Across the Curve

Some Corporate Bond Stuff

Via Bloomberg:

IG CREDIT: Trading Not Keeping Pace as Issuance Takes Focus
2016-05-19 09:57:34.278 GMT

By Robert Elson
(Bloomberg) — Secondary IG trading ended with a Trace
count of $16.5b vs $15b Tuesday, $17.1b the previous Wednesday.
10-DMA $14.7b; 10-Wednesday moving avg $18.7b.

* 144a trading added $2.5b of IG volume vs $2b Tuesday, $2.2b
last Wednesday

* The most active issues:
* HSBC 4.30% 2026; client and affiliate flows accounted
for 94% of the volume with client selling 2.5x buying
* BUD 3.65% 2026; client buying twice selling
* JPM 3.30% 2026; client and affiliate flows took 100% of
volume
* BNG 1.375% 2019 was most active 144a issue; client selling
and affiliate buying split volume 50/50 on just 1 large
ticket for each

* Bloomberg US IG Corporate Bond Index OAS at 154.6 vs 156.2
* 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 +155 vs +156
* 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

* Standard & Poor’s Global Fixed Income Research IG Index at
+201 vs +202
* +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 +652 vs +666; +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 83.9 vs 82.5
* 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

* IG issuance totaled $19.875b Wednesday vs $20.8b Tuesday,
$7.275b Monday
* Note: subscribe bar in upper left corner
* May now stands at $140b
* YTD IG issuance now $734b; YTD sans SSA $601b

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Tough Times Aheadfor Rentier Class and Luxury Car Dealers in Greenwich

Via Bloomberg:

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Goldman Sachs Does Not Expect June Rate Hike

Via Barron’s:

By Shuli Ren

The U.S. Federal Reverse wants financial markets to price in the possibility of a June rate hike but won’t do anything next month, analysts say.

Despite being a dollar bull and talking about policy divergence on a weekly basis, Goldman Sachs still doesn’t see a rate hike in June and made no changes to its forecast for two hikes this year – one in September and another in December. Analyst Jan Hatzius and team wrote:

We continue to see the odds of a June hike as below 50% for two reasons. First, we interpret recent commentary from Fed officials as implying that the uncertainty surrounding the Brexit vote—a concern also raised in the minutes—makes a hike at the June FOMC meeting the week before less likely. Second, the very low market-implied probability of a hike just a month prior to the meeting would make a June hike a unique outcome in modern Fed history.

Ah, history will repeat itself!

Fund managers now perceive Brexit as the number 1 black swan risk, according to the latest Bank of America Merrill Lynch survey.

Earlier this week, Goldman downgraded stocks to Neutral, in part because it expects a strong dollar, which makes foreign stock returns less appealing. For details, see my blog “Goldman Downgrades Stocks: 5 Conviction Themes On Oil, Dollar, FX, Credit“.

Asian markets are in broad retreat today while the U.S. dollar strengthened further. The U.S. Dollar Index rose for 3 straight sessions. The greenback still has some catching up to do: The Powershares DB US Dollar Index Bullish Fund (UUP) fell 3.9% this year

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Did Traders Rig market for Sovereigns and Supras?

Via Bloomberg and a hat tip to Steve Feiss  (@stevefeiss) at Government Perspectives:

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Norway Could Go Negative

Via FT:

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Iron ore Rally Not Sustainable

Via Bloomberg:

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Early FX

Via Kit Juckes at Socgen:

<http://www.sgmarkets.com/r/?id=h108d534f,170b1a28,170b1a29&p1=136122&p2=9be40419257f0c442f738d0707caf5df>

Persuasion was on the FOMC’s mind and if New York Fed President Dudley looks like a cat who’s found the cream when he speaks at his press briefing this afternoon (15:30 BST) it’ll be because the market has largely done what the Fed wanted – Treasury yields are up, but the S&P is little changed, as the odds of a June hike jump from 6% to 32% according to Bloomberg, the odds of a hike this year rising to 73%. Even though my inbox has been deluged by people telling me that the Fed wants us to think they might raise rates but definitely won’t be doing anything next month.

% chance of Fed Funds being higher by June, Dec

[http://email.sgresearch.com/Content/PublicationPicture/226073/1]

Higher US yields and a steady equity market is a recipe for the dollar to go up against everything, including the yen. The dollar index has reversed all of April’s fall, back to late-March levels, which means it’s moving marginally ahead of the rise in yields (TIIPS at 24bp now, 10yr Treasury yield 1.87. That in turn reflects positioning as long dollar positions have been scaled back dramatically in recent weeks (CFTC data suggest that bit of the market is now short USD), which is reason enough to believe that this bounce can continue.

