Markets All Too Quiet Ahead Of Inflation, Retail Sales Data

Asian stocks and S&P futures are both feeling the weather this morning, while European stocks are little changed as traders have decided to hold back until today’s key US CPI and retail sales data is released in under two hours.

Commodities have posted another modest rebound, driven by a rise in metal prices that has helped ease a China-led rout even as oil traded modestly in the red. The Bloomberg Commodity Index rose for a third day, recovering from a 16-month low on May 9.

A dip on Wall Street overnight on signs of weak consumer spending and waning enthusiasm over the recovery in European corporate earnings has put MSCI’s gauge of world stock markets on track for its first weekly loss in four. “We’ve had a nervous twitch about China, over this week,” said Sean Darby, chief global equity strategist at Jefferies told Reuters. “We’ve had a bit more of a regulatory overhang coming through in the financial system.”

China’s banking regulator this week launched yet another emergency risk assessments of lenders’ new business practices, as Beijing extends its crackdown on shadow banking.  Meanwhile, with corporate earnings seasons in the U.S. and Europe drawing to a close investors, focus is likely to shift back to central banks, particularly in the United States, where inflation pressures are growing.

Massively overbought European stocks continue to struggle for direction after the biggest, if relatively modest, drop in three weeks on Thursday as investors assessed global earnings and mixed U.S. economic data.  As a result, European stock markets steadied this week after a torrid rally in recent weeks. Company profits are expected to grow 20 percent in the first quarter, the best corporate results in a decade, according to Morgan Stanley. The Stoxx Europe 600 was little changed in early trading, with AstraZeneca Plc climbing 4.8 percent while Cie. Financiere Richemont SA slumped 4.9 percent. European outperformance this year against global peers remains intact, with the benchmark’s 10 percent gains outpacing the 7 percent rise on the S&P 500. Greek stocks snapped a their longest winning streak in two decades.

“European stocks are still in the sweet spot of basking in the removal of political risk in Europe for the time being, though it is somewhat ironic that we could see a modest decline on the week as investors take stock,” said Michael Hewson, chief markets analyst at CMC Markets.

S&P 500 futures were down 0.3 percent after the underlying gauge fell by the same amount Thursday.

The Bloomberg Dollar Spot Index headed for its best week of the month as bets stack up on a Federal Reserve interest-rate increase next month. Accelerating German economic growth, where Q1 GDP came in line at 1.7% Y/Y, failed to ignite buying of stock or upset bonds as investors signaled overbought fatigue. Treasury yields fell, tracking a move in core European government bonds as gold extended a rebound from a two-month low and industrial metals including copper, nickel and zinc advanced.

The yield on 10-year Treasury notes fell two basis points to 2.37 percent, after retreating three basis points Thursday. Yields for the euro zone’s weaker borrowers, such as Italy, Portugal and Spain, were all also 1 to 3 basis points lower as investors awaited announcements of the volumes for expected bond sales next week by France and Spain.

Oil prices held recent gains as traders expected OPEC-led production cuts to extend beyond the middle of this year and as U.S. crude inventories fell to their lowest levels since February. International Brent crude futures were at $50.78 per barrel. U.S. West Texas Intermediate crude futures were at $47.85 per barrel, both little changed on the day.

Key reports on Friday are forecast to show U.S. inflation and retail sales both increasing in the last month, and may validate the case for the Fed to keep raising interest rates; alternatively one or both missing big and all those shadow bets about no rate hike in June will suddenly get much more attention. For now, however, the sellside remains optimistic: “We expect inflation pressures to remain solid in the economy, as labor markets continue to tighten and the dollar and commodity prices are broadly stable,” Barclays Plc economist Blerina Uruçi wrote in a client note.”

