Nikkei 14,000 Holds, Shanghai 2,000 Holds, But USDJPY 101 Breaks Bad

Another right of perfectly round number supports: while the Shanghai Composite once again dipped below 2000 overnight to as low as 1991 only to close modestly higher, and the Nikkei followed suit, also sliding below the psychological support level of 14,000 to an intraday low of 13,964 only to close just above 14,000 if in the red, it was the USDJPY that has suffered the most technical pain when shortly after 2:30 am eastern time, the USDJPY dropped by nearly 40 pips, hours after the BOJ indicated that not only is it happy with where in the QE process it stands, but hinted there may well be no more QE, and certainly nothing imminent . In the process, the USDJPY fully smashed the 200 DMA, with the next key parallel support being the 200DMA in the EURJPY at 138.08 (which was at 138.34 last). When that too gives way, it is a straight line to double digits in the USDJPY, and the countdown to the end of the Abe regime begins in earnest.

Aside for technical squaring there has been little overnight newsflow, aside from Germany selling €3.772 billion in bunds which had a retention of 24.6%, the highest since 2012, which meant the auction was technically "uncovered", although in Europe when it comes to snapshots of liquidity things are getting progressively worse (just observed the nearly two months in failed weekly sterilizations) so this is hardly a surprise. Additionally, UK retail sales ex autos soared 1.8% on expectations of a modest 0.5% rise, up from an upward revised 0.1% print, putting even more pressure on the BOE to do something, especially in light of a monstrous housing bubble that is no longer a secret to anyone.

After the BoJ left policy unchanged and the BoE minutes gave more hints of rate increases on the horizon, in what is shaping up to be another event-day on the US calendar, the market turns its attention to the Fed minutes to provide clues on US policy direction. Before the FOMC minutes come out, Fed chair Yellen and NY Fed President Dudley speak. Dudley took markets by surprise yesterday by saying that the exit strategy should entail reinvesting its mortgage portfolio until after the first rate increase.

But the biggest question of the day undoubtedly is: with Tuesday no longer "Tuesday" when it comes to the markets, will Wednesday be the new Tuesday, although since there is no POMO today,  it may

Bulletin headline summary from RanSquawk and Bloomberg

  • BoE minutes suggested an earlier hike would be required if rate hikes are to be gradual, this combined with a strong UK retail sales led GBP to outperform (briefly moving above 1.6900) and sent Gilts lower.
  • A technically uncovered new 10y Bund offering from the Bundesbank saw Bunds break below 146.00 and print session lows of 145.88.
  • Treasuries lower as market awaits release of April FOMC minutes; NY Fed’s Dudley yesterday said fed funds rate is likely to remain well below its historical average for current rate of inflation.
  • Minutes may go into prospects for long-run equilibrium fed funds rate, end of reinvestments, reverse repo facility and should show some discussion of exit principles, JPM chief U.S. economist Michael Feroli wrote yesterday
  • The Bank of England said the arguments in favor of an interest-rate increase are growing stronger for some officials as the economy recovers and the risk of financial imbalances mounts
  • Japan’s central bank refrained from boosting stimulus and raised its view of business investment as the economy shows signs of weathering the impact of the first sales-tax increase since 1997
  • Moody’s revised its credit outlook for Chinese developers to negative from stable, citing a slowdown in home sales growth as liquidity weakens and inventories rise in the coming 12 months
  • Obama’s administration will make public a secret legal memo it has used to justify drone strikes against U.S. citizens overseas who are suspected terrorists, an administration official said
  • The U.S. shifted a Marine contingent to Italy to prepare for the possible evacuation of American personnel from Tripoli, citing lessons learned from the 2012 attack in Benghazi as political turmoil intensified in Libya
  • Russia and China reached a deal to supply natural gas through a new pipeline between the two countries, paving the way for hundreds of billions of dollars in fuel sales over the next three decades
  • Sovereign yields mostly higher. Nikkei -0.2%, Shanghai +0.8%. European equity markets steady, U.S. stock futures gain. WTI crude higher, copper lower, gold little changed
  • Looking ahead, today sees a lack of tier 1 data until the FOMC minutes, before which markets will be looking out for comments from Fed voters and doves Yellen, Dudley and Kocherlakota as well as comments from non-voter George.

