Futures Flat On FOMC, GDP Day; Bunds Battered After Euro Loans Post First Increase In Three Years

Today we get a two-for-one algo kneejerk special, first with the Q1 GDP release due out at 8:30 am which will confirm that for the second year in a row the US economy barely grew (or maybe contracted depending on the Obamacare contribution) in the first quarter, followed by the last pre-June FOMC statement, in which we will find out whether Janet Yellen and her entourage of central planning academics will blame the recent weakness on the weather and West Coast port strikes and proceed with their plan of hiking rates in June (or September, though unclear which year), just so they can push the economy into a full blown recession and launch QE4.

This is how Deutsche Bank previews today's macroeconomic twofer:

By tonight we should have a lot more to talk about with regards to the US economy and the Fed as we see the first estimate of Q1 GDP and the FOMC conclusion. As we discussed earlier in the week the consensus for growth is 1% with DB now at 0.7% and the Atlanta Fed GDPNow at 0.1%. While we think some of the likely weakness is temporary we still believe that the US will continue to struggle to get close to its former trend rate of growth as far as the eye can see. That's partly due to sympathy with secular stagnation views and partly due to global weakness combined with a stronger dollar in a beggar thy neighbour world. We don't think the Fed shares this view so the FOMC statement (no press conference) will be interesting as to how much they put recent weakness down to transitory factors. DB’s Peter Hooper expects that the Fed will leave the door open for a June hike but sound balanced enough to leave market expectations for a rate hike by December (with high probability) if not September in place. However our read on this is that it leaves plenty of the time for the data to go either way so although we'll learn a lot about their thoughts on the recent weakness, the reality is that data will blow everything out of the water over the coming months.

Speaking of more QE, while hardly noticed in the US, overnight the Bank of Thailand shot a few rounds in the global currency war when it cut rates unexpectedly from 1.75% to 1.50%, followed by the Swedish Riksbank, which kept rates on hold at a negative 0.25%, however boosted its own QE by SEK40-50 billion as yet another bank tries to outpace its competitors in the race to the currency devaluation bottom.

Also overnight we got a German Bund auction which was once again technically an "uncovered" failure with just €3.65 billion in bids for a €4 billion issue, not helped when stops were tripped to the downside earlier, blowing out by a whopping 8 bps, and touching as much as 0.24% following news yesterday that Gundlach was joining Gross in shorting the German Treasury.

But perhaps the biggest catalyst for the selloff in the government complex as well as the jump in the EURUSD above 1.10 for the first time in three weeks is that for the first time in three years, lending by Euro-area banks to companies and households rose, which according to Bloomberg is "a sign that record monetary stimulus is finally reaching the economy."

From Bloomberg:

Bank lending increased 0.1 percent in March from a year earlier, the ECB said in a statement on Wednesday. Loans had posted annual declines in every month since May 2012. Lending climbed 0.2 percent from February.


“With its more aggressive stance, the ECB is finally bringing the euro zone back to at least trend growth,” said Holger Schmieding, chief economist at Berenberg Bank in London. “Money and credit point to a firming business cycle.”

Of course, while one can be skeptical about these numbers and ask just how many of the trillions in NPLs had to be netted out of the calculation, the risk for the liquidity addicts is that loan creation will surge in the coming months and thus force the ECB to halt QE prematurely. As a reminder, commercial bank loan creation has been the all critical missing link from the European recovery.

Then again, Europe did "represent" a loan recovery in early 2012 before the latest credit dead cat bounce faded just as fast.

Back to markets, where we saw Asian stocks trade mostly lower following a mixed Wall Street close, which saw the NASDAQ 100 underperform after Twitter’s poor earnings release, dampening sentiment across Asian tech names. Shanghai Comp (-0.01%) and Hang Seng (-0.15%) fell and are on course for their first 2-day decline in 2 months, weighed on by several poor earnings. ASX 200 (-1.2%) was the worst performer with all sectors firmly in the red after yesterday’s AUD rally. Japanese stock markets were closed due to the Showa Day holiday.

European equities trade mixed with the telecommunications sector outperforming following talk of a possible combination between Sky (+0.6%) and Mediaset (+1.2%). The basic materials sector led the way lower with iron prices retracing some of its 20% gains seen this month. Large cap earnings in the form of Volkswagen saw the DAX heavyweight post a beat on revenue and profit which led to carmaker to initially open higher by 2%, only to pare the move after participants focused on CEO Winterkorn warning that market conditions for the auto-market will be challenging this year.

In fixed income markets, UST’s have edged lower alongside German paper with the UST 10y yield reaching 2% for the first time since March 17th. Weakness in Bunds have also pushed the 10y yield back above 0.2% after tripping stops to the downside at 159.00 and following the recent technically uncovered Bobl auction. German paper is also weighed upon by an influx of supply from the Eurozone in today's session.

Today provides a flurry of central bank releases with the Riksbank kicking off proceedings after they unexpectedly kept interest rate on hold at -0.250% which sent EUR/SEK lower by more than 700 pips. Furthermore, the Riksbank expanded their quantitative easing programme further by SEK 40-50bln and warned of a possibility of further cut in rates in the near future.