Real support is back for the dollar

[http://email.sgresearch.com/Content/PublicationPicture/226073/2]

The CFTC data, in terms of outright positioning, show (falling) net shorts in GBP, EUR and MXN, promising the hope of resilience, and longs in JPY, CAD, AUD and NZD, which makes that set look more vulnerable. We’re stopped out of USD/CAD shorts, and to our existing dollar longs vs. NZD and GBP (which we’re staying with for now) we add short AUD/USD, where the chart looks awful and the market can rebuild shorts. I’ve written lots of times that I’m too timid to go long USD/JPY again yet and despite a market that is long yen, I am fearful that the EMFX weakness we are seeing can spill over to wider risk aversion and support the yen.

The UK sees retail sales data this morning, with a bounce from last month’s weakness expected. We look for +0.3 ex auto fuel, which is +1.6% y/y. We’re sticking with short GBP/USD but we’re stopped out of GBP/NOK after losing two months’ worth of gains in the blink of an eye. A reminder if needed that this is a difficult market! Receiving 5y5y sterling vs. paying 5y5y dollars is a better trade to position for a soggy economy and fading Brexit fears than purely focusing on shorting the currency.

In the Euro Area we will get the ECB’s account of the last policy meeting as well as March current account data. Current yield differentials argue for a possible further fall in EUR/USD, albeit within the now well-established range. And this afternoon the US sees Fed vice-Chair Stanley Fischer speak at 14:15 while we also get jobless claims and Philadelphia Fed data.

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FOMC Analysis

Via Stephen Stanley at Amherst Pierpont Securities:

The April FOMC minutes confirmed my suspicion that the Committee was considerably more serious about a June rate hike than market participants (and most Street economists) thought.  It was my guess in the run-up to the April meeting that the Fed would try to use tweaks to the April FOMC statement language to nudge the odds of a June rate move implied by market pricing to closer to 50-50, so that the Committee would have its options open at the June gathering.  The Committee made the changes that I thought they would, but much to my surprise (and apparently to the Fed’s chagrin), the financial markets proceeded over the past few weeks to essentially price a June hike out almost entirely (the odds of a June move were around 20% at the time of the April meeting and got as low as 4% a few days ago).  This explains why the recent rhetoric has been so strident.  Much like this year’s political campaign, it seems that one has to use unusually strong language to get anyone’s attention.  As I noted Monday, the April FOMC minutes afforded the Committee its last chance to speak as a single voice, and the Fed did not disappoint.

I would note first that the Committee wanted to have its options open.  At a time when the market was pricing 20% odds of a June move, the minutes noted that “Some members expressed concern that the likelihood implied by market pricing that the Committee would increase the target range for the federal funds rate at the June meeting might be unduly low.”  This is not at all surprising to me.

However, the minutes went a step further.  While the Committee was not quite as locked in for a June move in April as they were for December liftoff in October, many of the members seemed to be closer than even I thought.  Here is the key passage from the minutes: “Most participants judged that if incoming data were consistent with economic growth picking up in the second quarter, labor market conditions continuing to strengthen, and inflation making progress toward the Committee’s 2 percent objective, then it likely would be appropriate for the Committee to increase the target range for the federal funds rate in June.”  To be fair, this was a majority, not a universal view.  The varied opinions were laid out as follows: “Participants expressed a range of views about the likelihood that incoming information would make it appropriate to adjust the stance of policy at the time of the next meeting. Several participants were concerned that the incoming information might not provide sufficiently clear signals to determine by mid-June whether an increase in the target range for the federal funds rate would be warranted. Some participants expressed more confidence that incoming data would prove broadly consistent with economic conditions that would make an increase in the target range in June appropriate. Some participants were concerned that market participants may not have properly assessed the likelihood of an increase in the target range at the June meeting, and they emphasized the importance of communicating clearly over the intermeeting period how the Committee intends to respond to economic and financial developments.”

