Credit Pipeline

June 2nd, 2016 6:09 am

Via Bloomberg:

IG CREDIT PIPELINE: List Remains Long, Aetna Possible for Today
2016-06-02 09:36:53.408 GMT

By Robert Elson
(Bloomberg) — LATEST UPDATES

* Aetna (AET) Baa1/A; investor calls, arranged by C/UBS, ended
yesterday
* ~$28.9b Humana buy
* $13b bridge (August 28)
* Emera (EMACN) Baa3/BBB, to hold investor calls June 2-3 in
connection with sr debt and hybrid securities offerings;
company may issue up to $800m notes, filing shows
* The Sultanate of Oman Baa1/BBB-, mandates
C/JPM/MUFG/NBAD/NATIXIS to arrange investor meetings June
2-7; USD 144a/Reg-S deal may follow
* Kingdom of Saudi Arabia (SAUDI), weighing sale of $10b-$15b
after end of Ramadan in July
* May replicate Qatar’s $9b sale by issuing 5y, 10y, 30y
bonds, sources say
* Great Plains Energy (GXP) Baa2/BBB+ to issue long-term
financing including equity, equity-linked securities and
debt prior to closing of Westar Energy (WR) A2/A deal; says
financing mix will allow it to maintain investment-grade
ratings
* Bayer (BAYNGR) A3/A-, may be close to picking banks to
finance Monsanto (MON) A3/BBB+ bid; banks offering $40b-$50b
bridge loans, term loans could total more than $20b,
according to sources
* Moody’s & Fitch put Bayer’s rating on review for
downgrade due to its offer to buy MON
* Australia and New Zealand Banking Group (ANZ) Aa2/AA-,
mandates ANZ/C/DB/GS/MS for global roadshow May 31-June 3;
144a/Reg-S Tier 1 USD issue may follow
* Apple (AAPL) Aa1/AA+, may return to market
* It priced $12b in 9 parts Feb. 16
* Re-opened 3 of the above issues for $3.5b March 17
* Merck & Co (MRK) A1/AA; has not priced a new issue since
Feb. 2015, $1.5b matured May 18
* General Electric Company (GE) A3/AA-, has yet to issue YTD;
parent GE Co has $11.1b maturing this year, $2.3b matured in
May
* GE may be among high grade industrials to add leverage
in 2016, BI says in note (see point 3)

MANDATES/MEETINGS

M&A-RELATED

* Abbott (ABT) A2/A+; ~$5.7b St. Jude buy, ~$3.1b Alere buy
* $17.2b bridge loan commitment (April 28)
* Air Liquide (AIFP) –/A+; ~$13.4b Airgas buy
* $10.7b financing incl bonds, EU3b-3.5b equity (April 26)
* Sherwin-Williams (SHW) A2/A; ~$9.3b Valspar buy
* $8.3b debt financing expected (March 20)
* Nasdaq (NDAQ) Baa3/BBB; Marketwired buy
* $1.1b bridge (March 10)
* Shire (SHPLN) Baa3/BBB-; ~$32b Baxalta buy
* $18b loan to be refinanced via debt issuance (Jan 18)
* Molson Coors (TAP) Baa2/BBB-; ~$12b MillerCoors buy
* $9.3b bridge (Dec 17)
* Teva (TEVA) Baa1/BBB+; ~$40.5b Allergan generics buy
* $22b bridge; $5b TL commitment (Nov 18)
* Duke Energy (DUK) A3/A-; $4.9b Piedmont Natural buy
* $4.9b bridge (Nov 4)
* Anthem (ANTM) Baa2/A-; ~$50.4b Cigna buy
* $26.5b bridge (July 27)

SHELF FILINGS

* Tesla Motors (TSLA); automatic debt, common stk shelf (May
18)
* Debt may convert to common stk
* Reynolds American (RAI) Baa3/BBB filed automatic debt shelf;
sold $9b last June (May 13)
* Statoil (STLNO) Aa3/A+, files debt shelf; last issued USD
Nov. 2014 (May 9)
* Corporate Office (OFC) Baa3/BBB-; debt shelf (April 12)
* Rogers (RCICN) Baa1/BBB+; $4b debt shelf (March 4)

