Futures Rebound As Yellen's Market-Lifting Track Record Offsets Greek Gloom

With the Fed's June FOMC statement in just over 7 hours and a Yellen press conference to follow shortly, one in which nobody expects the Fed will announces its first rate-hiking cycle in nine years despite repeated clues by Yellen that not only is there froth in the market but that the Fed has no dry powder to contain the next crisis when it emerges (even though a rate hike will catalyze the next crisis), traders have chosen to ignore the chatter from Greece which is getting worse by the hour, and unlike recent days, have bought risk overnight based on one simple technical: of the five press conferences in ten Fed meetings held by Yellen as Chairman, the S&P finished higher 80% of the time. And that, in a world dominated by HFT "big data" statistics is all one needs to know to load the boat.

Here is Deutsche's preview of today's potentially quite historic FOMC meeting: "DB’s Chief Economist Peter Hooper expects that we get no clear verbal signal pointing to a September liftoff tonight, but the Committee’s economic projections and Yellen’s message at the press conference will not be interpreted as inconsistent with that outcome. Peter notes that one important aspect of the meeting will be how upbeat the Committee sounds about economic developments in the opening paragraph of the statement as well as in Yellen’s statement at the press conference. The message will be that things are gradually moving into place for liftoff, but without clear indication or suggestion that it will be September, particularly given the still significant data to come between now and then. Recent data supports a more upbeat tone relative to April, while housing numbers and the latest trade report support the view that the winter lull was largely transitory. On the inflation picture, Peter believes that although the level of prices is still significantly lower than the Fed eventually wants to see, this is not a picture that would inhibit them to raising rates later this year, rather it’ll be interesting to see if Yellen acknowledges the green shoots in wage inflation or if she chooses to ignore or downplay them. In terms of economic projections, it’s likely we see the 2015 growth forecast downgraded, however Peter see’s little reason for the projections of either unemployment or core PCE inflation to change appreciably. Given little change in the prospective key drivers of policy rates, there therefore seems little reason to adjust the dot charts meaningfully. It’s possible that we see some of the higher dots marked down, but the important cluster around the median dot is expected to remain where it is for this year and next in Peter’s eyes. It’s possible that we do see the median dot for the longer-term neutral rate edge lower to 3.5% however."

Speaking of Greece, one thing nobody expects and yet which the ECB could finally trigger is the so-called nuclear option, when the central bank refuses to raise or even reduces the ELA support for the Greek insolvent banking system. Such a development would launch the endgame culminating with either a Grexit or the Tsipras government resigning.

In any event, despite the lack of progress to resolve the situation in Greece, signs of fatigue following days of selling became apparent today and in turn meant that equity indices in Europe fluctuated between minor gains and losses since the open. In equity specific news, Remy Cointreau traded sharply higher after reporting higher FY operating profit and also raised dividend. Elsewhere, reports suggesting that from German press that Deutsche Telekom are in discussions with Comcast over the German telecoms T-Mobile unit.

Short-Sterling curve bear steepened aggressively following the release of the latest UK jobs report (better than expected wage growth data), while the release of the BoE minutes failed to reveal any meaningful change in the stance (9-0 vote). As a result of the re-pricing, a rate hike is now expected to take place in June 2016 vs. August 2016 prior to the release.

In Asia stocks traded mixed with the Shanghai Comp (+1.65%) despite sustained worries of a fresh clampdown on margin financing and this week’s wave of new IPOs. As virtually everyone has noted by now, the only question is not if but when the Chinese bubble pops. However, with the government firmly behind the biggest Chinese asset inflation in 8 years, this can go on for a while. The Hang Seng (+0.7%) fluctuated between gains and losses, while Nikkei 225 (-0.4%) remains in the red, after overturning its opening gains. The ASX 200 (+1.1%) is the session’s best performer lifted by financials as the sector trimmed yesterday’s losses, pushing the index back above its 200 DMA.

The CHF strengthened across the board, on touted safe haven bid, lack of liquidity, uncertainty over the FOMC and pre-positioning ahead of the SNB policy meeting tomorrow. Consequent USD weakness ensured that EUR/USD traded higher, while GBP/USD benefited from better than expected UK jobs report, while the release of the BoE minutes failed to reveal any meaningful change in the stance (9-0 vote).