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Bulletin Headline Summary From RanSquawk

• European trading in tepid fashion with eyes on the US data CPI and Retail Sales scheduled later in the session.
• Modest softening seen in US Treasury yields has pulled USD/JPY a little further away from the 114.00 level
• Looking ahead, highlights include US CPI, Retail Sales and Baker Hughes Rig Count

Market Snapshot

• S&P 500 futures down 0.2% to 2,385.50
• STOXX Europe 600 up 0.1% to 394.87
• MXAP down 0.3% to 150.55
• MXAPJ down 0.2% to 492.23
• Nikkei down 0.4% to 19,883.90
• Topix down 0.4% to 1,580.71
• Hang Seng Index up 0.1% to 25,156.34
• Shanghai Composite up 0.7% to 3,083.51
• Sensex down 0.3% to 30,161.49
• Australia S&P/ASX 200 down 0.7% to 5,836.90
• Kospi down 0.5% to 2,286.02
• German 10Y yield fell 1.7 bps to 0.415%
• Euro up 0.04% to 1.0865 per US$
• Brent Futures down 0.2% to $50.67/bbl
• Italian 10Y yield rose 4.4 bps to 1.999%
• Spanish 10Y yield fell 1.1 bps to 1.636%
• Brent Futures down 0.2% to $50.67/bbl
• Gold spot up 0.3% to $1,228.56
• U.S. Dollar Index little changed at 99.65

Top Overnight News from Bloomberg

• Sprint Corp. is said to have started preliminary talks to merge with T-Mobile US Inc., the latest attempt to consolidate in a market watched closely by U.S. regulators
• RWE AG plans to expand liquefied natural gas business by making the most of supply contract with Qatar to meet Europe’s growing dependency on fuel imports
• Allianz SE affirmed commitment to bond manager Pacific Investment Management Co., signaling no plans to follow French rival Axa SA in putting some of U.S. money management business up for sale
• Trump Escalates FBI Fight With Comey Attack. The FBI Fights Back
• Brookfield Said Near Closing Deal for Renova’s TerraForm Stake
• Anthem’s Latest Court Loss Means Cigna Deal Is All But Dead
• Waymo’s Case Against Uber Sent by Judge to U.S. Prosecutors
• United Internet to Buy Drillisch in German Mkt Consolidation
• SoftBank Said Near Quitting Intelsat Deal Over Bond Standoff
• Mnuchin Said to Start Review That Could Ease Volcker Rule’s Bite
• Home Capital Says Reputational Hit Casts Doubt on Bank Survival
• Calpers Increased Wells Fargo Stake Before Opposing Directors
• Activision’s Hires Greeted With $40 Million Welcome Package
• GE to Close Baker Hughes Deal by Middle of the Year, Rice Says
• JPMorgan’s Frenkel Says Fed Hike Delay Has Negative Implications
• Monsanto, Bayer File Merger to Brazil Antitrust Regulator

In Asia equity markets have traded mixed following the lacklustre lead from Wall St. where retailers were pressured amid soft earnings from Macy’s, while a lack of tier-1 data or drivers added to the subdued one heading into the weekend. ASX 200 (-0.7%) traded in the red as REIT and energy sectors underperformed, while Nikkei 225 (-0.4%) was also negative alongside a firmer currency after USD/JPY relinquished the 114.00 handle. Shanghai Comp. (+0.7%) and Hang Seng (+0.1%) were choppy, but still outperformed the region following a CNY 459Bn Medium-term Lending Facility operation by the PBoC. 10yr JGBs tracked the gains in T-notes amid a risk averse tone in Japan, while the curve slightly steepened on mild underperformance in the super long end.

