Last night's docket of atrocious Japanese economic data inexplicably managed to push the Nikkei lower, not because the data was ugly but because the scorching inflation - the highest since 1991 - mostly driven by import costs, food and energy as a result of a weak yen, and certainly not in wages, has pushed back most banks' estimates of additional QE to late 2014 if not 2015 which is as we predicted would happen over a year ago. As a result the market, addicted to central bank liquidity, has had to make a modest reassessment of just how much disconnected from reality it is willing to push equities relative to expectations of central bank balance sheet growth. However, now that the night crew trading the USDJPY is replaced with the US session algo shift which does a great job of re-levitating the pair, and with it bringing the S&P 500 higher, we expect this brief flicker of red futures currently observable on trading terminals to be promptly replaced with the friendly, well-known and "confidence-boosting" green. The same goes for Treasurys which lately have been tracking every directional move in stocks not in yield but in price.
Yesterday's latest record US session close petered out in the Asian session and most bourses are trading a little weaker today. Losses are being paced by the Nikkei. It’s a different picture in China where Bloomberg is reporting that there is growing consensus that China’s targeted stimulus is beginning to morph into something larger. The PBoC has made a few changes to policy around the edges to ease pressures for some banks (e.g. targeted RRR cuts), complementing the State Council’s recent announcements on tax breaks and faster railway spending.
In Europe, BNP Paribas (-5.4%) are the notable underperformer after pre-market reports the US DoJ are to seek more than USD 10bln penalty from the Co., a value which is twice as large as figures reported last week. This has seen both Credit Agricole and SocGen trade lower who are also ex-dividend and therefore cementing the CAC’s position as Europe’s underperformer (-0.3%). Elsewhere, despite metals markets holding steady throughout the session, the recent losses across the complex have weighed on the basic materials sector and consequently pushed the FTSE 100 lower due to the number of mining names in the index.
Looking ahead, today’s session sees the release of the US PCE deflator, Chicago PMI, University of Michigan confidence, a host of Fed speakers and ECB’s Costa.
Bulletin headline summary from RanSquawk and Bloomberg
- Treasuries head for gains on the week and month, 30Y bond yields poised to fall for fifth straight month, last seen in 2006; market focus shifting to ECB next week, possibility for additional accommodation.
- China will cut reserve requirement ratio “properly” for some banks which granted a certain amount of loans to agricultural borrowers and smaller companies in support of the real economy, without giving more details
- BNP Paribas SA fell the most in 15 months in Paris trading after a person familiar with the matter said U.S. authorities are seeking more than $10b to settle federal and state investigations into dealings with sanctioned countries including Sudan and Iran
- Japan’s industrial production and household spending fell more than forecast and inflation surged to a 23-year high on a tax rise that is pinching consumers who have seen limited wage gains
- Calls within Obama’s own party for Veterans Affairs Secretary Eric Shinseki to resign continued to mount as the top Democrat in charge of U.S. House races said it’s time for him to step down
- Pro-Russian rebels downed a military helicopter in eastern Ukraine, killing a general and 13 troops, as a spokesman for Obama blamed “outside” assistance in providing weapons * Russia has pulled back most of its troops from the border with Ukraine, according to a U.S. defense official
- Sovereign yields higher. Nikkei -0.34%, Shanghai little changed, most other Asian equity markets lower. European equity markets mixed, U.S. stock futures lower. WTI crude lower, gold little changed, copper rises
US Econ Calendar
- 8:30am: Personal Income, Apr., est. 0.3% (prior 0.5%)
- Personal Spending, Apr., est. 0.2% (prior 0.9%)
- PCE Deflator m/m, Apr., est. 0.2% (prior 0.2%)
- PCE Deflator y/y, Apr., est. 1.6% (prior 1.1%)
- PCE Core m/m, Apr., est. 0.2% (prior 0.2%)
- PCE Core y/y, Apr., est. 1.4% (prior 1.2%)
- 9:00am: ISM Milwaukee, May, est. 52 (prior 47.26)
- 9:45am: Chicago PMI, May, est. 61 (prior 63)
- 9:55am: U. Mich. Confidence, May final, est. 82.5 (prior 81.8
- 11:00am POMO: Fed to purchase $850m-$1.1b notes in 2036-2044 sector
- 3:00pm: Fed issues QE calendar for June
Japanese Core CPI rose to its highest level since Feb 1991, further negating any hope of more easing from the BoJ and prompting several large investment banks to push back their BoJ easing expectations.