So, let’s try to decode that.  “Most” felt that the default result would be a June rate hike.  “Several,” which I would characterize as 4 or 5, worried that there wouldn’t be enough data to sign off on a June move (I will come back to this).  “Some,” which is less than “several,” perhaps 2 or 3, were more confident that the data would be sufficient.  And “some” worried that the markets weren’t pricing enough in, the implication being that the FOMC could not or would not go if the markets were not pricing it more than a threshold probability (50%) of a move.  The last point led those participants to emphasize the need to communicate clearly, and the cavalcade of speakers over the last week or two have certainly been clear.  And Chair Yellen scheduling a speech for June 6 also should help in the effort to “communicate clearly.”

Coming back to the question of whether the Fed would have enough information to make a move in June, my view is that this relates primarily to the question of whether the low Q1 GDP reading was a fluke.  Recall that the Fed already played this game in 2015, as Fed officials put off liftoff from June to September because they wanted to see Q2 GDP actually print after the weather-induced weakness in Q1 (even though virtually everyone understood that the Q1 figure was almost certainly a one-off).  That plan backfired, as the summer market turmoil pushed liftoff back another three months and forced the FOMC to raise rates in December, a timing that was always viewed as far less than ideal.  I think Chair Yellen and many of the doves were initially inclined to want to go through this kabuki dance all over again this year, but the hawks feel like, with the labor market close to full employment and inflation already inching higher, the Fed needs to get more serious about normalizing policy.  The debate from the minutes that I quoted above reflects this discussion.

In any case, I would offer three reasons to believe that the Fed is likely to have sufficient evidence about Q2 GDP to sign off on a rate hike by mid-June.  First, the Committee seemed to already be surprisingly confident in late April that the low Q1 GDP reading was fluky.  As hinted by the statement, the Committee was more persuaded by the ongoing strength in labor market data.  “Most” subscribed to the view that the labor market data trumped the GDP reading.  “Many” also believed that the low Q1 GDP readings in recent years were due at least in part to “measurement problems.”  Second, even if one was wavering in late April, the blowout April retail sales data released last Friday should have allayed most doves’ doubts about a bounceback in Q2.  The main fear was that the slowdown in consumer spending in Q1 would extend forward.  The majority of the FOMC did not expect that, as the fundamentals for the household sector are predominantly good, but that would be the risk, and it was specifically cited several times in the April FOMC minutes.  The surge in retail sales, which implies a big increase in overall consumer spending in April, has Q2 tracking estimates already on a 3%+ trajectory for real consumer spending and a 2½% to 3% range for Q2 real GDP.  So, barring a setback between now and June 15, the key impediment to a June rate hike has already been swept away.  Finally, on Monday afternoon, when the market was pricing a 4% probability of a June move, the Fed announced that Chair Yellen would be speaking on June 6.  Granted, I could be reading too much into this announcement, but there would be no need for Yellen to speak if her aim was to confirm what everyone already thought – that the Fed was not going to raise rates in June.  In contrast, scheduling a speech just after the last key data release (the May employment report) and just before the blackout period begins would make a great deal of sense if Yellen felt the need to reinforce the likelihood of a June rate hike, especially given that the Committee specifically “emphasized the importance of communicating clearly over the intermeeting period.”

So, I am increasingly confident that the FOMC will raise rates in June.  The markets have moved to about a 1 in 4 chance, still far too low in my view but significantly more realistic than where they were a few days ago.  I would look for Fed officials to continue to bang the gong over the next few weeks, and for Chair Yellen to close the deal on June 6.

In terms of the other aspects of the economy feeding into the FOMC’s decision-making calculus:

Inflation:  A pretty active debate continues with regard to the inflation outlook.  The minutes led off the discussion on this topic by laying out the dovish position.  “Some” (presumably including Yellen) took the soft March core CPI result as an “I told you so” after hawks were undoubtedly chirping after back-to-back 0.3% jumps in January and February.  “Several” also argued that the labor market still appeared to be exerting little upward pressure on prices.  Finally, “several” highlighted the downside risks from the decline in survey- and market-based inflation expectations this year.  In contrast, “many others” (which sounds like a majority) felt that “the recent developments provided greater confidence that inflation would rise to 2 percent over the medium term.”  “Some” viewed the recent uptick in core inflation as broadly based and unlikely to unwind.”  In addition, tightening resource utilization, the recent depreciation of the dollar, and firming oil prices all point to a pickup in inflation going forward.  Since the meeting, there have been two developments.  The core CPI rose by a solid 0.2% in April, which does not point to runaway inflation but was sufficient to at the margin to nudge the scale toward the “we’re going to get to 2%” camp.  In addition, survey-based inflation expectations gauges ticked higher since the meeting.  So, I think the evidence here also would seem to be enough to meet the “sufficiently clear signals” threshold for a June move.