Top Asian News

• China Credit Growth Exceeds Estimates Despite Regulatory Curbs
• Kuroda Attending G-7 Says Free Trade Helps Reduce Inequality
• Temasek’s Fullerton Says Traders Are Mispricing Fed Rate Hikes
• Chinese Shares Diverge as Hong Kong Climbs and Mainland Drops
• Hitachi Sticks to $8.8 Billion Acquisition Plan to Lift Returns
• Noble Group Can’t Promise Return to Profits as Shares Plummet
• Lion Air Has Yet to Receive Notice on 737 Max Delivery Delay

European equities have started the last trading session of the week on a downbeat footing with macro newsflow throughout the Asian and European sessions particularly light thus far. From a sector standpoint, healthcare names are seen near the top of the board thanks to AstraZeneca (+5.3%) and a positive cancer drug update while Vivendi (+6.0%) have also helped to keep stocks afloat given their acquisition of a stake in Havas. To the downside, energy names lag in a pullback from recent gains with OPEC newsflow muted thus far. In fixed income markets, prices have shown some modest upside thus far amid light volumes and the week’s supply fully absorbed by the market. Focus for French paper will now begin turning towards the upcoming domestic Parliamentary elections with Harris polling showing a lead for Macron’s En Marche! Party. In the periphery, yields have come off modestly in early trade but with little in the way of notable traction.

Top European News

• Faster German Growth Buoys Draghi’s Firming Euro-Area Recovery
• Thyssenkrupp Slumps After Forecasting Negative Free Cash Flow
• ArcelorMittal Slides Even After Reporting Profit Doubled
• Richemont Chairman’s Son to Join Board as Profit Beats Estimates
• Pimco’s Strongest Inflows in Four Years Boost Allianz Earnings
• London Landlord Home Sales Plummet as Tax Changes Slash Returns
• Le Pen Hesitating to Run in Parliamentary Elections: Parisien
• De’ Longhi Seeks Major M&A as Coffee Boosts Growth, CEO Says
• Barclays CEO Tricked Into Replying to Email Hoax, FT Says

In currencies, the Bloomberg Dollar Spot Index was little changed after adding 0.7 percent this week, its best showing over a five-day period since mid-December.The yen rose 0.2 percent to 113.65 per dollar, paring its decline for the week to 0.8 percent. The euro gained 0.1 percent to $1.0873. The currency is down 1.1 percent for the week, the worst performance since March. Traders are awaiting the inflation and retail sales figures out of the US and to that end, we have seen little else other some intra range jostling as the market positions itself ahead of the dual release. Modest softening seen in US Treasury yields has pulled USD/JPY a little further away from the 114.00 level, but so far 113.50 holds. Pressure also coming from some GBP/JPY selling as the Pound loses ground in the wake of the Bo E/Q I R yesterday. Sellers of Cable continue to run into stubborn support ahead of 1.2830-35, but EUFt/GBP continues to offers a better route with the backdrop of support seen in EUFt/USD from the mid 1.0800’s. Cross rate resistance from 0.8460-70 worth noting at this point, but price action is relatively slow.

In comodities, oil lost 0.2 percent to trade at $47.75 a barrel even after clocking up a weekly gain of 3.3 percent. Gold advanced 0.4 percent to $1,229.75 an ounce after a 0.5 percent advance Thursday. Commodity prices are all moving up to a very modest degree at the present time. Traders here have been largely unresponsive towards the OPEC comments which strongly suggest there will be an extension to the production cuts in place, but after healthy drawdowns revealed in both the API and DoE reports, WTI has pushed up through first resistance at USD47.00, and backed up by the concurrent Brent reclaim of USD50.00. The follow through has petered out at USD48.00 and USD51.00 respectively, but consolidation mode has since set in. Gold managed to hold the support seen ahead of USD1200 as the USD recovery stalls, but along with Silver, remain way off the recent highs. In metals, Copper is the lead metric, and we have pushed above USD2.50 again after holding the band of support stretching down to USD2.45.

Looking at today’s calendar, there’s some important data out in the US where we’ll get the April retail sales figures, while the other big release is the April CPI report. The final release today is the preliminary University of Michigan consumer sentiment survey for May. Away from the data the Fed’s Evans is due to speak at two separate events this afternoon at 9am and 10.30am while the Fed’s Harker speaks at 12.30pm.

