovish bets on euro rates. It is in that context that the services PMI and retail sales will have to be assessed today. Unconfirmed ECB sources yesterday claimed that the central bank is divided on a further cut in the refi rate. Whether that means the ECB can steal the thunder from US data is extremely doubtful. ADP and ISM employment components will be dissected this afternoon for a final stab at Friday's payrolls guesstimate.
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DB's Jim Reid recaps the balance of overnight events.
Fixed income asset classes continue to come under pressure across EM and DM, with fairly notable intra-day vol in some areas, as investors fret over the Fed’s potential path of asset purchases. Following yesterday’s moves, 10yr yields in USTs, bunds and gilts are +52bp, +37bp and +41bp off their recent lows respectively. Similarly, major DM credit indices have pulled back from the cyclical tights seen last month including US CDX IG (+13bp off the tights), European iTraxx (+17bp) and Australian iTraxx (+18bp). Interestingly US CDX IG traded between - 2bp and +5bp yesterday, a range wider than any seen for a few months. There is clearly nervousness around the Fed.
It remains to be seen whether the correction will continue, but for now the technical picture continues to generate headlines amid reports of outflows across a number of fixed income funds. Bloomberg reported yesterday that PIMCO’s Total Return Fund, which is the world’s largest mutual fund, had clients redeem $1.32bn last month. The article notes that the redemptions were the first since 2011, which although not insignificant remain fairly small in context of the fund’s $285bn size. In high yield, there have been recent reports of outflows from the SPDR Barclays High Yield and iShare/iBoxx High Yield Corporate bond funds (Bloomberg), which is adding further nervousness to the entire asset class. Indeed, it hasn’t just been fixed income which has been at the behest of the Fed's likely next move. Yesterday saw the S&P500 (-0.55%) oscillate between highs of +0.35% and lows of -1%, helped along by a number of Fed speakers. Fed Governor Sarah Raskin bemoaned the state of the labour market, saying that the unemployment rate underestimates the true scope of the unemployment problem, and also noting that those who do find employment often must accept low quality positions. Meanwhile, FOMC dissenter Esther George repeated her call to slowdown stimulus saying the risk of tightening too late was just as high as if the Fed tightened too soon.
Turning to Asia, equities are trading with a negative tone overnight, taking their lead from the cautious end to the US session yesterday. The Hang Seng (-0.8%) and KOSPI (-1%) are both trading in the red, in contrast to the better sentiment in Japanese equities. Prime Minister Abe outlined his economic growth strategy overnight. The measures announced include the establishment of special strategic zones for high density construction, and the opening up of energy, health and infrastructure sectors. The Nikkei and TOPIX indices initially traded up as Abe spoke but subsequently sold off as some were disappointed by the lack of detail around the plans. Dollar yen has seen volatile trade, and is currently 0.3% lower as we go to print (99.7).
Staying in Japan, the Nikkei reported that the BoJ’s balance of JGBs grew by more than JPY8trillion last month to JPY104trillion as of the end of May. Its balance sheet has surpassed the JPY100 trillion yen mark for the first time. According to the article, the central bank purchased 40-year JGBs for the first time (JPY45billion) last month, with its holdings of 10-year JGBs increasing the most. Interestingly, the Nikkei is also reporting that the BOJ's REIT purchases are bumping up against a ceiling.
Turning to the day ahead, the US ADP employment report and non-manufacturing ISM are the key data points ahead of Friday’s all-important payrolls. Consensus is for +165k private level change for the ADP report and forecasters are looking for a 53.5 ISM print. Factory orders, MBA mortgage applications and the Fed’s Beige book round out the US dataflow. In Europe, services PMIs and Q1 GDP for the Euroarea are scheduled.