WTI and Brent crude futures trade higher, supported by a weaker USD and yesterday’s API inventory report which showed a second consecutive drawdown in crude oil stockpiles. While the release of the DoE crude inventories are expected to show a drawdown of 1800K which is also supporting price action in oil. Spot gold has continued to gradually edge lower throughout the session alongside the stronger USD.

In summary: European shares trade between gains and losses with the autos and retail sectors underperforming and oil & gas, banks outperforming. Bank of England officials said factors holding back economy and keeping inflation below target are fading. U.K. wage growth higher than est., unemployment in line. Japan exports rise less than estimated. The French and Swedish markets are the worst-performing larger bourses, the Italian the best. The euro is stronger against the dollar. Japanese 10yr  bond yields fall; Spanish yields decline. Commodities gain, with silver, gold underperforming and Brent crude outperforming. U.S. mortgage applications, FOMC rate decision due later.

Market Wrap

  • S&P 500 futures up 0.3% to 2094.5
  • Stoxx 600 down 0.1% to 385.6
  • US 10Yr yield up 3bps to 2.33%
  • German 10Yr yield up 1bps to 0.81%
  • MSCI Asia Pacific down 0% to 146.4
  • Gold spot down 0.3% to $1178.9/oz
  • 27.7% of Stoxx 600 members gain, 70% decline
  • Eurostoxx 50 -0.2%, FTSE 100 -0.3%, CAC 40 -0.5%, DAX -0.2%, IBEX +0.1%, FTSEMIB +0.6%, SMI -0.4%
  • Asian stocks little changed with the Shanghai Composite outperforming and the Nikkei underperforming; MSCI Asia Pacific down 0% to 146.4
  • Nikkei 225 down 0.2%, Hang Seng up 0.7%, Kospi up 0.3%, Shanghai Composite up 1.6%, ASX up 1.1%, Sensex up 0.5%
  • Euro up 0.14% to $1.1264
  • Dollar Index down 0.15% to 94.85
  • Italian 10Yr yield down 7bps to 2.26%
  • Spanish 10Yr yield down 8bps to 2.28%
  • French 10Yr yield down 2bps to 1.23%
    S&P GSCI Index up 1.3% to 441.6
  • Brent Futures up 2% to $65/bbl, WTI Futures up 1.7% to $61/bbl
  • LME 3m Copper up 0.3% to $5767.5/MT
  • LME 3m Nickel up 0.6% to $12800/MT
  • Wheat futures up 2% to 504.3 USd/bu

Bulletin Headline Summary from Bloomberg and RanSquawk

  • CHF strengthens on touted safe haven flow, while GBP gains ground across the board following better than expected UK jobs report.
  • Greece remains in focus, EU officials have requested that EU leaders attend a summit this Saturday, while a senior EU Officials said that sufficient cover is in place in the Eurozone in reference to Greece.
  • Going forward, focus will be on the FOMC announcement and the weekly DoE Inventories report.
  • Treasuries decline before Fed concludes two-day meeting, with statement and updated SEP due at 2pm followed by Yellen presser.
  • FOMC statement may note improving economic data although Fed appears unlikely to begin hiking rates in June, based on published research from economists/strategists
  • Having soothed investors for the past seven years with low interest rates, bond-buying and other interventions aimed at shoring up weak economies, monetary policy makers are slowly stepping out of markets in a variety of ways
  • France’s European commissioner, Pierre Moscovici, said requests being asked of Greece were far from “crazy,” amid the direst warnings yet from the Greek central bank chief about the consequences of failure to reach an accord
  • Bank of England officials said factors constraining price growth were “likely to dissipate fairly shortly,” and could strengthen “notably” by year-end
  • Separate data published Wednesday showed U.K. pay growth accelerated to the fastest in almost four years
  • The ECB’s ABS purchase program should be judged on more than purchases and new issuance, a central bank official said; criteria should also include success in removing “stigma” from ABS and issuance of more “simple and transparent” deals
  • It’s no longer a question of whether China’s stock market rally is a bubble, but when the bubble will burst, according to a growing number of analysts; Bocom Intl says a crash may come within six months
  • About 1% of the global population, or about 73 million people, have been forced to leave their homes amid a spike in armed conflict over the past four years, the Institute for Economics  and Peace said in a report published on Wednesday
  • Sovereign 10Y bond yields mostly lower. Asian stocks mostly higher, European stocks mixed, U.S. equity-index futures gain. Crude oil and copper gain, gold lower