US Event Calendar

• 8:30am: US CPI MoM, est. 0.2%, prior -0.3%; Ex Food and Energy MoM, est. 0.2%, prior -0.1%
  • US CPI YoY, est. 2.3%, prior 2.4%; Ex Food and Energy YoY, est. 2.0%, prior 2.0%
  • US CPI Core Index SA, prior 251
• 8:30am: Real Avg Weekly Earnings YoY, prior -0.01%; Real Avg Hourly Earning YoY, prior 0.3%; Retail Sales Advance MoM, est. 0.6%, prior -0.2%
  • Retail Sales Ex Auto MoM, est. 0.5%, prior 0.0%; Retail Sales Ex Auto and Gas, est. 0.4%, prior 0.1%; Retail Sales Control Group, est. 0.4%, prior 0.5%
• 10am: U. of Mich. Sentiment, est. 97, prior 97; Current Conditions, prior 112.7
• 10am: Business Inventories, est. 0.1%, prior 0.3%

Central Banks

• 9am: Fed’s Evans Speaks in Dublin
• 10:30am: Fed’s Evans Live Interview on Bloomberg TV
• 12:30pm: Philadelphia Fed’s Harker Speeks at Drexel University

DB’s Jim Reid concludes the overnight wrap

Things have been so quiet this week that an ape walking down our trading floor would have been a welcome distraction. Having said that the S&P 500 broke its record run of 10 out of 11 days with a sub +- 0.20% move last night by falling an earth shattering -0.22%! Believe it or not, that was the biggest fall in the S&P since April 21st. In fairness it did recover somewhat into the close after being down as much as -0.74% at one stage. The VIX also rose to its ‘highest’ level in over a week at 10.60. Much of the blame for the early weakness in equities was directed at the US retail sector following disappointing earnings reports out of both Macy’s and Kohl’s, which sent shares down -17% and -8% respectively. Nordstrom shares were also down -8% during the day, only to then plummet a further -6% in extended trading last night after the company delivered a similarly disappointing earnings release after the close. It was a similar story in the CDS market for US retailers yesterday too with 5y CDS for Macy’s and Nordstrom ending up about 25bps and 16bps wider respectively. It’s worth noting that these earnings updates come before today’s US retail sales report for April. Market consensus is for a +0.6% mom headline print and +0.4% mom rise in the core.

Across the border Canadian equity markets also weakened in the wake of Moody’s downgrading the Canadian banks. Meanwhile that early weakness in the US appeared to be the main catalyst also for European markets finishing in the red yesterday. The Stoxx 600 closed -0.52% at the closing bell. The FTSE 100 was flat, outperforming mainland Europe, but that was mostly to do with the leg lower for Sterling (-0.40% but down -0.68% at its lows) following the BoE meeting. We’ll touch on that in more detail below. Meanwhile bond markets took slightly divergent paths. Yields were generally higher across the board in Europe with 10y Bunds edging up just over 1bp to 0.428% and yields in Italy and Spain just over 4bps higher. That may have partly reflected ECB board member Peter Praet’s comments who said fiscal authorities should plan sufficiently ahead to prepare for the time when it will be appropriate to start a gradual process of normalization. In the US 10y Treasuries were 2.7bps lower at 2.388% which appeared to be more in-keeping with the slightly more risk-off tone. Bucking the trend though was Oil which extended its rebound with WTI (+1.06%) back near $48/bbl again.

The macro data didn’t really move the dial too much although it was interesting to see US continuing claims print at 1918k which is the lowest since November 1988. After that you’d have to go back to 1973 to find the next lowest reading. Initial jobless claims also came in at 236k making it 114 straight weeks below 300k. In other news headline PPI rose by more than expected in April (+0.5% mom vs. +0.2% expected) while the core also edged up +0.7% mom and more than expected (+0.2% expected).