US Economic Calendar

  • 7:00am: MBA Mortgage Applications Central Banks
  • 10:00am: Fed’s Dudley speaks in New York
  • 11:00am: Fed’s Yellen speaks in New York
  • 12:50pm: Fed’s George speaks in Washington
  • 1:30pm: Fed’s Kocherlakota speaks in Minneapolis
  • 2:00pm: FOMC releases minutes from April 29-30 meeting
  • No POMO today

Asian Headlines

Bank of Japan kept monetary policy unchanged, alongside expectations as such JGBs and Nikkei 225 were little chnaged with the index down 0.2%. The Bank retained their promise to lift the monetary base to JPY 270trl, reaffirming that they are to continue easing until 2% inflation is stable. The JPY modestly weakened as the Bank kept further easing on the table, however markets quickly reversed this trend ahead of the European open as the BoJ provided nothing new and saw USD/JPY trigger stops below 101.00.

EU & UK Headlines

With a lack of tier 1 data or economic commentary out of the Eurozone, all eyes were on the UK's retail sales and BoE minutes. Heading into the release some speculated about a potential split in the MPC over the timeline for a rate rise by the central bank and also as rumours circulated of a stronger retail sales report. However, the minutes release revealed the MPC were unanimous in maintaining current rates and size of the APF facility, but did suggest an earlier hike would be needed if rate hikes are to be gradual. This hawkish comment combined with the forecast busting retail sales (M/M 1.8% vs. Exp. 0.5%) saw GBP/USD surge above the 1.6900 handle, with the UK curve aggressively steepening as gilts fell below the 111.00 handle.

Prelim Barclays month end extensions show Pan-Euro Agg at +0.04y, Sterling-Agg at +0.06y

US Headlines

The key risk event for the US is the FOMC minutes release with focus set to be on range of expectations from Fed officials on a timeline for the first Fed Fund Rate (FFR) hike. Also of note, Fed's Yellen, Dudley, George and Kocherlakota are all due on the speaker slate ahead of the release.

Prelim Barclays month end extensions show US Treasury at +0.13y


Equities opened lower across the board with BNP Paribas (-2%) the underperformer amid further litigation concerns, causing the CAC 40 to be laggard for the session. However, stocks did see a recovery as Italian paper was lifted, with the move being attributed to talk of domestic buying. This then saw a recovery of the periphery which filtered through to equities (Euro Stoxx +0.25%).


In early European trade USD/JPY broke below the 101.00 level, tripping stops on the way amid BoJ Governor Kuroda providing no hints of further easing. GBP was the outperformer for the session amid the slightly more hawkish BoE minutes release and particularly strong UK Retail Sales Release. Meanwhile, EUR/USD has gravitated to a 400mln in option expiries between 1.3700 and 1.3710.


WTI Crude futures reside in positive territory heading into the North American Open following an unexpected draw in API inventories and supply concerns out of Libya. Upside risk continues to be a theme in the energy markets heading into the driving season. Looking ahead, focus today is set to be placed upon the DoE's release, with the headline figure expected at 0K.

Large outflows seen in ETFs yesterday with a total outflow of 92,115oz (2.6 tonnes) led by SPDR and ZKB who had outflows of 57,778oz and 32,390oz respectively. This marks the lowest levels of holdings in SPDR since 2008. (RANsquawk/BBG)

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We conclude with Andy Reid's recap of recent events

In the absence of tier one macro data, markets continued their focus on central bank speakers with NY Fed’s Bill Dudley taking much of the limelight yesterday. Overall, Dudley’s speech was on the dovish side which was not a major surprise given that his views are thought to be generally similar to Yellen’s. There has been plenty of recent discussion about the Fed’s “exit strategy” and Dudley’s view is that the pace of Fed tightening will depend in large part on how financial conditions respond to policy changes. Dudley said “If the response of financial conditions to tightening is very mild—say similar to how the bond and equity markets have responded to the tapering of asset purchases since last December—this might encourage a somewhat faster pace. In contrast, if bond yields were to move sharply higher, as was the case last spring, then a more cautious approach might be warranted”. The FT’s Robin Harding interpreted this as suggesting that in the context of current low bond yields, Dudley’s words could imply a Fed that is more comfortable with earlier and faster rate hikes. Other points worth highlighting from Dudley’s speech was that he called for a tweak in the Fed’s exit strategy, preferring the Fed to keep reinvesting its mortgage portfolio until after it starts raising rates.