OTHER

* Discovery Communications (DISCA) Baa3/BBB-; may revisit bond
market this yr, BI says (May 18)
* Ford Motor Credit (F) Baa2/BBB; may have ~$7b issuance this
yr (May 10)
* Wal-Mart (WMT) Aa2/AA; 2 maturities in April (April 1)
* GE (GE) A1/AA+; $25b debt possible for M&A, buybacks (Jan
29)

Some Corporate Bond Stuff

June 2nd, 2016 6:06 am

Via Bloomberg:

IG CREDIT: PFE, WBA, BAC 10Y Issues Led Secondary Trading
2016-06-02 09:53:54.788 GMT

By Robert Elson
(Bloomberg) — Secondary IG trading ended with a Trace
count of $17.2b vs $16.8b Tuesday, $18.8b last Wednesday. 10-DMA
$15.1b; 10-Wednesday moving avg $18.3b.

* 144a trading added $3.1b of IG volume vs $2.6b on Tuesday,
$3.8b last Wednesday

* The most active issues:
* PFE 2.75% 2026 was 1st with client and affiliate selling
2.8x buying
* WBA 3.45% 2026 was next with client flows taking 87% of
volume
* BAC 3.50% 2026 was 3rd with client and affiliate trades
taking 93% of volume
* SWEDA 2.125% 2017 was most active 144a issue; client and
affiliate flows took 100% of volume

* Bloomberg US IG Corporate Bond Index OAS at 155.0 vs 154.6
* 2016 high/low: 220.8, a new wide since Jan. 2012/150.8
* 2015 high/low: 182.1/129.6
* 2014 high/low: 144.7/102.3

* BofAML IG Master Index at +154, unchanged
* 2016 high/low: +221, the widest level since June
2012/+152
* 2015 high/low: +180/+129
* 2014 high/low: +151/+106, tightest spread since July
2007

* BofAML HY Index at +601 vs +597, its time below 600 since
November; it topped at +887 in Feb.

* Standard & Poor’s Global Fixed Income Research IG Index at
+201, unchanged
* +262, the new wide going back to 2013, was seen
2/11/2016
* The widest spread recorded was +578 in Dec. 2008

* S&P HY spread at +639 vs +640; +947 seen Feb. 11 was the
widest spread since Oct. 2011
* All time wide was +1,754 in Dec. 2008

* Markit CDX.IG.26 5Y Index at 77.3 vs 76.5
* 73.0, its lowest level since August, was seen April 20
* 124.7, a new wide since June 2012 was seen Feb. 11
* 2014 high/low was 76.1/55.0, the low for 2014 and the
lowest level since Oct 2007

* Current market levels
* 2Y 0.899%
* 10Y 1.835%
* Dow futures -13
* Oil $49.26
* ¥en 109.09

* IG issuance totaled just $3.15b Wednesday, the lowest volume
in over 2 weeks, vs $17.1b Tuesday
* May ended at a record $209.51b; stats and recap
* YTD IG issuance now $803b; YTD less SSAs $666b

Saudi Arabia Promises Not to “Shock’ Market

June 2nd, 2016 6:01 am

Via Reuters:

Saudi Arabia promised on Thursday not to shock the oil markets as OPEC headed into a heated debate about production policy, with Iran insisting on the right to raise output steeply.

Tensions between the Sunni-led kingdom and the Shia Islamic Republic have been the highlights of several previous OPEC meetings, including in December 2015 when the group failed to agree on a formal output target for the first time in years.

Several OPEC sources said Saudi Arabia and its Gulf allies would propose to set a new collective ceiling in an attempt to repair OPEC’s waning importance and end a market-share battle that has sapped prices and cut investment.

Failure to reach any deal would revive market fears that OPEC’s largest producer Saudi Arabia, already pumping near record highs, may raise production further to punish rivals and gain additional market share.

“We will be very gentle in our approach and make sure we don’t shock the market in any way,” new Saudi Energy Minister Khalid al-Falih told reporters ahead of the meeting.

Answering a question on whether Riyadh would propose setting a new collective output ceiling, he said: “We will do that when necessary‎.” He added that he would listen to anything Iran brings to the table.