Global economic and financial developments: Everyone agreed that the risks associated with the global economy and markets had receded since March, but there was a predictable split on where that left us.  “Several” felt that the risks to the economy were balanced by late April, while “many others” still believed that the risks were skewed to the downside, due to worries about consumer spending (which, as I argued above, should be mostly resolved) and the global and financial outlook.  “Some” noted that “global financial markets could be sensitive to the upcoming” Brexit vote.  But Brexit did not warrant another mention in the minutes.  Importantly, there was no mention of Brexit in the extended discussion about whether the FOMC might move in June.  It is still a potential factor, as a number of officials have pointed out, but I am skeptical that it will be a decisive factor in the Fed’s June debate.  Taking the global risks sentence out of the April FOMC statement was “intended to convey the Committee’s sense that the risks associated with global developments had diminished somewhat since the March FOMC meeting without characterizing the overall balance of risks.”  “Several” pointed out that the U.S. economy and financial markets had come through the episode of volatility earlier this year “looking remarkably resilient,” and “a number” cited reports that credit conditions for household and business borrowers were “favorable.”  Unless we get another hiccup in markets between now and June 15, I doubt that global and financial risks will pose an obstacle to a June move unless Brexit fears overwhelm the markets, which I doubt.

Labor Market: The disagreements here are narrowing.  Everyone concurs that labor markets are healthy and tightening.  The only remaining point of contention is whether any meaningful slack remains.

Other topics:

There was apparently an extensive discussion about the low productivity trend in the economy.  There were two camps.  “Some” worried that with productivity so low, even tepid growth could be associated with faster declines in unemployment and a larger acceleration in inflation than the FOMC projects.  Others felt that low productivity might lead to soft income and sales growth, in which case unemployment and the federal funds rate would probably evolve largely as expected.  I thought it was interesting that the choices were skewed in that way (i.e. the risks are skewed toward a need for faster rate hikes than expected) in the context of the productivity discussion, which is exactly how I see it.

Hawks getting antsy: There were several new arguments in the April minutes that point to higher levels of agitation among the hawks.  First, “a couple” argued that the Fed was being so patient that further postponement of rate hikes might confuse the public about the Fed’s decision calculus and harm the Fed’s credibility.  These are strong words, the equivalent of questioning the central banking legitimacy of those calling for further delay.  “Two  participants” also cited the fact that the Fed is far behind relative to “standard policy benchmarks” (i.e. Taylor Rules).  They appealed to the risks of waiting too long and forcing a disruptively rapid series of hikes later and the risks of inducing “imprudent risk-taking in financial markets.”  I would add that while there was only one formal dissent (George), “a few” wanted to raise rates in April, which suggests that at least two non-voters would have dissented if they had held a vote.

All in all, after reading the minutes, market participants should probably be less surprised at the strident tone of officials over the last few weeks and more open to a June rate hike.  I come out more comfortable than before that my stubbornness in sticking to June rate hike call was the right decision.  Now, we digest the data and wait to hear from Yellen on June 6.

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Saudi Arabia Says “Check is in the Mail”

Via Robert Sinche at Amherst Pierpont Securities:

Bloomberg just posted a story on payments by the Saudi government at least partially with IOUs, something that also was done in the 1990s. While this has garnered headlines, it may reflect the weakness in oil prices – and revenues – earlier this year, revenues that will be increasing slightly as the recent oil price recovery feeds through to increased cash flow with a slight lag.

In one sense, this move is somewhat surprising. The chart below shows Government Demand and Savings Deposit Balances with banks, the combination of two series reported by the Saudi Arabian Monetary Agency (SAMA). First, there is seasonality, as deposits swell as the winter months approach and then fall as the northern hemisphere heating season wanes. Second, the level of Demand and Savings Deposits, while at a 2-year low, remains well above the levels of 2012-13, so the switch to selective use of IOUs does not reflect a desperate move because they are “running out of money”. As a result, this may reflect a short-term timing issue but is probably not a dire issue, although I’m sure those who think the Fed should stay on hold forever probably have a new entry on their list of reasons for not normalizing rates.

