April has been quite a month, and it has been some time since we last did our periodic market recap of all things that mattered in our eyes. This week sees a flurry of market events that may prove very significant in dictating where prices head in May and beyond.
In this note, we will briefly go over, in bulletin format, some of the key developments we have seen in April across the globe from the American economy, to the renewed conflagrations in the tug of war between Greece and its creditors, to China's economic woes and financial troubles.
In Part 2, we will touch on the various markets we cover, present our views and purported strategies to trade them going forward.
US GDP & FOMC In Full Focus
Before jumping in, April is set to close with a bang on what is easily the most busy week in terms of economic data releases for a long time. We have various sets of CPI and employment data releases from Europe the developed economies. GDP figures are also set to hit the wires, chiefly from the UK, US, and Canada.
Most importantly, central banks will be in hard focus where Australia's RBA fired the first salvo (Tuesday), followed by the FOMC on Wednesday, with New Zealand's RBNZ set to announce its policy measures a couple of hours later. The BoJ will also hold its press conference (Thursday) where the market expects it to address speculation if further easing by the bank is out of the question. Various other central banks such as Sweden's and Mexico's will also announce monetary policy measures between Wednesday and Thursday.
It is safe to say the market's attention will be fixated on the US 1Q15 GDP figures (preliminary) and the ensuing FOMC statement and press conference. Just 6 weeks ago, Janet Yellen attempted to tame the market's expectations of an early rate "liftoff"; and it was only a few weeks after that America's labor market which had been the darling of the economy disappointed badly.
All that uncertainty sent shockwaves down the market's spine, with shadow volatility increasing in stark fashion. With US macro economic data so inconsistent, and consensus expectations oscillating like a wildly swinging pendulum, Wednesday's twin events will either add to the confusion or provide some clarity or semblance of it.
What A Mess, Easy Trends Are Over
US: Data Deteriorates And Confuses
Starting off with the US, things have not gotten better. The data we've been looking at has been very mixed and unpredictable relative to consensus estimates. After March's terrible payrolls data, the market seemed to have discounted further disappointments.
The Citi Econ Surprise Index has fallen to levels not seen since 2007, highlighting the degree of data misses in the past 5 months. This is why we expect a rate hike only in October at the earliest, as we stated in our March 20th note.
Home price growth has decelerated notably, while consumer sentiment has fallen sharply in recent months. In April alone, initial jobless claims have missed twice in a row. Various manufacturing metrics like the Dallas Fed Manufacturing Index and the Markit PMI have also disappointed. Small business confidence has slipped albeit slightly, along with consumer confidence; current conditions remain inline with expectations but future outlooks have deteriorated.
Core durable goods shipments and orders actually saw YoY contractions, not a healthy sign for the broader economy. Retail sales was another that missed expectations, and readers should remember that consumer spending drives more than 70% of America's economy.
With GDP figures due today, we will have a better glimpse of what actually happened in the economy from January to March. Remember that GDP reports are lagging in nature, so what the market will be presented with today is actually things that have already happened a long time ago.
Europe: Greek Fuse Running Short, Economy Improves Slightly
Ah Europe, the continent that never fails to ruffle the market's feathers every now and then. The main even risk and talking point in April has been Greece. It doesn't take a rocket scientist to guess that. The issue with Greece, after a new (and amateurish) anti-EU government was elected into power, is that it still wants to be a chooser when it is actually a beggar - Greece continues asking for concessions while reneging on promises made earlier.
After the Troika was kind enough to grant the stricken nation the next tranche of bailout funds in February, the Syriza party led by Prime Minister Alexis Tsipras has continued with its atrocious demands that the Troika lower its defense.
With very limited amounts of cash, Greece has resorted to pillaging its state coffers, issuing executive orders dictating the transfer of reserves from state accounts to the government. This happened 2 weeks ago while the Greek government was still in talks with European leaders in negotiating a longer term solution.
A week later, the solvency issue devolved into something much sinister: capital controls. Deposits in various Greek banks belonging to Greeks that were behind on payments to the state (including utilities) experienced haircuts in the form; in layman terms, outright capital confiscation from the bank accounts of indebted Greeks.
Don't expect a resolution to be brokered anytime soon. The rhetoric will continue to be ratcheted between the Greek government, Greek citizens, and Greece's creditors. Germany also seems to have become less patient about a proper resolution, with its finance minister alluding to the idea that Greece was the main impediment to a European economic recovery. This sentiment is widespread across the single currency bloc.
The markets have gotten so used to the Greek drama that European sovereign bond yields have actually fallen in news of the renewed Greek crisis. The Euro has risen in value against almost most major currencies while various Eurozone equity indices have been in a range.
Moving away from Greece, whose problems seem are perpetual, the Eurozone's economy has actually improved marginally ever since the EU recorded its coldest ever deflation in January. Manufacturing and services PMIs have risen across almost all of the EU27 (except for Greece and a few others like Spain). It seems the employment situation has stabilized, with unemployment rates not recording higher highs. Germany remains the strongest powerhouse with record low unemployment and ZEW surveys that indicate confidence in the domestic economy.