Refreshing our screens this morning bourses for the most part are tracking the moves in Europe and on Wall Street yesterday. The Nikkei (-0.69%), Kospi (-0.43%) and ASX (-0.89%) are all in the red while the Hang Seng is currently flat. Bucking the trend with the rest of Asia once again is China where the Shanghai Comp is +0.59%. News has emerged overnight of a trade deal between China and the US. The agreement is said to cover 10 areas where negotiators from both countries have reached consensus according to Bloomberg. Agricultural trade and market access for financial services appear to be two sectors in the agreement.

Staying in Asia, just after we went to print yesterday, our Chinese economist Zhiwei Zhang gave a quick update on the Chinese economy. He highlighted that although broad credit growth dropped sharply in Q1, most of it was due to slower growth of credit to non-bank financial institutions, as the government tied up regulatory loopholes. Credit growth to the real economy only moderated slightly.He therefore does not expect growth to collapse even if the quarterly growth profile is slowing (6.9% yoy in Q1 to 6.8%, 6.6% and 6.5% in Q2, Q3 and Q4 respectively). Zhiwei is more concerned about risks in 2018 than this year. High CPI inflation is unlikely to be a problem for the PBoC this year, due to low food prices. The market interest rates are high now, but the government has the option to bring them down if necessary. But the PBoC may have less room to manoeuvre in 2018. CPI inflation may move to above 3% sometime in 2018, partly due to the low base effect this year. Moreover, the cumulative effects from the Fed rate hikes will constrain the PBoC’s policy space as well. See the following link for more and within it a link to his more detailed piece on Q1 marking the growth peak https://goo.gl/bVlJPn.

Coming back to the BoE, as expected there were no surprises with the MPC leaving policy unchanged with the May Inflation Report and the statement that policy can go in either direction was repeated. DB’s Mark Wall noted that the modest hawkish tilt from the last meeting in March continued into the May Inflation Report and if anything became more explicit. Mark also notes that at the last meeting, the BOE admitted upside and downside risks, but the rhetoric around growth was more constructive, Forbes voted for a hike and “some members” were ready to join her quickly if data surprised to the upside. The only difference in May is the BOE no longer mentions downside risks. Yet despite this net hawkish move and an inflation profile that is now upward sloping in the final year of the trajectory, BOE Governor Carney’s presentation of the Inflation Report at the press conference did not give the market a strong reason to price more risk of tighter UK monetary policy. The analysis and the presentation felt at odds with one another in Mark’s view. DB’s baseline view remains that BOE monetary policy will stay unchanged for the foreseeable future. The BOE’s presentation of the forecasts may differ after the elections, but then the outlook will become increasingly a function of the tone of the Brexit negotiations. Judging by recent comments from both sides, there will need to be some early goodwill created in the negotiations to ensure the BOE assumption of “smooth” exit remains valid.

Looking at today’s calendar now, this morning in Europe we’ll be kicking off in Germany where we will get a first look at the Q1 GDP growth print (market expecting +0.6% qoq while our team expect +0.4% qoq) and the final revision to April CPI. The other data out this morning is the Euro area’s industrial production report for March. There’s some important data out in the US this afternoon. As noted earlier we’ll get the April retail sales figures, while the other big release is the April CPI report. Our US team expect both headline and core CPI to have increased +0.2% mom (which is in-line with the market). The final release today is the preliminary University of Michigan consumer sentiment survey for May. Away from the data the Fed’s Evans is due to speak at two separate events this afternoon at 2pm BST and 3.30pm BST while the Fed’s Harker speaks at 5.30pm BST. The ECB’s Lane is due to speak this morning at 9.30am BST.

Before we sign off, it’s worth also highlighting some of the scheduled events this weekend. Tomorrow President Trump is due to deliver a keynote address. On Sunday China President Xi Jingping is due to host world leaders including Russia’s Putin and the IMF’s Lagarde at a summit. Emmanuel Macron will also be sworn in as French President on Sunday while perhaps the most important event is the German state election in North Rhine-Westphalia – Germany’s most populous state.