More Fed Jawboning On Deck To Usher Green Close To First Half Of 2013

Overnight newsflow (which nowadays has zero impact on markets which only care what Ben Bernanke had for dinner) started in Japan where factory orders were reported to have risen the most since December 2011, retail sales climbed, the unemployment rate rose modestly, consumer prices stayed flat compared to a year ago, however real spending plunged -1.6% significantly below the market consensus forecast for +1.3% yoy, marking the first yoy decline in five months. This suggests that households are cutting utility costs more so than the level of increase in prices. By contrast, real spending on clothing and footwear grew sharply by 6.9% yoy (+0.6% in April) marking positive growth for a fourth consecutive month. Simply said, the Japanese reflation continues to be limited by the lack of wage growth even as utility and energy prices are exploding and limiting the potential for core inflation across the board.

China's central bank once again promised that the liquidity situation is under control, which is ironic considering funding costs are about 200-300 bps higher than where they were two weeks ago.

Elsewhere, in Europe, in addition to assorted irrelevant economic data (irrelevant as there continues to be no credit creation so no upside impulse can be sustained period) which saw Greek retail sales crash from already disastrous 2012 levels, there was a SDZ report citing a Morgan Stanley paper that the ECB is considering engaging in QE. It very well may just be MS' wishful thinking, as the possibility for the ECB to engage in outright monetization of European bonds brings back the specters of the bank and fiscal union, both of which are nowhere near being completed and are very unrealistic in the medium or even long-term.

There was more news, and on today's docket we have the Chicago PMI in a few hours, but as noted earlier, all of it is meaningless in a market in which only technicals and central bank jawboning matter. To which end, here are the Fed speaker highlights du jour, in which the FOMC members will once again explain just how confused the market is when interpreting Ben Bernanks, whose simple message was just "BTFF"

  • 8:00am: Fed’s Stein speaks on monetary policy in New York

  • 9:15am: Fed’s Lacker speaks on economic outlook in White Sulphur Springs, W. Va.

  • 3:30pm: Fed’s Williams speaks on monetary policy in Sonoma, Calif.

The rest of the key overnight news bulletin from Bloomberg:

  • Treasury yields extend declines from highest levels since 2011 as JPY weakens through 99 level; Fed officials intensified efforts to clarify Bernanke comments that triggered a growth-threatening rise in long-term rates.

  • Chinese central bank Governor Zhou Xiaochuan said the nation will maintain market stability and adjust policies at the right time, his first comments since a record cash squeeze hit the world’s second-largest economy

  • ECB’s Draghi has asked team to do 360-degree study of ways out of the debt crisis as Spanish and Italian bond yields climb again, Sueddeutsche Zeitung reports, without saying how it obtained the information

  • Greece faces collapse of second privatization, FT reports, as Emma Delta, the only bidder for the country’s 33% stake in OPAP, wants to cancel two elements of the deal agreed last month

  • EU leaders are set to scale back promises of support for ailing banks when central euro-area bank supervision starts next year, raising questions about the scope of their crisis-fighting plan

  • German retail sales rose 0.8% in May, more than forecast, after falling 0.1% in April

  • Sovereign yields mostly lower. Nikkei rises 3.5%, most other Asian stock markets gain. European stocks mostly lower; U.S.index futures rise. WTI crude, copper and gold gain


Economic Data

  • 9:00am: NAPM-Milwaukee, June, est. 45.2 (prior 40.67)

  • 9:45am: Chicago Purchasing Manager, June, est. 55.0 (prior 58.7)

  • 9:55am: University of Michigan Consumer Confidence, June final, est. 83.0 (prior 82.7)

Deutsche Jim Reid's does a more comprehensive news recap:

Overnight Asia is ending H1 with a continuation of the trends seen over the last few sessions - credit grinding tighter while the 10yr UST yield remains stable at around 2.5%. In the equities space, strong gains are being seen for the fourth day, with most indices 1-2% firmer. Chinese equities have recovered off earlier losses (Shanghai Comp +0.8% as we type) helped by comments from the PBoC governor Zhou at a financial conference in Shanghai. Zhou said prudent monetary policy is appropriate and pledged to maintain financial market stability. On economic growth, Zhou commented that China’s growth slowdown remains in a “reasonable zone” and that the country will focus on further financial market reforms. Gold (-1.5%) briefly traded below the $1200/oz level ($1201/oz as we type) which is its lowest level since August 2010. We note that the yellow metal has lost more than 10% since Bernanke’s post-FOMC conference last week.

