Thursday, May 29, 2014

Morning Data ( US ) and Overnight News and Data from Asia and Europe May 29 , 2014 --- US Economy Shrank By 1% In The First Quarter: First Contraction Since 2011 ..... Initial Claims Drop Near Cycle Low "As Good As It Gets" Levels ...... Buying Of Bonds And Stocks Continues In Event-Free Overnight Session

 News and Data..... May 29 , 2014 and Overnight from Asia , Early Morning from Europe....



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Excluding Obamacare, US Economy Contracted By 2% In The First Quarter

As if the official news that the US economy is just one quarter away from an official recession (and with just one month left in the second quarter that inventory restocking better be progressing at an epic pace) but don't worry - supposedly harsh weather somehow managed to wipe out$100 billion in economic growth from the initial forecast for Q1 GDP - here is some even worse news: if one excludes the artificial stimulus to the US economy generated from the Obamacare Q1 taxpayer-subsidized scramble, which resulted in a record surge in Healthcare services spending of $40 billion in the quarter, Q1 GDP would have contracted not by 1% but by 2%!




US Economy Shrank By 1% In The First Quarter: First Contraction Since 2011

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Weather 1 - Quantitative Easing 0.
Spot on the chart below just how high the culmination of over $1 trillion in QE3 proceeds "pushed" the US economy.
Joking aside, even if the realization that nobody can fight the Fed except a cold weather front is quite profound, in the first quarter GDP "grew" by a revised -1.0%, down from the 0.1% first estimate, and well below the -0.5%  expected, confirming that while economists may suck as economists, they are absolutely horrible as weathermen.
Bottom line: for whatever reason, in Q1 the US economy contracted not only for the first time in three years, but at the fastest pace since Q1 of 2011. It probably snowed then too.
The breakdown by components is as follows:
Some highlights:
  • Personal consumption was largely unchanged at 2.09% from 2.04% in the first estimate and down from 2.22% in Q4. Considering the US consumer savings rate has tumbled to post crisis lows at the end of Q1, don't expect much upside from this number.
  • Fixed investment also was largely unchanged, subtracting another 0.36% from growth, a little less than the -0.44% in the first estimate and well below the 0.43% contribution in Q4.
  • Net trade, or the combination of exports and imports, declined from
    -0.83% to -0.95%, far below the positive boost of 0.99% in Q4.
  • The biggest hit was in the change in private inventories, which tumbled from -0.57% in the first revision to a whopping -1.62%: the biggest contraction in the series since the revised -2.0% print recorded in Q4 2012.
  • Finally, government subtracted another -0.15% from Q1 growth, more than the -0.09% initially expected.
So there you have the New Normal growth, which incidentally now means that in the rest of the year quarterly GDP miraculously has to grow at just shy of 5% in the second half for the Fed to hit the "central tendency" target of 2.8%-3.0%.
And now we await for stocks to soar on this latest empirical proof that central planning does not work for anyone but the 1%.


Initial Claims Drop Near Cycle Low "As Good As It Gets" Levels

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The flip-flopping noise of the initial claims data continues as last week's spike and miss is rebounded into this week's beat and drop. At 300k - down 27k from last week - initial claims are at their lowest since May 2007 - practically as good as it gets. Continuing claims continue to fall - now at 2.63 million - to the lowest in the cycle and lowest since Nov 2007.Continuing claims are falling at the fatest pace since 2010.

Initial claims near cycle lows...

As continuing claims plunges to cycle lows at the fastest pace since 2010...