Saudi Arabia Said to Consider Paying Contractors With IOUs
2016-05-18 14:56:24.151 GMT

By Matthew Martin and Archana Narayanan
(Bloomberg) — Saudi Arabia has told banks in the country that it is considering giving contractors IOUs to settle some outstanding bills, according to people familiar with the discussions. A projected budget deficit this year is prompting the government to weigh alternatives to limit spending. Contractors would receive bond-like instruments to cover the amount they are owed by the state which they could hold until maturity or sell on to banks, the people said, asking not to be identified because the information is private. Contractors have received some payments from the government in cash and the rest could come in “I-owe-you” notes, the people said.

Saudi Arabia has responded to the recent decline in crude prices, which account for the bulk of government revenue, by stopping payments to contractors and suppliers, tapping its foreign reserves and borrowing from local and international banks. Saudi Arabia’s Finance Ministry declined to comment. The Saudi Arabian Monetary Agency didn’t immediately respond to a call and e-mail outside office hours.

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FX

Via Marc Chandler at Brown Brothers Harriman:

Dollar Gains on More Supportive Rates Outlook

• The US dollar is rising against all the major currencies today as rates markets are adjusting in its favor
• During the North American session, the FOMC minutes will be the highlight
• Japan reported stronger than expected Q1 GDP
• The UK reported labor market data
• South Africa reported April CPI ahead of the SARB meeting tomorrow

The dollar is broadly firmer against the majors as rates markets turn more supportive.  Sterling and the yen are outperforming, while the Antipodeans are underperforming.  EM currencies are broadly weaker too.  INR, CNY, and TWD are outperforming while ZAR, PLN, and MYR are underperforming.  MSCI Asia Pacific was down 0.7%, with the Nikkei basically flat.  MSCI EM is down 0.8%, with Chinese markets down around 1.5-2.5% on the day.  Euro Stoxx 600 is down 0.1% near midday, while S&P futures are pointing to a lower open.  The 10-year UST yield is up 1 bp at 1.78%.  Commodity prices are mixed, with oil down marginally and copper down nearly 1.5%.  

The US dollar is rising against all the major currencies today.  The Australian dollar is retracing a sufficient part of its recent gains to suggest that the current phase of the US dollar’s recovery is not over.  Given that the Aussie topped out a week before the other major currencies, it is reasonable that this is where the US dollar begins recovering first.  AUD’s recent resilience was noted, but that has evaporated today with a 0.6% drop in early European activity.

We had noted the divergence between what appeared to a constructive technical condition and interest rate markets that were largely unchanged.  The recent price action is providing more interest rate support for the dollar.  Specifically, consider the Fed funds futures strip.  The August contract can be used to calculate the odds of a June or July rate hike.  The implied yield has risen 3 bp this week.  It may not sound like much, but it is the difference between almost a 25% and 36% chance.  

The December contract is also interesting.  The yield has risen 6 bp this week.  The implied yield now stands at 58 bp.  If the Fed did not raise interest rates until December 14, fair value for the December contract is about 51 bp.  The market has moved to discount one 25 bp move and about a third of another move.  

Look at what is happening to the US-German two-year interest rate differential.   Despite the strong US retail sales report and consumer confidence on May 13, the US premium over Germany on two-year money rose a single basis point.  However, this week it is already up 10 bp to reach the upper end of the range that has prevailed since late-March.  

The euro has been pushed through last week’s lows and appears set to test important support in the $1.1200-1.1220 area.  This area corresponds to last month’s lows and is also the 38.2% retracement of the euro’s rally since the early-December upside reversal during Draghi’s press conference.  It probably requires a break of $1.12 to convince more participants that a high is in place.  

The calendar is light for the US today.  The main feature is the FOMC minutes from the April meeting.  The minutes pick up a range of views.  The FOMC statement is one view, as nuanced as it may be.  Given the discussions in March, with some regional presidents suggesting the possibility of an April hike (and Yellen at the NY Economic Club saying no), the minutes are likely to be more hawkish than the statement.  This also seems obvious from recent comments from a few Fed presidents.  

There was one dissent, Kansas Fed’s George.  We suspect, but cannot prove, that there is an agreement about dissents.  George’s dissent may represent others’ views.  One need not be Tyler Durden to appreciate that the Fed’s public persona is finely crafted, with much thought and consideration.  

Yesterday, Lockhart, Williams, and Kaplan all sounded hawkish.  Lockhart said 2-3 rate hikes this year are possible, while Williams said that he views the June FOMC meeting as live.  Indeed, Lockhart said he doesn’t rule out hiking ahead of the Brexit vote.  Lastly, Kaplan said that a rate hike may be warranted in the no-so-distant future.  Yet we must note that none of the three are voting members in 2016.