Any agreement between Riyadh and Tehran would be seen as a big surprise by the market, which in the past two years has grown increasingly used to clashes between the political foes as they fight proxy wars in Syria and Yemen.

Saudi Arabia effectively scuppered plans for a global production freeze – aimed at stabilising oil markets – in April. It said then that it would join the deal, which would also have involved non-OPEC Russia, only if Iran agreed to freeze output.

Hawking Risky Bonds to Retail

June 2nd, 2016 5:55 am

Via Reuters:

UPDATE 1-EU watchdog wants banks to spell out risks of ‘bail-in’ bonds

(Adds detail)

By Huw Jones

Banks must spell out the risks to investors in buying so-called bail-in bonds that can be written down to shore up an ailing bank, the European Union’s markets watchdog said on Thursday.

Banks are having to issue such bonds to top up their core capital reserves and help them to cope with severe market shocks without calling on taxpayers to rescue them.

The European Securities and Markets Authority (ESMA) said in a statement that banks were likely to issue a significant amount of such debt, but retail investors in particular might not be aware of the risks they may face.

ESMA said an analysis of complaints from investors showed some buyers were wrongly told the bonds were as safe as a bank deposit or were protected by a deposit guarantee scheme.

Last year hundreds of people in Italy lost their savings when retail bondholders’ holdings were used to help bail out four small banks, and the regulator is anxious to ward off potential mis-selling scandals.

The issue has a broader significance too beyond the protection of retail investors, given sharp falls in European banking shares earlier this year were partly blamed on the introduction in January of EU rules known as the Bank Recovery and Resolution Directive (BRRD) that govern bail-in debt.

“Investor protection is a core part of ESMA’s mission and we are concerned that investors may find it hard to understand the risks inherent in these investments given the complexity and novelty of the BRRD regime,” ESMA Chairman Steven Maijoor said.

Regulators now have powers to “resolve” a failing bank by writing down its bonds, even if the lender does not actually go bust, triggering insolvency proceedings.

Analysts said the slump in banking shares was partly due to investors realising that effectively any bonds in a troubled bank could take a hit, making such bonds harder to price.

During the 2007-09 financial crisis, bondholders in ailing banks were shielded from the multi-billion euro losses suffered by shareholders and plugged by taxpayers.

The powers to write down bonds also cover debt issued before January and ESMA wants banks to go back to investors and explain that such older debt could potentially take a hit as well.

In 2014 Britain’s Financial Conduct Authority imposed restrictions on the sale of a similar type of bank bond, known as contingency capital or Cocos, to retail investors. (Editing by Jane Merriman and David Holmes)

Negative Rates Hurt European Banks

June 2nd, 2016 5:51 am

Via Bloomberg:

  • Net interest income falls for first time in two years
  • Squeeze seen worsening as ‘better-earning assets melt away’

The largest banks in the euro region earned less from lending in the first quarter as the European Central Bank’s experiment with negative interest rates compounded the pain of a trading slump and rising regulatory costs.

A drop in net interest income, the first in two years, may worsen after the ECB lowered its deposit rate to minus 0.4 percent in March, meaning it’s charging lenders more to hold their excess cash. The central bank’s next rate decision will be announced on Thursday, and economists predict policy will remain unchanged.

“In the banking world, we are currently struggling with negative interest rates,” said John Cryan, Deutsche Bank AG’s chief executive officer, at a conference in New York on Tuesday. “We will struggle more as the effect of those negative interest rates plays out into our deposit books.”

Net interest income, the difference between what lenders charge customers to borrow and what they pay for funding such as deposits, fell a combined 2.5 percent at the region’s 13 biggest publicly traded banks in the first quarter from a year earlier, data compiled by Bloomberg show. Their combined pretax profit slid 20 percent.

 

“The interest-rate environment comes at a bad time,” said Dieter Hein, an analyst at Fairesearch-Alphavalue. “Banks face a lot that is weighing on them at the moment, with higher regulatory costs, capital requirements, levies and in some cases litigation.”

Lenders are raising fees when possible and cutting deposit rates to ease the impact of the ECB’s measures. Some are also taking previously unimaginable steps, like requiring corporate clients to pay interest on their deposits and even storing cash in vaults to avoid charges at the central bank. The measures aren’t proving sufficient.