The USD-index has ticked lower with market participants exiting their long USD positions ahead of the FOMC meeting today which is expected to be relatively dovish given the slew of lacklustre data throughout the month. GBP/USD has benefitted from broad based USD weakness and reached 8 week highs as investors are caught short shrugging off some of the political uncertainty surrounding the UK. EUR/USD has also seen supported with slightly positive rhetoric from EU’s Moscovici stating that negotiations are close however, maintaining that progress remains slow.

USD/JPY has squeezed higher after RANsquawk sources noted a carry-trade driven hedge fund buying in USD/JPY in addition to favourable yields in UST’s as it trades at 2% for the first time in over a month. For EUR/JPY, main desks are eyeing a break of 131.50 which could result in the cross to test 135.00.

WTI and Brent crude futures reside in modest negative territory after yesterday’s API’s which showed a build of 4.2mln vs. a Prev. 5.5mln, a record 16th consecutive weekly build. In precious metals markets, spot gold is seen lower in a retracement of yesterday’s gains with Chinese gold output rising 14.72% Y/Y to 110,704 tons.

In summary: European shares fall with the basic resources and chemicals sectors underperforming and telco, utilities outperforming. Fed to Release Interest Rate Decision. Saudi King Puts Son Second-in-Line to Throne. Riksbank Increases Bond Purchases as Key Rate Left Unchanged. The Swedish and Dutch markets are the worst-performing bourses, the Italian the best. The euro is stronger against the dollar. German 10yr bond yields rise; French yields increase. Commodities decline, with nickel, silver underperforming and wheat outperforming. U.S. mortgage applications, FOMC rate decision, GDP, personal consumption, core PCE, pending home sales due later.

Market Wrap

  • S&P 500 futures down 0.1% to 2109.8
  • Stoxx 600 down 0.1% to 405.7
  • US 10Yr yield little changed at 2%
  • German 10Yr yield up 6bps to 0.23%
  • MSCI Asia Pacific down 0.8% to 156.1
  • Gold spot down 0.5% to $1206.6/oz
  • Asian stocks fall with the Shanghai Composite outperforming and the ASX underperforming.
  • MSCI Asia Pacific down 0.8% to 156.1; Nikkei 225 is closed, Hang Seng down 0.1%, Kospi down 0.2%, Shanghai Composite up 0%, ASX down 1.8%, Sensex down 0.5%
  • Euro up 0.19% to $1.1002
  • Dollar Index down 0.18% to 95.92
  • Italian 10Yr yield up 6bps to 1.44%
  • Spanish 10Yr yield up 6bps to 1.39%
  • French 10Yr yield up 7bps to 0.49%
  • S&P GSCI Index down 0.4% to 432.7
  • Brent Futures down 0.5% to $64.3/bbl, WTI Futures down 0.6% to $56.7/bbl
  • LME 3m Copper down 0.5% to $6088/MT
  • LME 3m Nickel down 1.2% to $13290/MT
  • Wheat futures up 0.1% to 476.5 USd/bu

Bulletin headline summary from Bloomberg and RanSquawk

  • The USD-index is softer ahead of today’s FOMC meeting as market participants square positions before the highly awaited release
  • US Treasury yields reach 2% for the first time since March 17th due to an influx of supply this week from the US
  • Looking ahead sees the release of German CPI, US GDP, Pending Home Sales, DoE crude inventories as well large cap earnings from Mastercard, Mondelez, Valeant and Time Warner
  • Treasuries steady before FOMC statement at 2pm and as week’s auctions conclude with $15b 2Y FRN, $29b 7Y notes; WI yield 1.765% vs 1.792% in March.
  • FOMC statement today likely to mention weaker 1Q due to temporary factors, reflect reduced chances of June liftoff, based on published research and interviews
  • Lending by euro-area banks increased 0.1% in March from a year earlier, according to ECB, after posting annual declines in every month since May 2012
  • Germany received EU3.649b bids at an auction of 5Y notes, missing EU4b goal; Bundesbank retention rose
  • ECB raised the amount of emergency liquidity available to Greek banks while signaling that access to such funds may become more difficult as bailout talks remain deadlocked
  • Greek Finance Minister Yanis Varoufakis said he and his wife were attacked by a group of hooded anarchists while they dined in central Athens Tuesday night
  • Hillary Clinton’s presidential run is prompting new scrutiny of the Clintons’ financial and charitable affairs—something that’s already proved problematic for the Democratic frontrunner, given how closely these two worlds ove rlap
  • Sovereign bond yields higher.  Asian, European stocks lower, U.S. equity-index futures decline. Crude oil, gold and copper lower