Chart: Bloomberg









Buying Of Bonds And Stocks Continues In Event-Free Overnight Session

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The complete implosion in volume and vol, not to mention bond yields continues, and appears to have spilled over into events newsflow where overnight virtually nothing happened, or at least such is the algos' complete disregard for any real time headlines that as bond yields dropped to fresh record lows in many countries and the US 10Y sliding to a 2.3% handle, confused US equity futures have recouped almost all their losses from yesterday despite a USDJPY carry trade which has once again dropped to the 101.5 level, and are set for new record highs. Perhaps they are just waiting for today's downward revision in Q1 GDP to a negative print before blasting off on their way to Jeremy Grantham's 2,200 bubble peak after which Bernanke's Frankenstein market will finally, mercifully die.
Looking at overnight markets, 10yr UST yields are down another half a basis point in Japanese trading at around 2.43%. Other government bonds in Asia Pac are trading firmer today led by Australia (-9bp), New Zealand (-5bp) and Indonesia (-3bp). The gap tighter in US yields is creating a strong search for yield in Asian EM especially in credit as evidence by the strong performance of recent new deals and the strong demand in secondary. This is a continuation of the price action that we saw in LATAM late yesterday. EMFX bellwethers including the INR (+0.1%) and KRW (+0.05%) are trading firmer today, adding on to the solid gains posted yesterday. In Japan, the drop in retail sales in April was worse than expected (-4.4% vs -3.3% expected) following the sales hike of that month, but this is partly offset by the anecdotal evidence from retailers that suggest that sales have recovered well in May. The Nikkei is down slightly overnight (-0.05%) while the Hang Seng (+0.1%) and HSCEI (+0.6%) are on firmer footing.
Outside of rates, another focus in Asia is on the renminbi with USDCNH breaking out of its recent trading range, The CNH has managed to firm a little overnight but the start of this week has seen the currency depreciate about 0.5% against the USD, large in historical context and pushing it to its weakest level since Q3 2012. There have been a lot of reports in recent weeks that the PBoC is in the midst of tweaking reserve ratios and other targeted monetary levers to ease funding pressure on banks. And if we look at onshore money market rates, short term funding costs appear to be stable so far this month, although we enter into the traditionally volatile June period when short term rates have typically fluctuated. DB’s Chinese bank analysts also highlight in a report that China’s financial sector is coping well with the repayment peaks of trust products and higher risk corporate bonds expected in May and June, as most of them have repaid or rolled over, with the unresolved risks concentrated in the coal and mining sectors.
European shares remain mixed with the banks and utilities sectors underperforming and personal & household, oil & gas outperforming. The Spanish and Italian markets are the worst-performing larger bourses, the U.K. the best. The euro is stronger against the dollar. Japanese 10yr bond yields fall; Portuguese yields increase. Commodities gain, with nickel, zinc underperforming and soybeans outperforming. European newsflow remains light with parts of Europe on Ascension holiday and no tier 1 data to guide fixed income or equities markets. BoE's Weale (neutral) said the BoE needs to start raising interest rates sooner rather than later if it wants to avoid sharp and painful increases in the future, and the BoE can wait a bit longer before first rate hike, but he is not sure how much longer.
Looking at the day ahead, it looks like the main focus will be on the 2nd estimate of US Q1 GDP.  Other data today are US jobless claims and pending home sales.
Market Wrap
  • S&P 500 futures up 0.1% to 1910.3
  • Stoxx 600 down 0% to 344.3
  • US 10Yr yield down 2bps to 2.42%
  • German 10Yr yield up 0bps to 1.34%
  • MSCI Asia Pacific up 0.2% to 142.2
  • Gold spot down 0.3% to $1254/oz
Bulletin headline summary from Bloomberg and RanSquawk
  • Fixed income and Equities markets (Euro Stoxx 50 -0.2%) remain subdued with Europe on holiday.
  • The USD index has begun to soften and drift back towards its 200DMA after yesterday’s sharp gains.
    Treasuries extend week’s gains amid expectations for additional ECB easing next week, month-end index rebalancing; 30Y yield headed for its 5th straight monthly decline, last seen in 2006.
  • Week’s auctions conclude with $29b 7Y notes, yield 2.010% in WI trading vs 2.317% April award; notes yesterday traded below 2.00% level for first time since November
  • Bill Gross is betting 5Y Treasuries will do well because markets overestimate how much the Fed will raise rates. Bond managers at Goldman, BlackRock and JPM say he’s wrong and the intermediate bonds he holds will suffer when the Fed lifts borrowing costs