Commerzbank AG, Germany’s second-biggest bank, blamed negative rates for cutting revenue by about 90 million euros at its corporate- and consumer-banking divisions in the quarter.

The German lender will probably be “one of the biggest losers from low rates,” said Morgan Stanley analysts, including Huw Van Steenis, in a note Wednesday. “We expect negative rates to keep dragging, with mitigating actions not showing any effect” before 2017 or 2018, they wrote.

‘Melting Away’

If interest rates stay where they are, the combined lending revenue at Germany’s five publicly traded banks will fall by 2.1 billion euros in 2018, or about 9 percent, from last year, estimated Jochen Schmitt, an analyst at Bankhaus Metzler in Frankfurt.

As old loans mature or are refinanced, euro-zone banks will be left with an increasing stock of newer loans made at lower interest rates. Those may prove less profitable if the bank’s funding costs don’t decline as well.

“We’re going to start seeing profitability come under more and more pressure as the better-earning assets melt away,” said Michael Huenseler, who helps manage 17 billion euros, including bank bonds, at Assenagon Asset Management in Munich.

ECB Vice President Vitor Constancio, speaking to Bloomberg Television last week, said that while negative rates over time may hurt bank profitability, the net effect of the central bank’s stimulus programs has benefited lenders by boosting the price of assets, reducing bad loans and sparking an economic recovery.

The ECB, led by President Mario Draghi, expanded its monthly bond-buying program by a third in March and launched a new series of long-term loans to banks to stimulate the economy. Rates on those loans can be as low as the interest rate on the deposit facility, indicating the ECB may pay lenders to borrow under certain conditions.

There’s some evidence its policies are starting to have the desired effect. Banks increased lending to non-financial companies and households almost every month in the last year, after an almost three-year contraction.

While the central bank may brush off bankers’ complaints, it can’t ignore investors’ concerns that lenders are becoming riskier, said Huenseler.

Since the ECB first cut the deposit rate below zero in June 2014, the cost of insuring European financial firms against default has doubled, based on the Markit iTraxx Europe Subordinated Financial Index of 30 companies.

Yet even some bankers see little alternative to the ECB’s drastic measures.

“It’s necessary for the economic environment in which we move, even though it’s not good for us,” Jose Antonio Alvarez, CEO of Spain’s Banco Santander SA, told reporters in April. “Any retail bank, including us, would like to have higher interest rates. That clearly helps the business, the margins, the capacity to generate results.”

Early FX

June 2nd, 2016 5:48 am

Via Kit Juckes at SocGen:

<http://www.sgmarkets.com/r/?id=h10a33796,172e784b,172e784c&p1=136122&p2=32e23e669c0b4b0c5211940f5c0106a9>

The US manufacturing ISM held above 50, bouncing to 51.3 in fact, removing one threat to the current speculation of a summer rate hike. The second threat to the market’s confidence that the FOMC will follow through on its more hawkish tone comes in the form of the non-farm payroll data tomorrow, and the third is the reaction of financial markets – US equities first and the dollar second. The S&P 500 ended just under 2100 yesterday, 1 ½% off its (all-time) highs and the dollar’s still 3% below the January. So far, so good then. Markets are going to be in wait-and-see mode through today’s US ADP employment survey (expect +162k) and jobless claims. If we get a ‘solid’ employment report tomorrow and equities don’t react negatively, expectations of a June/July hike will build further, but tomorrow’s data do face a drag from the strike at Verizon.

With markets overall in wait and see mood, the yen was the winner in FX again overnight. The consumption tax increase has finally been postponed, and another significant round of fiscal easing is coming. See here<http://www.sgmarkets.com/r/?id=h10a33796,172e784b,172e784e> for our thoughts on fiscal policy. The shift in emphasis away from easy money and towards easier fiscal policy marks a turning-point in Abenomics. Of course, easier fiscal policy is possible largely because so much of the public sector’s debt is now in the hands of the BOJ, but even so, if we now get decreased talk of further BOJ action and upgraded growth forecasts, that doesn’t point towards dramatic yen weakness. However, I’m not ready to embrace a strong yen yet. Firstly, I’d be more convinced if the Nikkei wasn’t greeting the latest developments by blowing raspberries at them. A positive equity market reaction to easier fiscal policy would help get growth back to a sustainable path. And secondly, the collapse in relative US/Japanese real bond yields that drove USD/JPY down, is still being corrected. As long as real yields are supportive of USD/JPY, the temptation is to fade yen strength (after tomorrow’s NFP).