EU & UK HEADLINES
Markets have used today to take a breather from recent sharp gains in fixed income products as participants book profits ahead of the weekend (Jun-14 Bund -30 ticks), with the yield on the US 10yr steadily moves back towards the 2.50% level.
BoE's Bean (Dove) said there is no case for immediate rate rise and will increase rates gradually when the time comes. (Wales Online)
Final Barclays month end extensions show Pan-Euro Agg at +0.04y (Prelim +0.04y), Sterling-Agg at +0.06y (Prev. +0.02y);
Fed's George (Non-FOMC – Hawk) predicts the Fed will raise the main rate faster than it forecasts citing leveraged loans as banks are taking on more risk. George also added the Fed will need to resist pressure to back away from rate hikes. (BBG)
Final Barclays month end extensions show US Treasury at +0.12y (Prelim +0.13y).
BNP Paribas (-5.4%) are the notable underperformer after pre-market reports the US DoJ are to seek more than USD 10bln penalty from the Co., a value which is twice as large as figures reported last week. This has seen both Credit Agricole and SocGen trade lower who are also ex-dividend and therefore cementing the CAC’s position as Europe’s underperformer (-0.3%). Elsewhere, despite metals markets holding steady throughout the session, the recent losses across the complex have weighed on the basic materials sector and consequently pushed the FTSE 100 lower due to the number of mining names in the index.
FX markets remain relatively subdued with the USD index still above its 200DMA and failing to weigh on its major counterparts, with markets now looking ahead to tier 1 US data for any firm direction.
Spot gold has traded steady throughout the morning and above the USD 1250 handle, with little newsflow to provide the yellow metal with any firm direction. In metals commentary, amid the ongoing platinum strikes in South Africa the country's largest energy provider, Eksom, has suggested that it cannot supply the 500MW that mines require to operate at full capacity, and is only able to supply 400MW.
CME lowered Natural Gas Henry Hub future initial margins for specs by 10.5% to USD 2,805 per contract from USD 3,135. (CME) WTI crude futures have traded with marginal losses across the morning in a pullback of yesterday’s gain after the Seaway Pipeline closure and DoE Inventories report which despite the headline coming in at a build, it was smaller than that of the API release.
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DB's Jim Reid summarizes the balance of the overnight events
Following yesterday's discussion on bond yields and the updated chart showing how close we are again to 500 years yield lows, we had one of the largest email responses/discussions since I published my all time top 10 box sets at the back end of last year. So it seems box sets and bonds really get our readers going. Given the interest in the former I should say that we are currently watching one of the best new series I've seen in a while. It’s a BBC show I bought on DVD called "Line of Duty". Series 1 was very good and series 2 (the latest one) has started very well. I'm gripped. No spoilers from those for saw it on telly earlier this year please. Since I named my top 10 we've watched True Detective (very good), started Suits (enjoyable mindless escapism) and watched the entire 8 series of Curb Your Enthusiasm. My wife hadn't seen it before so I had the pleasure of watching it for a second time.
Talking of repeats, the biggest recurring theme in financial markets at the moment seems to be new yield lows in bonds and record highs in US equities. As we enter the last trading day of May US long bonds have now rallied every month of the year, and the last time we saw a five month streak like this was 2006. Treasuries also rallied hard again initially yesterday before reversing the gains as the S&P 500 (+0.54%) closed out at another record high. It doesn't seem that good or bad data notably alters the path of assets one way or another at the moment as central bank liquidity continues to trump everything. We're building up to a fascinating ECB meeting next week. It’s fair to say expectations are relatively high and have contributed to the recent bond moves.