  • Argentina and Paris Club creditors agreed on an arrangement to clear overdue debt payments over a five-year period, raising the prospect of international aid
  • Vladimir Putin signed a treaty with his counterparts from Kazakhstan and Belarus creating a trading bloc of more than 170m million people to challenge the U.S. and EU
  • Obama is offering a less-is-more doctrine to explain his foreign policy, a bow to the reality that after five and a half years in office his strategy remains a puzzle to much of the public
  • Yemen’s army has begun a U.S.-backed offensive to dislodge al-Qaeda militants whose growing numbers pose a threat to neighbors including Saudi Arabia
  • Pressure grew on U.S. Veterans Affairs Secretary Eric Shinseki to resign as an internal report found “systemic” scheduling problems that have stymied healthcare for veterans
  • Sovereign yields mostly lower. Nikkei little changed, Chinese indexes fall. European equity markets lower, U.S. stock futures gain. WTI crude little changed, gold and copper fall
US Economic Calendar
  • 8:30am: GDP Annualized q/q, 1Q (S), est. -0.5% (prior 0.1%)
    • Personal Consumption, 1Q (S), est. 3.1% (prior 3%)
    • GDP Price Index, 1Q (S), est. 1.3% (prior 1.3%)
    • Core PCE q/q, 1Q (S), est. 1.3% (prior 1.3%)
  • Initial Jobless Claims, May 24, est. 318k (prior 326k)
  • Continuing Claims, May 17, est. 2.650m (prior 2.653m)
  • 9:45am: Bloomberg Consumer Comfort, May 25 (prior 34.1)
  • 10:00am: Pending Home Sales m/m, Apr., est. 1% (prior 3.4%); Pending Home Sales y/y, Apr., est. -8.8% (prior -7.4%) Central Banks
  • 11:00am POMO: Fed to purchase $2.5b-$3.25b notes in 2019-2020  sector
  • 1:00pm: U.S. to sell $29b 7Y notes
ASIAN HEADLINES
JGBs traded higher by 15 ticks at 145.52 underpinned by spill-over buying in US/European fixed income markets and a weak post-sales tax retail sales. Nikkei (+0.7%) recovered from earlier losses weighed by yesterday’s weakness in US equities.
EU & UK HEADLINES
European newsflow remains light with parts of Europe on Ascension holiday and no tier 1 data to guide fixed income or equities markets.
BoE's Weale (neutral) said the BoE needs to start raising interest rates sooner rather than later if it wants to avoid sharp and painful increases in the future, and the BoE can wait a bit longer before first rate hike, but he is not sure how much longer.
Final Barclays month end extensions show Pan-Euro Agg at +0.04y (Prelim +0.04y), Sterling-Agg at +0.06y (Prev. +0.02y)
US HEADLINES
US newsflow continues to remain light, with attention now turning to the secondary reading of US GDP, which is expected to be revised lower.
Final Barclays month end extensions show US Treasury at +0.12y (Prelim +0.13y)
EQUITIES
Amid muted European volumes, European indices trade relatively rangebound (-0.2%) while the FTSE 100 outperforms, with Smith & Nephew gaining as a result of continued M&A speculation with Stryker. Elsewhere, financials lag with Commerzbank (-3%) down after a broker move at Exane.
FX
GBP/USD was placed under pressure in early trade, weighed on by GBP/JPY which trades at a one-month low after breaking below the 50 and 100DMAs, with month-end related buying of EUR/GBP also putting pressure on GBP/USD. However both EUR/USD and GBP/USD managed to reverse earlier losses in recent trade amid a weakening in the USD index as it drifts lower towards its recently breached 200DMA and technical buying. AUD is stronger due to overnight CAPEX data from Australia which has pushed AUD/NZD to 5-month highs. Following the BoJ updating their JGB purchases earlier, Morgan Stanley say it's JPY bullish, with crosses set to come under further pressure, noting that EUR/JPY is now confirming a break below its 200DMA and MS expect USD/JPY to follow.
* * *
DB's Jim Reid concludes the overnight recap
After 2 weeks of consolidation, bonds resumed their march lower in yield yesterday with US yields hitting 11-month lows and the European complex flirting with all time lows in many markets. Indeed in our 2012 "A Journey into the Unknown" document we showed Dutch yields back to the year 1517. The all time low was 1.49% at the end of December 2012, however last night we closed at just below 1.60 (-5.4bps) and within touching distance of fresh 500 year lows. For France, where we have data back to 1746, we closed 6bps away from all-time lows at 1.72 last night. Germany is still 17bps away from the May 2013 lows but Spain is now at all time lows (data back to 1789) again and Italy is close to near 70 year lows. These are truly remarkable times. As we said when we published "A Journey into the Unknown", the uniqueness of this situation with yields generally close to multi-century all time lows proves how uncertain the outlook remains. There really is no precedent for so many countries to have such low yields. None of us can know the full ramifications of this.
In simple terms there are 2 ways to look at this. Either bonds are the short trade of the millenium (literally) at these levels or that something very unusual is going on globally and will continue for some time. Our view remains slanted towards the latter although at these levels it really is hard to recommend being long if making a decent return is your aim. We think yields stay low for longer but that we might be near the bottom of the range at the moment.