USD/JPY and real yields as ‘Abenomics 2.0 is born

[http://email.sgresearch.com/Content/PublicationPicture/226799/2]

Today’s other two ‘big events’ are the ECB meeting and the OPEC meeting, both in Vienna. The ECB meeting will be interesting for the press conference, but there is very little chance of new policies being enacted. Rather, implementation of the previous announcements (TLTRO 2, bond-buying) and Greece will be key topics. At some point, pressure to taper bond purchases will start to be heard, but not until headline and core CPI measures are higher than today. EUR/USD continues to trade its narrow range,

EUR/USD – going nowhere

[http://email.sgresearch.com/Content/PublicationPicture/226799/3]

OPEC is getting its wish for higher oil prices, though not through any fault of its own. Nothing is expected today, but the tensions between Iran and Saudi Arabia are such that the risk of a further increase in Saudi output can’t be ruled out and with it, the risk of a temporary downward correction in prices. Probably a non-event, possibly another trigger for some risk aversion.

The UK sees the construction PMI this morning and the EU referendum campaign, in all its silliness, all day. With the vote three weeks away, 1-month volatility has spiked and risk-reversals have moved sharply in favour of sterling downside. Polls suggest the outcome remains in the balance though bookmakers still significantly favour ‘remain’. GBP/USD does badly whenever volatility is high and that isn’t changing. The post-vote economic outlook meanwhile is for more monetary policy divergence relative to the US and will ‘sell any kind of post-vote bounce’ is trite, it still sees the right stance to take. As does receiving 5y5y sterling vs. US in the rates market.

Risk-reversals capture the jump in the cost of hedging downside risks to GBP from ‘Brexit’

[http://email.sgresearch.com/Content/PublicationPicture/226799/6]

Auto Sales: Plateauing

June 1st, 2016 9:27 pm

How do you conjugate the verb “to plateau”?

Anyway auto sales are plateauing according to Bloomberg:

  • GM, Ford U.S. deliveries declined more than predicted in May
  • Industry sales dropped 6% in month with 2 fewer sales days

U.S. auto sales fell in May, marking the second monthly decline this year and reinforcing the idea that the demand for cars and trucks, while still historically robust, has reached a plateau.

The declines at General Motors Co., Ford Motor Co. and Toyota Motor Corp. were all greater than analysts predicted, sending their shares lower. Industrywide sales dropped 6 percent to 1.54 million, the first decline since January, researcher Autodata Corp. reported.

The results for May, whose Memorial Day weekend promotions make it a bellwether for gauging buyer appetite, show consumer demand for cars leveling off faster than executives predicted. The automakers’ reports join other economic data, including jobs numbers coming Friday, that Federal Reserve policy makers will examine when considering a possible rate hike this month or next.

“The economy is still a new building, it’s still coming to fruition,” Rebecca Lindland, senior analyst for auto researcher Kelley Blue Book, said in an interview. “It’s not something anyone would describe as this really strong, robust growth machine yet.”

The economy expanded modestly across most of the U.S. since mid-April, tightening the labor market and nudging wages higher, a Federal Reserve report showed today. Prices in federal funds futures contracts suggest a 24 percent chance of a rate increase this month and 53 percent by the policy makers’ July session.

 

The industry’s annual sales pace, adjusted for seasonal trends, was 17.5 million vehicles for the month, Autodata said. The average analyst estimate was 17.4 million in a Bloomberg survey.

Detroit-based GM ’s deliveries plunged 18 percent, missing estimates for a 13 percent drop. Light-vehicle sales slid 6.1 percent at Ford, 9.6 percent at Toyota and 4.8 percent for Honda Motor Co. Deliveries at Nissan Motor Co. matched predictions for a 1 percent drop, while Fiat Chrysler Automobiles NV surprised forecasters with a small gain.

Automaker shares declined, with GM falling 3.4 percent, the most since January, while Ford dropping 2.8 percent.

