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Summary

  • The sales tax increase hit Japanese retail sales more than expected.
  • Australian capex in Q1 was weaker than expected, but the outlook is better.
  • BOE's Weale signals a hawkish push against Carney.
  • EONIA eases after a rising to almost 50 bp.
  • US Q1 GDP revisions may be greater than expected.

The Great Bond Conundrum is unlikely to be resolved today, but the global capital markets appear to be taking a pause today, helped in part by the Ascension Day holiday that has thinned activity in Europe. The attempt to extend the euro and sterling's recent losses was not very satisfying, and a short covering bounce lifted the tone in late morning activity in London.

US Treasuries remain bid, while European peripheral bonds are better offered. The new decline in US yields is weighing on the greenback against the yen. The euro fell to 15-week lows against the yen and broke below its 200-day moving average (~JPY138.35) for the first time since late 2012. Although steadied alongside the short-covering bounce in the euro, this area may now offer resistance.

There are five developments that investors should be aware of today.

First, Japanese retail sales for April were considerably weaker than expected. This will bolster the argument that the BOJ and Japanese government are over confident of the economy's ability to absorb the sales tax increase. Retail sales fell 13.7% on the month, after having increased 6.4% in March. The year-over-year rate fell to -4.4% from 11.0%. Japan's GDP expanded by 5.9% at an annualized rate in Q1 and is expected to contract by 3.0%-3.5% this quarter. Meanwhile, the Topix extended its advancing streak into seven sessions with a 0.2% rise today. The benchmark 10-year JGB yield eased slightly but was sufficient to fall to its lowest level (~56 bp) in about a year.

Second, an external member of the Bank of England's Monetary Policy Committee, Weale was interviewed by the Financial Times. His comments suggested a return of an old fissure in the MPC. Recall former Governor King wanted to ease policy further and was out-voted by the MPC. Carney, like the previous governor, is finding opposition to his relative dovishness and this issue is likely to continue to ferment in the coming months. Weale, like Bean, who is stepping down, argues that there is less spare capacity in the UK economy. Weale is not advocating an immediate hike as he recognizes the BOE can wait. However, he seems to be pushing in the time frame. This does not mean that investors should be looking for Weale to dissent at next week's MPC meeting. However, the first dissent under Carney's watch is possible by late summer.

Third, the Australian dollar is the strongest of the major currencies today, gaining about 0.7% against the US dollar and resurfaced above $0.9300 for the first time in eight sessions. The $0.9200 support area held on repeated tests in recent days, and the grab for yield together may have brought in buyers. The Australian dollar has also moved above the NZD$1.09 cap that has largely held since the end of last December. NZD$1.10 is the next technical level, but there is potential toward NZD$1.12 over the longer term, as the market reassesses the trajectory of RBNZ policy. Some are beginning to question the likelihood of a hike at the June 12 meeting. Australia's Q1 capex was almost three times weaker than expected at -4.2% (Bloomberg consensus was -1.5%) and that followed a revised drop of roughly the same magnitude in Q4 13 (-4.5% vs. initial estimate of -5.2%). However, as the Aussie recovered from the initial decline, observers seemed to begin highlighting the most optimistic outlook over the course of the new fiscal year (A$137 bln vs A$125 bln).

Fourth, EONIA has finally broken. It had risen for seven consecutive sessions coming into today. Yesterday it was fixed at almost 47 bp (nearly twice the 25 bp repo rate). Under the weight of liquidity injections this week (via 7-day and 3-month repo and failure to fully sterilize SMP purchases), EONIA was fixed just below 24 bp today. European banks secured their month end funding ahead of today's holiday. Excess liquidity rose by 66 bln euros to 136.4 bln, which is the most in three weeks.

Fifth, the US reports its second estimate of Q1 GDP. It is widely expected to be revised to show a contraction from a 0.1% initial estimate. The risk appears to the downside of the Bloomberg consensus for a -0.5% print. Inventories, net exports and non-residential investment were weaker, and are unlikely to have been more than partly blunted by the better consumption and residential investment. Given the US bond market, we note that Treasury will sell $29 bln of 7-year notes today. The first two legs of this week's auctions, (2-year and 5-year notes) saw fairly lackluster reception. Leaving aside the issue of what is driving the market for another post, technically, the break of the 2.46% yield level on the 10-year note is significant. The next technical target is around 2.36%.

Source: Thursday In 5 Points