Mr Dudley said that raising interest rates first would give the Fed the flexibility to cut them again if the economy slows. While on the topic of the Fed’s exit strategy, The NY Fed President talked at length about the interaction between reverse repo and interest on reserve tools when the time comes for the Fed to tighten policy. In terms of the terminal fed funds rate, Dudley argued that due to demographics and higher capital requirements for banks, the long term equilibrium fed funds rate is likely to be permanently lower. Despite all of this, the reaction from the bond markets to the comments was relatively muted. 10yr  UST yields were already trading lower (-3.5bp) before the comments above and closed at around 2.51%.

While the macro data has been light over the last 24 hours, there was a steady stream of micro data but much of it had a negative tone. One of the more interesting pieces of company-specific news came from equipment-maker Caterpillar whose quarterly machine sales numbers are keenly watched as a leading indicator of capital spending. Caterpillar’s April sales numbers (global rolling 3-month) were down 13% yoy which marks the worst result since February 2010. By region, there was particularly weak demand across the emerging markets. Machine sales dropped 25% yoy in Caterpillar's Asia-Pacific region which compares to three-month rolling sales declines of 20% ending in March and 17% ending in February in that region. In LATAM sales were down 28%, versus -21% in March and -16% in February. European sales fell 24% yoy in the three months to April, compared with -21% in March and -9% in February. On a better note, machine sales were up 12% in North America for the three months ended April, which was better than March’s 6% and is the best result since the month of October 2012. So it seems there has been a divergence in Caterpillar’s demand between the US and the rest of the world. Caterpillar’s stock closed 3.6% lower yesterday, leading the overall US industrial goods sector down (-1.3%).

Turning briefly to overnight markets, it’s another mixed session for Asia with Chinese stocks getting a boost from reports that Chinese state-linked investors are buying domestic equities in an effort to lift sentiment (Reuters). The Shanghai Composite is 1.3% off the opening lows off the back of that headline, though the index is still hovering near the optically-important 2,000 level.

Elsewhere, the ASX200 is down 0.3% led by mining companies as markets react to another drop in iron ore prices (down another 1% yesterday) to 20-month lows. The BoJ concluded its latest policy meeting by keeping policy unchanged as was widely expected. There was minimal reaction in Japanese asset classes to the announcement and both the Nikkei (-0.3%) and USDJPY (-0.2%) are marginally softer today. BoJ governor Kuroda speaks shortly after we go to print.

Outside of Caterpillar’s sales numbers, other snippets of micro data also failed to inspire confidence. The overall S&P500 closed -0.65% weaker and one of the underperforming sectors was Retail (-0.9%) which was weighed by some surprisingly weak earnings updates from major retailers. Staples’ (-12.55%) Q1 earnings missed analyst estimates and at the same time its Q2 outlook was interpreted to be a fair bit weaker than market expectations. Leisure retailer Dick’s Sporting Goods fell 17.98%, the most in a decade of trading, after the company said that sales of golf and hunting gear for the year will be weaker than previously guided. The company said that Q2 earnings would come in around 20% lower than where analyst consensus was. Fashion-retailer Urban Outfitters fell -8.82% as investors reacted to its aftermarket earnings from Monday. Away from the retail sector there was talk of large global asset allocators and ETFs shifting funds out of stocks and into bonds, and that seemed to fit the overall theme of yesterday which was bonds stronger and equities weaker. Across the Atlantic the selloff in Italian BTPs continued and yesterday saw 10yr yields up another 12bp, dragging with it Spanish (+8bp) and Portuguese (+11bp) yields. European credit also suffered as a result particularly periphery European bank credit and this helped deliver the fifth straight widening for the iBoxx EUR corporate index (+0.3bp yesterday). Ahead of next month’s ECB meeting Governing Council member Ewald Nowotny warned that negative deposit rates “must still be thoroughly discussed”.

Turning to the day ahead, FOMC and Bank of England minutes will be the main focus. In terms of the FOMC, DB’s Joe Lavorgna highlights that the official meeting statement barely changed between March and April meetings. Nevertheless Joe thinks that there may be more clarity provided on the issue of labour market slack given the minutes of the previous meeting suggested participants had debated this topic at length. We might also get clues as to how FOMC members discussed the market’s reaction to the Fed funds “dot plot”.

In terms of central bank speakers, The NY Fed’s Dudley speaks again today in New York. The Fed’s George and Kocherlakota will also be commenting on monetary policy and the economy at separate events today. Fed Chair Janet Yellen will be addressing New York University graduates at a commencement ceremony at Yankee Stadium. It’s not clear that Yellen will be making comments about the economy but it appears unlikely that she will be using this opportunity to signal any drastic changes to her views.


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