Outside of Europe, yesterday’s 7bp rally in 10yr UST yields took many by surprise and there were various theories as to what caused it. Some say this was driven by the FT article suggesting that perhaps China was buying treasuries through Belgium. The article says that the reported amount of treasuries held in Belgium, possibly at Euroclear, has doubled from $180bn last October to a current level of $381bn and that potentially China could be behind that flow (Financial Times). Others attributed the rally to month-end buying flows and more short covering from one of the biggest wrong way trades of this year. We should also note that the growing yield differential between US and core European bonds has probably made the former more attractive. For example the differential between UST and Bund yields is around +110bp now, versus a three year average and median of +47bp and +31bp respectively. DB’s George Saravelos also highlights that there has been pent-up fixed income demand from 2013 which has coincided with fresh demand from EM inflows and China-specific intervention.
All these are plausible explanations for what we saw yesterday although we'd also highlight that there is increasing anticipation about what the ECB could unveil in terms of policy easing when they meet next Thursday. Yesterday we got one of the first comments from an ECB official since the central bank concluded its annual gathering in the mountains north west of Lisbon earlier this week. Media reports have said that the ECB is weighing up a package of easing options, and yesterday Executive Board member Yves Mersch confirmed that the policy meeting next week could yield a combination of easing measures to try and tackle the problem of low inflation and credit growth. When asked about the chance of a cut in the ECB's three main policy rates, Mersch said he assumes the differential between the rates (i.e. the corridor) will be maintained because narrowing the corridor could harm interbank markets – so there is a very real possibility that we see negative deposit rates on this day next week. Partly in reaction to this, EURUSD (-0.3%) hit its lowest level since early February yesterday.
Perhaps the rally in rates was also prelude to today’s release of the second estimate of US Q1 GDP. There is market chatter that we could get a significant downward revision to the first estimate due to revised assessments of business investment, equipment spending and construction activity. Note that the advanced estimates showed that growth was just 0.1% in the first quarter but Bloomberg consensus is expecting this to be downgraded by 60bp, well into negative territory at -0.5%. DB’s Joe Lavorgna is at -0.8%.
Looking at overnight markets, 10yr UST yields are down another half a basis point in Japanese trading at around 2.436%. Other government bonds in Asia Pac are trading firmer today led by Australia (-9bp), New Zealand (-5bp) and Indonesia (-3bp). The gap tighter in US yields is creating a strong search for yield in Asian EM especially in credit as evidence by the strong performance of recent new deals and the strong demand in secondary. This is a continuation of the price action that we saw in LATAM late yesterday. EMFX bellwethers including the INR (+0.1%) and KRW (+0.05%) are trading firmer today, adding on to the solid gains posted yesterday. In Japan, the drop in retail sales in April was worse than expected (-4.4% vs -3.3% expected) following the sales hike of that month, but this is partly offset by the anecdotal evidence from retailers that suggest that sales have recovered well in May. The Nikkei is down slightly overnight (-0.05%) while the Hang Seng (+0.1%) and HSCEI (+0.6%) are on firmer footing.
Outside of rates, another focus in Asia is on the renminbi with USDCNH breaking out of its recent trading range, The CNH has managed to firm a little overnight but the start of this week has seen the currency depreciate about 0.5% against the USD, large in historical context and pushing it to its weakest level since Q3 2012. There have been a lot of reports in recent weeks that the PBoC is in the midst of tweaking reserve ratios and other targeted monetary levers to ease funding pressure on banks. And if we look at onshore money market rates, short term funding costs appear to be stable so far this month, although we enter into the traditionally volatile June period when short term rates have typically fluctuated. DB’s Chinese bank analysts also highlight in a report that China’s financial sector is coping well with the repayment peaks of trust products and higher risk corporate bonds expected in May and June, as most of them have repaid or rolled over, with the unresolved risks concentrated in the coal and mining sectors.
Looking at the day ahead, it looks like the main focus will be on the 2nd estimate of US Q1 GDP. Ahead of that we have the final estimate of Spanish GDP (0.4% expected). Other data today are US jobless claims and pending home sales.