Fewer Days

All of the six largest carmakers had been predicted to report declines for May, which had two fewer sales days than the year before.

“Obviously we’re hoping for improvement” in the industry’s sales rate as the year goes on, Mark LaNeve, Ford’s U.S. sales chief, told analysts and reporters on a conference call. “I talk to the dealers about this all the time: What needs to be low is still low — unemployment, interest rates, gas prices — and what needs to be high is still high — consumer confidence, the housing market.”

One reason deliveries have softened is that carmakers aren’t trying to push sales with big rebates, said Kevin Tynan, auto analyst with Bloomberg Intelligence, a unit of Bloomberg LP. “Rather than chasing volume for the sake of volume, they are making better margins,” he said in a phone interview.

Automaker Results

Among the highlights from today’s reports:

  • Sales of Ford and Lincoln passenger cars plunged 25 percent, led by the Taurus sedan, once the company’s flagship. F-Series pickup sales rose 9 percent and van sales had their best May since 1978, aided by the full-size Transit.
  • GM’s retail sales fell 13 percent and the company continued to pull back on deliveries to rental-car fleets. The largest U.S. automaker said it sold 22,000 fewer rental cars in the month, the biggest reduction in the past two years.
  • Every Nissan-badged car except Maxima and Versa declined, leaving the brand with a 2.9 percent decline in car deliveries. Nissan brand light-truck sales set a May record, with Rogue crossover sales rising 5.9 percent.
  • Fiat Chrysler’s 1.1 percent gain surprised analysts who predicted a 0.7 percent decline. Jeep sales, the Italian-American carmaker’s profit engine, rose 14 percent from a year earlier, while minivan deliveries jumped 84 percent.
  • Volkswagen AG’s namesake brand sales fell 17 percent, the seventh consecutive monthly decline as the German automaker struggles to recover from a diesel-emissions test scandal. On average, analysts had predicted a 21 percent slide.
  • Sales by Honda’s Acura luxury division dropped 20 percent. The decline was smaller among its namesake-brand cars, down 0.4 percent. The Civic car posted a 2.7 percent gain.

Allocations to Corporate Bonds at Record

June 1st, 2016 9:03 pm

I was away from markets for a large chunk of the day but found this Bloomberg item as I perused my emails upon my return to Across the Curve’s sprawling corporate headquarters.

Via Bloomberg:

IG CREDIT: Client Allocations to Corporates Hit New Record High
2016-06-01 17:25:42.619 GMT

By Robert Elson
(Bloomberg) — Client allocations to corporate bonds moved
to 36.3%, according to the SMR Money Manager Asset Allocation
Survey, vs 36.1%, the previous new high made last week.

* The survey began, in 1999, at the all time low of 19.1%
* Last week’s IG issuance totaled $42b; HY added another $11b,
the largest week YTD
* Yesterday saw another $17b of new IG issuance

FX

June 1st, 2016 6:33 am

Via Marc Chandler at Brown Brothers Harriman;

Dollar Moves Lower, Sterling Can’t Get Out of its Own Way

  • The delay in Japan’s sales tax hike was confirmed
  • The May manufacturing PMI readings are the main economic news from the eurozone
  • The UK manufacturing PMI surprised on the upside
  • Australia’s Q1 GDP expanded by 1.1% q/q and 3.1% y/y
  • China’s official PMIs showed some stabilization taking place in the economy
  • The US calendar is full with manufacturing ISM, construction spending, auto sales, and Fed beige book
  • Korea reported May trade data overnight; Brazil reports Q1 GDP and May trade

The dollar is mostly softer against the majors.  The yen and the Kiwi are outperforming, while sterling and the Loonie are underperforming.  EM currencies are mixed.  RON and PHP are outperforming while MYR and RUB are underperforming.  MSCI Asia Pacific was down 0.1%, with the Nikkei falling 1.6%.  MSCI EM is up 0.1%, with Chinese markets narrowly mixed.  Euro Stoxx 600 is down 1% near midday, while S&P futures are pointing to a lower open.  The 10-year UST yield is down 1 bp at 1.83%.  Commodity prices are mostly lower, with oil down nearly 2% and copper down 1.5%.