In Japan, the Nikkei (+3.7%) and Dollar-Yen (+0.6%) are both up this morning boosted by economic data which suggested easing deflation and improving economic activity in the month of May. Japan's National CPI printed at -0.3% (vs -0.4% consensus). On a core basis CPI came in line with estimates of 0.0%.Nevertheless this was a better outcome than last month’s -0.4% result and was sufficient for Japan’s economy minister Amari to reaffirm that Japan was on a gradual trend out of deflation. Industrial production grew 2% (vs 0.2% expected) and retail trade also surprised to the upside (1.5% vs 0.7%). The jobless rate remained unchanged at 4.1% (vs 4.0% expected).

Redemption flows from fixed income also remains a main theme for markets. According to the FT (which cited Lipper flow data), investors withdrew $8.6bn from US bond funds in the last week with the four-week total up to $23.7bn, marking the worst month of outflows since October 2008 when investors redeemed a record $44bn from bonds. The picture isn't also any better for EM debt funds. Both hard and local currency EM debt funds saw a total of $5.6bn leave the asset class (or about 2.36% of AUM) for the week ended 26th June. This is a historic high in USD terms and close to the largest weekly outflow since November 2008 in AUM terms.

Returning to markets, the S&P 500 (+0.6%) spent much of yesterday’s session trading sideways within a 7pt range. With US rates stabilising, yield products fared quite well. Indeed, Italian and Portuguese bond yields fell by 13bp and 17bp respectively. In Credit, the major indices also narrowed by about 2-3bps, though US primary market activity remained subdued. Yesterday’s Fed speakers were fairly balanced. The NY Fed's Dudley said that QE may be prolonged if the economy misses on Fed forecasts, but also noted that the pace of growth "willpick up notably in 2014" and household leverage is "now at the lowest level in well over a decade". Fed Governor Jerome Powell also stressed that a reduction of bond purchases could be delayed but emphasised the “importance of data over date”.

The S&P 500 index of homebuilders outperformed at +3.1% on the day, boosted by the continuing positive dataflow coming from the real estate sector. Pending home sales recorded a 6.7% month-on-month increase which is also the highest monthly increase since December 2006. Other data, including jobless claims (346k), personal income (+0.5%) and spending (+0.3%) came roughly in line with expectations.

Coming back to the Fed, the WSJ is reporting that the Obama administration is currently compiling a shortlist of candidates to succeed Bernanke when his term ends in January. Names being discussed in the media include current Vice Chair Janet Yellen and former treasury secretaries Larry Summers and Tim Geithner. The article says while there is no front-runner candidate, Obama could try and persuade Bernanke to serve a 3rd four-year term. Past Fed chair nominations have tended to be made anywhere between June and October (WSJ).

Turning to the day ahead, we have another round of Fed speakers lined up today including the San Francisco Fed’s Williams, Richmond Fed’s Lacker and Reserve Governor Jeremy Stein. As far as data is concerned, the final UofMichigan confidence survey and the Chicago PMI are the main highlights. See you in H2!

* * *

SocGen recaps the main macro highlights:

Have markets misread the Fed? A WSJ blog earlier this week discussed how markets had misinterpreted chairman Bernanke, and yesterday it was Fed member Dudley’s turn again, a leading dove (FOMC voter), to state that a rise in short-term rates is very likely to be a long way off even as it’s possible that the central bank may slow the pace of the bond-buying programme. The back-up in Eurodollar rates and Fed fund futures has indeed been startling since last week (just as it has been in the eurozone or the UK), even though the latest view of the Fed members were publicly known after the meeting: 15 of 19 Fed officials still see the rate below 1% in 2014, while 13 see rates at 1% or higher in 2015. Our view is that rates will stay unchanged until at least 2015. The front-end should indeed not be subject to this scale of volatility but the fact that it has implies there has been a dislocation which occurred due to a misreading of the US policy signal. The fact that central bankers were out on a limb this week to correct market expectations shows how delicate and accident prone the exit from nearly five years of stimulus will be, a point BIS governor Caruana made in his speech last weekend.

Meanwhile, 10y yields have eased back a touch even as equities and credit have rallied but swaption volatility has not eased back at all (US 5y5y above 100bp). This expression of uncertainty shows how sensitive bond markets will operate, in particular ahead of next week’s employment report.

A week of two halves in FX has seen a small return of demand for commodity currencies with the AUD and NZD leading the recovery and the NOK and CAD not following far behind. Whether this is the pause in a storm remains to be seen, but at least until US yields resume their up move, we are likely to see small bids in particular for the technically oversold currencies like the NOK. The RBA meeting is looming next week for the AUD, and it would be prudent not to get overextended into what could be another dovish state of intent.

Key data today include French consumer spending, Italian business confidence and the Chicago PMI. Fed speakers include Stein, Lacker and Williams.

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