US Event Calendar

  • 7:00am: MBA Mortgage Applications, June 12 (prior 8.4%)
    2:00pm: FOMC sets overnight bank lending rate target, est. 0% to 0.25% (prior 0% to 0.25%), issues updated SEP; Yellen news conference to follow

DB's Jim Reid completes the overnight wrap

Greece headlines are set to be put to one side tonight when at 7pm GMT, the focus will be switched over to the Fed when we get the statement outcome from the FOMC meeting and Fed Chair Yellen’s post-meeting press conference shortly after. 10y Treasury yields fell for a second consecutive day yesterday, finishing 4.7bps lower at 2.310%, while yields on Fed Funds rates also edged down after a fairly nervous session for markets following mixed US housing data, the continued ping-pong political battle concerning Greece and of course ahead of today’s main event.

Looking forward first of all to tonight and the FOMC, DB’s Chief Economist Peter Hooper expects that we get no clear verbal signal pointing to a September liftoff tonight, but the Committee’s economic projections and Yellen’s message at the press conference will not be interpreted as inconsistent with that outcome. Peter notes that one important aspect of the meeting will be how upbeat the Committee sounds about economic developments in the opening paragraph of the statement as well as in Yellen’s statement at the press conference. Peter expects that the message will be that things are gradually moving into place for liftoff, but without clear indication or suggestion that it will be September, particularly given the still significant data to come between now and then. Recent data supports a more upbeat tone relative to April, while housing numbers and the latest trade report support the view that the winter lull was largely transitory. On the inflation picture, Peter believes that although the level of prices is still significantly lower than the Fed eventually wants to see, this is not a picture that would inhibit them to raising rates later this year, rather it’ll be interesting to see if Yellen acknowledges the green shoots in wage inflation or if she chooses to ignore or downplay them. In terms of economic projections, it’s likely we see the 2015 growth forecast downgraded, however Peter see’s little reason for the projections of either unemployment or core PCE inflation to change appreciably. Given little change in the prospective key drivers of policy rates, there therefore seems little reason to adjust the dot charts meaningfully. It’s possible that we see some of the higher dots marked down, but the important cluster around the median dot is expected to remain where it is for this year and next in Peter’s eyes. It’s possible that we do see the median dot for the longer-term neutral rate edge lower to 3.5% however. So all eyes on tonight.

As mentioned, Fed Funds expectations slipped slightly yesterday leading into tonight’s meeting with the Dec15, 16 and 17 contracts 1bp, 2bps and 3.5bps lower in yield respectively although in reality are still at the higher end of the recent range. Treasuries were reasonably well bid with Greece concerns once again fueling something of a safe haven bid, while the Dollar index firmed modestly (+0.20%). Perhaps surprisingly it was a stronger day for US equities as the S&P 500 (+0.57%) and Dow (+0.64%) benefited from a boost in consumer staples stocks as M&A activity helped lift markets.

Data flow in the US was disappointing at the margin. Housing starts for May generated headlines following a -11.1% mom (vs. -4.0% expected) print, falling sharply to 1036k from 1165k in April. Despite a better than expected building permits reading meanwhile (+11.8% vs. -3.5% expected) as permits climbed to eight year highs, the WSJ noted that this figure was most probably overstated given the surge in applications due to the expiration of tax-abatement laws this month in New York which was evident by the bulk of the rise in permits coming from the Northeast region. Yesterday’s data saw the Atlanta Fed GDPNow forecast for Q2 real GDP growth stay at 1.9%, although that was after the soft housing starts data being offset by Monday’s uptick in forecasts of real investment in petroleum and natural gas after the IP report.