The US dollar is trading with a heavier bias to start the month of June.  Weaker stocks and firmer bonds has seen the yen rise the most, while sterling’s losses have been extended after an ICM telephone survey showed a small lead for those favoring Brexit.  

The Nikkei fell 1.6%, the largest loss since May 2 and snaps a five-day advance.  The delay in the sales tax hike was confirmed.  This second delay now puts it out into late 2019.  The economic data from Japan was mixed.  Capital expenditures in Q1 were stronger than expected (4.2% vs. 2.4%), and this warns of upside risks upside revisions to Q1 GDP (June 8) after it had already surprised to the upside.  

On the other hand, Q2 is off to a soft start.  The May manufacturing PMI stands at 47.7 (up from 47.6 in the preliminary estimate), but still off from 48.2 in April.  May’s decline was the fifth consecutive month.  The average from Q1 was 50.5.  

The US dollar fell to JPY109.65, after seeing a high near JPY111.45 at the start of the week.  The 20-day moving average is at JPY109.40.  The greenback has not closed below this average since May 13.  Below there is a band of support between JPY109.00 and JPY109.20.  A break of that support signals a move toward JPY108.50.  

The May manufacturing PMI readings are the main economic news from Europe.  The eurozone PMI was unchanged from the preliminary reading of 51.5, which is off 0.2 points from April’s 51.7 reading.  The April report matched the average of Q1.  However, on a trend basis, there has been a gradual decline since the beginning of the year, despite small upticks in February and March.

The main country breakdown shows the loss of momentum is widespread.  Germany’s is at 52.1 from the 52.4 flash reading, but it remains a bright spot within Europe.  It is the third monthly increase and stands above the Q1 average of 51.2.  France ticked up to 48.4 from the flash 48.3.  It is the third month below the 50-boom/bust level.  Despite the weakness in PMI, which averaged below 50 in Q1, eurozone GDP rose 0.6% and matched its best quarter since 2013.  

Italy and Spain also disappointed.  The Italian manufacturing PMI fell to 52.4 from 53.9.  It was not expected to fall as much.  It peaked at the end of last year at 55.6 and is now below the Q1 average (53.0).  Spain’s manufacturing PMI dropped to 51.8 from 53.5.  It is the lowest reading since last October, and it averaged 54.3 in Q1.  

The ECB meets tomorrow.  With the TLTRO and the corporate bond buying program yet to be launched, there is no expectation for fresh policy moves.  The two main points of interest will be from the staff forecasts and whether the ECB decides to accept Greek bonds as collateral again now that the troubled country has passed its first review (of the third assistance package).  

In March, the ECB staff forecast 1.4% growth this year followed by 1.7% and 1.8% for the next two years.  Despite the strong Q1 GDP, the staff may shave the growth forecasts.  Inflation forecasts seem less likely to be revised lower.  CPI was estimated at 0.1% this year, rising to 1.3% and then 1.6% over the next two years.  

The euro itself is firm.  It briefly dipped below $1.11 to start the week but has held above there since Monday.  A band of resistance is seen in from $1.1175 to $1.1220.  The intraday technicals suggest some consolidation is likely in early North American turnover before another attempt higher.  

Greece’s 10-year yield stood near 9% at the end of April.  It dropped to almost 7% in May, before consolidating around 7.25%.  If Greek bonds are not accepted as collateral by the ECB, they are vulnerable to a setback, and this would also weigh on Greek banks.  Choosing to include Greek bonds in the ECB’s asset purchase program does not appear imminent.  However, as Greece pay down its debt to the ECB, it may become possible later.  

The UK’s manufacturing PMI surprised on the upside.  It moved back above 50, even if barely (50.1) from a revised 49.4 reading in April.  It was initially reported at 49.2.  The median expectation was for more weakness.  This dovetails with our warning that the BOE’s assessment that economic weakness seen in some high frequency data is a result of the cooling effect of the referendum may be a useful argument, but it is difficult to substantiate.  Sterling itself is flirting with the two-month uptrend we noted that is found near $1.4440.  A convincing break opens the door to $1.4330.  