The weaker Euro coupled with energy prices that have since floored off have led to a small uptick in inflation and inflation expectations, the latter measured by breakeven rates. The ECB themselves acknowledged in its April press conference (an eventual one which saw a Germany feminist staging a surprise attack at Mario Draghi during his speech) that the inflation outlook has stabilized and is expected to gradually increase in 2H15.
When asked about the deprecation of the Euro, Draghi stated that it was too early to make judgements and that the ECB will remain fully committed to achieving its goals through the PSPP (QE). It is now clear that interest rates at the ECB will not be lowered further. The door was also left open to adjustments to the PSPP, but Draghi stated that an enlargement of the scope and size of the program was unlikely for the time being.
All in all, the Eurozone is improving gradually, bolstered from brighter consumer and business sentiment, the ECB's policies of easy money, low energy and input prices. The wildcard is still Greece, as has been for eons.
UK: General Elections Usher In Hope, Economy Still Strong
In less than 2 weeks time, the UK will take to the polls to elect a new parliament. After having dissolved its old parliament, the Labor and the Conservatives now stand neck and neck. We have observed that despite tepid economic data out of England, the pound along with the FTSE 100 have seen strength.
Earlier this week, the UK recorded a 2.4% GDP growth for 1Q15, missing expectations of 2.6%. Sequentially, the economy grew by 0.3% which was 0.2% under consensus.
The BoE along with its MPC stated in their previous session that rates will likely be raised only in 2016. Recall that the economy was sitting on the brink of deflation in February, with the markets expecting deflation to arrive in March.
The UK economy is still one of the strongest in the developed world and this is perhaps the reason for the relative strength in the pound. While we do not foresee the elections as having too much of an impact on the financial markets, be on the lookout for any signs of a reversal in the trajectory of prices.
China: Troubles Ahead, Government Denies
We plan to dedicate this subject to a separate note but we will nonetheless quickly touch on this point. April was generally a bright spot for most of the Eastern economies. According to official Chinese figures (which should be taken with a pinch of salt), China is tagging along as planned although growth has slowed to a 25-year "crawl" of 7% for 1Q15. The HSBC Flash and official PMIs continue to thread water at around 50, indicating that growth momentum is much weaker than a 7% annualized GDP growth rate would suggest.
A lot of talk and action has been orbiting the recent launch of China's debt swap program in which the government plans to facilities a mechanism that will allow local municipal debt to be swapped for government debt; the goal being to remove some of the financial burdens of entities whose balance sheets have become encumbered with falling municipal bond prices.
Another hot topic has been about the PBoC's policies which seems to be getting looser as China crawls along. Just last Sunday, the PBoC cut its Reserve Ratio Requirement (RRR) by 1% to a record low of 18.5%. The reduction was the most aggressive yet by the bank, indicating that there are indeed fault lines within the banking sector that are more than hairline.
It remains to be seen if this RRR heralds the start of a secular shift in monetary and financial policy by the PBoC. Apparently the government feels that banks aren't lending enough and credit growth is too weak. Then again, a 7% GDP growth rate isn't to shabby, or is it?
On top of the RRR cut, there have been rumors about an impending QE program by the PBoC, sending Chinese markets reeling higher in the last couple of weeks' trading. Although the government has denied such claims, we can reasonably foresee outright QE by the PBoC if financial stresses in the financial industry and local governments continue to mount.
Despite all of this talk about looser monetary policy, the Chinese Yuan (unofficial offshore rate) has strengthen against the Greenback. It is possible to foresee a reinstatement of a currency peg or managed float if the stronger Yuan starts eating into China's trade competitiveness.
Japan: No Rising Sun
The land of the rising sun has not actually gotten one despite various attempts by the Sinzo Abe administration and the BoJ to kickstart an economy trapped in a duality of a liquidity trap and a demographic quagmire; the latter a problem for the scientists rather than the financial wizards.
We have not been eagerly following developments of the Japanese economy because to us, the status quo will continue to persist until something huge happens. Something much larger than the BoJ's QQE or the aptly named Abenonics.
One shocker stood out in April. It wasn't the random disinflationary CPI print or the stagnating growth. It was retail sales that stood head and shoulders above the negatively surpirising indicators.
Retail sales for April plunged by the most on record, a 9.7% decline over the March and the third negative growth in a row. The effects of the consumption tax hike are still being felt throughout the economy, encouraging already thrifty consumers to save even more and spend even less - a satirical plus for Abenonics, we must concede.
The real deal for us is with the BoJ, because it is the only entity that has so far consistently provided (what is now) scarce volatility for the yen. The bank will stage a press conference 12 hours after we go to print, and the market is expecting some sort of dovish slant towards more QQE rather than maintaining the scope and scale of the current program.
Market participants will recall that earlier this month, the Japanese finance minister came out saying that the yen was too weak at 120 against the dollar, and that 105 was an appropriate rate for the yen to trade at.
However, less than 24 hours later, the finance minister retracted whatever he said the previous day and iterated that the yen was priced appropriately by market forces at 120 to the dollar. We guess that he got a tap in the shoulder by Kuroda and his henchmen.