We continue believe that investors are best advised to hear what the regional presidents say, but listen to the leadership of Yellen, Fischer, and Dudley.  Not to put too fine of a point on it, but a clearer sense of the Fed’s thinking will be likely found in Fischer and Dudley’s speeches tomorrow than the minutes today.

Japan reported stronger than expected Q1 GDP figures earlier today.  The Bloomberg median was 0.1%, but instead, Japan reported a 0.4% expansion.  This offset in full the revised -0.4% decline in Q4 15, (from -0.3%).  Consumer and government spending drove growth while business spending fell 1.4%.  Consumer spending rose 0.5%, more than twice the pace the market expected (0.2%).

While GDP was flat in the Q4 15-Q1 16 period, consumption fell.  The rise in consumption in Q1 16 followed a revised 0.8% contraction in Q4 (from -0.9%).  Consumption in Japan accounts for around 60% of GDP.  It has fallen on average 0.2% per quarter for the past four quarters.  It has risen 0.2% on average over the past 20 quarters (five years).  

Business spending fell 1.4% in Q1, almost twice the pace expected, and the Q1 revision was not friendly (1.2% from 1.5%).  During the past four quarters, business spending has fallen 0.3% on average.  Over the past five years (20 quarters) it has averaged 0.5%.  Our hypothesis is that the low level of business spending is not due to the lack of capital, high interest rates, or a heavy effective tax burden.  If that is true, it means that lowering interest rates and cutting taxes are unlikely to business spending.  

The policy outlook is unlikely to be changed by the GDP figures.  The Abe government is still thought to be working on a fiscal package, which may include the postponement of the retail sales tax increase.  While the details are expected to leak out, Abe expected to unveil it formally at the G7 summit at the end of the month that he hosts.  Many continue to expect the BOJ to also expand its monetary stimulus.  It may include buying more ETFs, and two new issues that meet its requirements are expected to come to market soon.

The US dollar has proven resilient against the yen despite the better than expected GDP report.  It briefly dipped to almost JPY108.70 from above JPY109 but rebounded to begin the European trading at its session high near JPY109.55.  The move above JPY109.50 resistance yesterday ran out of steam near JPY109.65.  The market may be reluctant to take the dollar much through this area without fresh developments.  The JPY110 area offers important psychological resistance, so that the dollar is unlikely to push through on the first approach.    

As we have seen, rate interest rate differential shift is supporting the pullback in the euro against the dollar.  However, the US premium over Japan for 10-year money is still not fat enough to draw strong interest.  At 187 bp, it has risen about 7 bp this week but it is still off a few bps since the end of April.  

The dollar’s gains against the yen do not mean that equity markets are stronger.  In fact, Asian markets, including the Nikkei fell after the S&P 500 lost 1% yesterday, and the MSCI Asia Pacific has surrendered about three-quarters of yesterday’s gains.  European shares opened around 0.3% lower, with nearly all sectors lower.  It presently looks as if the S&P 500 will open just above yesterday’s lows (2040).  Our technical analysis identified this as the upper end a band of support that extends to 2030.  A break brings our technical target of 1990-2000 into view.  

The UK reported firm labor market data.  April jobless claims came in at -2.4k vs. +5k expected, while the unemployment rate was steady in March at 5.1%.  Average weekly earnings were higher than expected, and the 3-month employment change was 44k vs. flat expectations.  This comes after softer than expected CPI data yesterday.  Retail sales will be reported tomorrow, and are anticipated to bounce back and recoup around half of March’s decline.  

South Africa reported April CPI, which rose 6.2% y/y (as expected).  March retail sales will be reported shortly, which are expected to rise 3.8% y/y vs. 4.1% in February.  The South African Reserve Bank meets tomorrow and is expected to keep rates steady at 7.0%.  However, the market is split.  Of the 25 analysts polled by Bloomberg, 19 see no change and 6 see a 25 bp hike.  We think the rand will be the deciding factor; with weakness persisting this week, a 25 bp hike has become more likely.

Brazil will reveal the second preview of IGP-M wholesale inflation, which is expected to rise 0.68% m/m.  Most measures of inflation in Brazil have been easing, with many expecting COPOM to start a new easing cycle this year.  Finance Minister Meirelles said that the central bank (BCB) will be given technical autonomy, and that he will discuss possible replacements for BCB directors with new chief Goldfajn.

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