There are two highlights from the Asian ex-Japan to note.  First, Australia’s Q1 GDP expanded by 1.1% q/q and 3.1% y/y.  The quarterly expansion was boosted by exports.  The year-over-year pace is the strongest since Q3 12.  The Australian dollar has extended its recovery after reversing higher on Monday.  It made a low then near $0.7150 and today approached $0.7300.  It moved above its 20-day moving average (~$0.7275) for the first time since May 3’s downside reversal.  

It has slipped back toward $0.7240 in the European morning, but the intraday technicals warn that the downside from here may be limited.  Although some observers continue to look for a rate cut (June 7), we are less sanguine.  Back-to-back cuts do not seem warranted and are typically associated with greater economic stress.  

Second, China’s official PMIs showed some stabilization taking place in the world’s second-largest economy.  The manufacturing PMI was steady at 50.1, while the service sector slipped to 53.1 from 53.5.  The Caixin manufacturing PMI eased to 49.2 from 49.4.  The dollar approached the year’s high against the yuan before reversing lower.  If the greenback’s recent gains against the other major currencies are pared today, it would not be surprising if the yuan is “fixed” higher tomorrow.

The US calendar is full.  The focus is on the April manufacturing ISM, construction spending, and auto sales.  Later in the US afternoon, the Fed releases its Beige Book ahead of the June 15 meeting.  US manufacturing surveys for May have been disappointing.  It is as if after a couple of month pick-up, they have slowed.  This was evident in yesterday’s Chicago PMI and the Dallas Fed survey.  Construction spending is expected to rise for the third consecutive month.  Auto sales are expected to have remained at an elevated pace with little change sequentially.  

Taken as a whole, the picture that may emerge is one that is vastly improved over the Q4 15-Q1 16 soft patch.  However, talk of a 3-handle on Q2 GDP may be a bit much at this juncture.  On balance, given the UK referendum and some mixed data, we suspect a July rate hike is more likely than June.

Korea reported May trade data overnight.  Exports came in at -6.0%% y/y vs. -0.4% expected and -11.2% in April.  This is the first snapshot of global trade last month.  Later today, Brazil reports its May trade data.  Exports are expected at -0.3% y/y vs. +1.4% in April.  Taiwan and Chile both report May trade next Tuesday.  Korea also reported lower than expected CPI for May.  Taken in conjunction with the weak trade date, we continue to believe that the BOK will cut rates in H2.  

Brazil also reports Q1 GDP today, which is expected to contract -5.9% y/y.  This would be the same as in Q4, and supports our view that the economy has not bottomed yet.  The political situation remains fluid too, as this week’s resignation of Temer’s second cabinet member underscores just how widespread the corruption really is.  The real is likely to continue weakening, and near-term targets for USD/BRL are the May high near 3.67 and then the April high near 3.72.  

Scathing Indictment

June 1st, 2016 6:23 am

Via Bloomberg:

Luke Kawa
LJKawa
June 1, 2016 — 6:00 AM EDT

Everything’s bigger in Texas, including hyperbole over the challenges of managing millennials.

On Tuesday morning, the Dallas Federal Reserve released its monthly manufacturing outlook survey, which came in far lower than expected, at -20.8.

Quite a few companies cited the new Department of Labor overtime rule that makes more salaried workers eligible for overtime pay as a future headwind for their businesses, many of which are still reeling from the collapse in oil prices. One company said its younger employees don’t deserve overtime pay because they slack off far too much through the regular workday.

“We have a serious productivity problem with office workers and estimated that less than 50 percent of their time is spent on value-creating business activities,” wrote one respondent. “The younger workers are often off task, engaged on social media, on the internet, texting on phones and other unproductive activities.”

The company took a dim view of the overtime rule’s likely impact on its staff, and on the nation.

“The Department of Labor must realize that if we are supposed to pay them overtime for work they should do during normal work this will make us have to focus on micromanaging employees and reducing compensation to reflect actual productivity of a mandated 40 hour or less workweek,” it warned. “All the government regulations and Department of Labor rules are doing is making our country less competitive, creating more part-time workers, reducing workers to a max of 35–39 hours, creating divisions and demotivating the top achievers.”

George Pearkes, macro strategist at Bespoke Investment Group, brought these comments to our attention.

“Anecdotal data aren’t data,” he cautioned.