US Event Calendar

  • 7:00am: MBA Mortgage Applications, April 24 (prior 2.3%)
  • 8:30am: GDP q/q, 1Q, est. 1%  (prior 2.2%)
    • Personal Consumption, 1Q, est. 1.7% (prior 4.4%)
    • GDP Price Index, 1Q, est. 0.5% (prior 0.1%)
    • Core PCE q/q, 1Q, est. 1% (prior 1.1%)
  • 10:00am: Pending Home Sales m/m, March, est. 1.1% (prior 3.1%); Pending Home Sales y/y, March, est. 5.1% (prior 12%)
  • 2:00pm: FOMC Rate Decision, Upper Bound, est. 0.25% (prior 0.25%)

DB's Jim Reid concludes the overnight recap

Turning to markets it looks like Asian investors are mostly on the back foot overnight. Indeed The Shanghai Composite (-0.35%) is having its first back to back loss in two months on news that one of the biggest brokerages in China has restricted the number of shares eligible for margin lending. The softer tone also comes after the numerous press chatter of Chinese QE over the last few days. Our former colleague Jun Ma has made some comments on the QE story. Indeed the now Chief Economist for PBOC said that he sees no need for PBoC to inject funds via bond purchases as the Chinese central bank has sufficient tools to maintain liquidity at reasonable levels, including targeted re-lending, interest rates and reserve requirement ratios. He also added that direct funding to government by central bank is forbidden according to China’s law. China’s 1yr rate swaps rose the most in a month following comments by Jun as markets scaled back hopes of QE.

Elsewhere in Asia the Hang Seng, KOSPI and the ASX 200 are down -0.5%, -0.6% and -1.3%, respectively. The Dollar is holding firm overnight against major currency pairs ahead of the Fed meeting announcement. Asian credit markets are focused on digesting new supply while the 10yr Treasury is largely unchanged at around 2% as we go to print.

Speaking of Treasuries the 8bp move higher in the 10yr was perhaps one of the more notable market moves during yesterday’s trading session. This was the biggest one day spike since early March and the first flirtation with the 2% mark for about 6 weeks. The 30yr yield rose 9bps higher to 2.70%. Staying in the US the S&P 500 (+0.28%) finished the day a little higher helped by gains across all sectors except Consumer Discretionary. Sentiment was boosted by positive earnings and encouraging signs from Greece’s debt negotiations even though the data flow was quite mixed. On the earnings front it was a busy day for US companies yesterday. A total of 40 companies reported of which 68% of them exceeded EPS estimates but only 40% of them did the same with sales forecasts. Data wise we saw Consumer Confidence in April plunge to the lowest level in four months whilst the Richmond Fed manufacturing index fell more than expected. US credit spreads were fairly stable with the market continuing to focus on the heavy supply. Oracle’s new deal was the largest print of the day as the company raised US$10bn across six tranches to fund cash dividends and share buybacks.

Moving to Europe, DB’s resident Greece expert George Saravelos had a note out yesterday with his latest views. In it he highlighted, “a ray of sunshine” in the situation due to three recent developments. First that opinion polls have started to turn with the electorate turning more cautious on the Greek government's negotiation strategy whilst support for a European solution has remained consistently strong both of which have been increasing pressure on the government. On the second positive recent development George points to the reshuffle of the Greek government’s negotiation team which has seen officials more closely aligned to the moderate deputy PM who has being given a greater role. The third and most important development according to George is PM Tsipras’s Greek TV news interview on Monday evening in which the PM signaled that a referendum would be his preferred route (rather than a general election). The implication of this is that it signals that an agreement which crosses the government’s “red lines” is being actively discussed and represents an internally consistent strategy from the PM for breaking the deadlock. Given these developments George believes the most likely outcome for Greece is a "reluctant agreement" followed by a referendum for popular approval. George sees this as the most positive outcome as it would likely pass and be a catalyst for the inclusion of more moderate parties into the government.

Looking back to the European session yesterday, it was a weak day for European markets with the Stoxx 600 down -1.6% led by a -2% fall in the DAX. European credit also struggled with iTraxx Crossover around 5bps wider. Performance wasn’t helped by a day of relatively weak data and some earnings disappointments. Indeed only about 56% of the European companies that reported yesterday managed to surprise EPS on the upside (TNT Express, MAN, and Santander were some of those who missed). That said sales performance was quite strong with over three quarters of those beating estimates. In terms of other data, UK Q1 GDP came in weaker than expected at +0.3% QoQ (vs. +0.6% previously and +0.5% expected).

On the topic of geopolitics the US Navy is said to have sent a destroyer towards the Persian Gulf on Tuesday after Iran took control of a cargo ship it accused of trespassing territorial waters. The cargoship carried 24 crew members and Iranian forces were said to have fired shots across the ship’s bow. The episode raised tensions between the two countries a few weeks after world powers and Iran reached a tentative agreement in which Tehran would drastically cut its enrichment of uranium in exchange for an easing of sanctions.

Looking to the day ahead, in Europe we have Spanish March retail sales (expected up +3.6% YoY), Italian April consumer confidence (expected steady 110) and German CPI April inflation (expected to fall to -0.1% MoM). Over in the US the big events will be the already previewed Q1 GDP and FOMC statement. In terms of earnings in Europe we will get results from the likes of VW, Barclays and Fiat whilst in the US we will get reports from Time Warner, MasterCard and others.