Yesterday's -1% US Q1 real GDP print was not a huge surprise given the additional data released since the first reading however it was slightly worse than expected. Clearly the market will largely shrug off the number because of the weather and to a large degree it is correct to do so. However for us it does highlight how shock proof economies are whilst nominal GDP is as low as it is now across the globe. Q1's US nominal GDP was only 0.3% annualised. Since 1961 there have only been 7 quarters worse in nominal GDP terms - 4 of which occurred in the GFC 5 years ago. Historically, bad recessions used to bottom out at these kind of nominal GDP numbers. So in this low growth and inflation world we don't have much cushion for an outside event. This is part of the reason why we continue to think more specific nominal gdp targeting should at least be debated around the globe.
Treasury yields rallied with the GDP print and hit intraday lows shortly before the Richmond Fed’s Jeff Lacker hit the newswires. In a TV interview, Lacker (a voter next year) shrugged off the Q1 number pointing to the drop in inventories which he described as a transitory factor. In terms of inflation, he said there are signs that prices were picking up and he was hopeful that inflation would accelerate to around 2% by the end of this year. This may have been a factor in the subsequent rise in yields but we also had better than expected jobless claims (300k vs 318k expected) and some were wondering whether there were any more buyers when yields had hit an intraday low of 2.40%. There was also talk that today’s April Core PCE deflator, a key inflation indicator for the Fed, may surprise to the upside, given normalisation of healthcare costs. For the record, the market is expecting the PCE deflator to print at 1.6% y/y in the headline and 1.4% y/y in the core (the latter, if correct, would be the highest print since early 2013).
The firm close to the US session has petered out in the Asian session and most bourses are trading a little weaker today. Losses are being paced by the Nikkei (-0.1%) after Japan’s April CPI printed at its highest level since 1991 (3.4% y/y headline, 3.2% y/y ex food). Inflation was boosted by the recent sales tax hike, but nevertheless a number of forecasters on the Street are predicting that there will be no further easing from the BoJ in 2014. It’s a different picture in China where Bloomberg is reporting that there is growing consensus that China’s targeted stimulus is beginning to morph into something larger. As we have written about in recent days, the PBoC has made a few changes to policy around the edges to ease pressures for some banks (e.g. targeted RRR cuts), complementing the State Council’s recent announcements on tax breaks and faster railway spending. We’ll be interested to see if this gets reflected in the official Chinese manufacturing PMI for May which will be released this weekend. Today though, the HSCEI is up 0.5% and Chinese CDS is outperforming at 4bp tighter.
Taking a quick tour of the other headlines, there has been plenty other Fed headlines aside from Lacker in the last 24 hours. The latest has been the Kansas City Fed’s Esther George (voter in 2015) who advocated a rate hike shortly after QE ends and he said that banks are responding to low rates by engaging in riskier activities. The SF Fed’s John Williams has a different tone, commenting that in times of high long-term unemployment, the Fed had the flexibility to let inflation exceed their target in an effort to achieve full employment.
Following warnings about trading revenues from Citigroup, JPM and CS in recent weeks, yesterday Goldman Sachs joined a growing chorus of broker dealers suggesting that low volatility was leading to subdued trading activity amongst investors. This was a key theme which came out of DB’s global financials conference and there was plenty of debate at the conference as to whether this was a structural vs cyclical problem. Other themes from the conference included concerns about regulations and the potential implications of negative interest rates in Europe.
On the topic of bank regulation, the WSJ writes today that US regulators and a large French bank are negotiating whether the bank will temporarily lose the ability to transfer money into and out of the US, in a response to potential evasion of US sanctions. The report was published late yesterday and may weigh on European bank stocks today. There is further bad news for European banks after Moody’s changed 82 EU bank’s rating outlooks to “negative” from “stable” reflecting the EU’s adoption of the single resolution mechanism and the explicit inclusion of burden-sharing with unsecured creditors.
Looking at the day ahead, US data will again be the focus before attention shifts to next week’s ECB meeting and US payrolls. Probably the most interesting of the data will be the April PCE Core and Deflator indices but we also get May's Chicago PMI and April's personal income and spending numbers. Canada also reports Q1 GDP. In Europe, German retail sales and Italian CPI round out the week’s calendar. Over the weekend, watch out for China’s official May manufacturing PMI (Sunday).