Moving on, another day passed by in the Greece saga with little material progress. Instead, hopes appear to be fading for any agreement at tomorrow’s Eurogroup meeting after German newspaper Bild reported Greek Finance Minister Varoufakis as saying that Greece will not present a list of new proposals at the meeting. Prime Minister Tsipras was as defiant as ever meanwhile. Speaking in parliament at a meeting of Syriza’s parliamentary group, Tsipras targeted criticism at the level of the IMF, saying that the Fund ‘bears criminal responsibility for the situation in the country’ while also blaming Creditors on the insistence of denying any discussion on debt relief. German Chancellor Merkel extended her conciliatory comments meanwhile, maintaining that she wants to do everything possible to keep Greece in the euro zone and ‘concentrating all my energy on helping the three institutions and Greece find a solution’. Later in the day US Treasury Secretary Lew called Tsipras urging him to make a ‘serious move’ to compromise. For now the focus turns to tomorrow’s Eurogroup meeting. In the event of a deadlock, suggestions are that an emergency EU Leaders Summit will be called over the weekend to try and place a formal deadline on Greece. Today’s ELA review will also be important in the context of any potential funding cut off.

There was plenty of volatility in European markets yesterday where we saw risk assets bounce off their lows for the day. Indeed, having traded as much as 1% down in early trading the Stoxx 600 then rebounded to finish +0.64% on the day, while there were similar moves for the DAX (+0.54%) and CAC (+0.51%). There was similar intraday volatility in peripheral bonds meanwhile. Having traded some 12bps wider at the open and breaking 2.5% for the first time since August last year, 10y Spain yields then rallied to finish 5.7bps lower on the day at 2.343%. Italy (-1.9pbs) and Portugal (-4.0bps) also had similar rallies as markets bounced around on the various Greek headlines although it appears that Merkel’s more conciliatory comments helped lift markets. 10y Bunds, meanwhile, benefited from safe haven flows for most of the session, closing 2.7bps lower in yield at 0.795%. It was a weaker day once again for Greek assets as Greek equities finished 4.77% lower to mark the third consecutive day of losses of at least 4.50% with a MTD return now of -14.82%. Greek 2y and 10y yields finished 95bps and 75bps higher respectively.

It was a reasonably busy day for data flow in Europe yesterday although one which offered few surprises. German CPI for May was unchanged in the final revision at +0.1% mom and +0.7% yoy. The headline CPI reading for the UK was also as expected at +0.1% yoy, lifting the economy out of deflation, however the core came in slightly below expectations at +0.9% yoy (vs. +1.0% expected). RPI (+1.0% yoy vs. +1.1% expected) and PPI (-1.6% yoy as expected) were mixed. The German ZEW investor confidence survey for June weakened meanwhile, with the reading falling 2.8pts to 62.9 (vs. 63.0 expected), the second consecutive monthly decline as mounting Greek concerns weighed. The expectations index also slipped, falling to 31.5 from 41.9 last month – the lowest level since November.

Elsewhere the ECB’s OMT program - the details of which were announced in September 2012 - received a boost yesterday after getting the backing of the EU Court of Justice. The ECJ stated that ‘the programme for the purchase of bonds on secondary markets does not exceed the powers of the ECB in relation to monetary policy and does not contravene the prohibition of monetary financing in member states’. The programme initially came about from Draghi’s promise to do ‘whatever it takes’ to save the Euro and the verdict will be a welcome one for the ECB President in his crisis fighting armoury.

Looking at our screens this morning, bourses are trading with little obvious direction in the Asia timezone. Losses are being led out of China where the Shanghai Comp (-1.26%) and Shenzen (-1.54%) have suffered sharp declines for the third consecutive day. The Nikkei (-0.40%) is also lower while the Hang Seng (+0.34%) and ASX (+0.97%) are both higher in trading this morning. Elsewhere, the Yen is fairly unchanged versus the Dollar at ¥123.45 after Japan posted slightly more disappointing than expected export numbers for May (+2.4% yoy vs. +3.0% expected). Imports contracted 8.7% after expectations for a 7% decline. 10y Treasuries are 0.7bps lower in yield meanwhile, while other bond markets in Asia are generally following suit.

Onto today’s calendar now, the final May reading for Euro area CPI will be of focus for markets this morning, as will the release of the BoE minutes and various UK employment indicators. There will likely be plenty of Greece headlines to digest too. Over in the US the attention is on the outcome from the FOMC meeting and the post meeting press conference from Fed Chair Yellen.