It took a precisely 0.1 beat in the Chinese Manufacturing PMI over the weekend (50.8 vs Exp. 50.7) for the USDJPY and the Nikkei to forget all about last week’s abysmal Japanese economic data and to send the Nikkei soaring by 2.1% to its highest print in 5 months. Subsequent overnight weakness from Europe, where the Eurozone Final May Manufacturing PMI dropped again from 52.5 to 52.2, below the 52.5 expected, served simply to push bunds higher back over 147.00, if not do much to US equities which as usual continue their low volume “the music is still playing” melt-up completely dislocated from all newsflow and fundamentals (because just like over the past 5 years, “there is hope”).
Looking at Asia, late on Friday, the State Council delivered one-half of that, with an announcement that it will expand its targeted RRR cuts to those financial institutions who have met certain lending ratios to the agricultural and small business sectors. This is the second tweak to reserve ratios since the PBOC cut the RRR for rural lenders in April. DB’s Chinese economist thinks that the expansion of this ‘targeted’ RRR cut should not be read as a prelude to a system-wide RRR cut, nor a drastic change in the stance of monetary policy. Li believes it simply reflects the government’s intention to encourage more resources to be made available for areas which have difficulty accessing capital and facing a high cost of funding.
There has been some consternation after over the weekend the Telegraph’s AEP noticed a hint in the CSJ that the PBOC may monetize debt, but there has really been no word yet on bond purchases following the China Securities Journal article last week suggesting that China Development Bank could issue below-market rate bonds which would be purchased by state-affiliated institutions.
Moving on to this Thursday’s ECB meeting, expectations appear to have been raised to very elevated levels. For credibility purposes the ECB would need to backstop SME lending for more than one year, but the bottom line is the size of what the ECB need to backstop to hit its objective of boosting lending to businesses and in particular SMEs is not that large. So we’ll have to see whether they deliver enough to help sentiment. The reality is that the market now expects QE at some point and the success of the meeting might depend on whether Draghi leaves the door open for it in his press conference.
In terms of the wider market’s expectations, of the 50 economists surveyed by Bloomberg, 44 expect the ECB to become the first major central bank to take interest rates into negative territory by cutting its deposit rate. All but 2 of 58 respondents said the benchmark rate would also be reduced. Germany’s Spiegel suggested that the ECB is considering new longer-term LTROs although the type of rate and a number of variables are still being debated internally. The FT reported late on Friday that the Bundesbank’s Weidmann is planning to support the ECB’s proposals to ease lending constraints on smaller businesses but his vote for rate cuts is thought to be more finely balanced.
Since today’s market volumes are lower than usual with China and Hong Kong closed, expect the equity levitation to proceed according to the central plan, even with the US Mfg ISM and construction spending on the table, which will serve to boost stocks whether it beats or misses.
Bulletin headline summary from RanSquawk and Bloomberg
- A low inflation reading out of Germany and mixed Eurozone PMIs saw European equities reverse opening gains and send Bunds back above 147.00.
- Treasuries ease in overnight trading after last week’s rally that pushed 7Y, 10Y and 30Y yields to new YTD lows; markets waiting for ECB Thursday amid expectations of additional accommodation, U.S. payrolls report Friday.
- From negative interest rates to conditional liquidity for banks, Draghi and colleagues have signaled all options are up for discussion when they meet on June 5
- Data tomorrow may reinforce the view that action is needed, with economists predicting a grim mixture of too-low inflation and unemployment near a record
- Obama will propose cutting greenhouse-gas emissions from the nation’s power plants by an average of 30% from 2005 levels; in a conference call yesterday, Obama dismissed complaints that the rule will drive up electricity prices, and told the Democrats listening: “Please go on offenseâ€
- Obama’s administration defended itself against accusations that it made dangerous concessions to terrorists and failed to give Congress adequate notice of its initiative to secure the release of Army Sergeant Bowe Bergdahl from the Taliban
- Russia gave Ukraine an extra week to pay in advance for this month’s gas supplies or risk a cutoff, at the start of a week of international talks on the crisis in the former Soviet republic
- U.K. mortgage approvals fell more than economists forecast in April, dropping to the lowest in nine months as banks tightened lending rules
- In May 1646, King Charles I admitted defeat in the English Civil War and surrendered to Parliamentarian forces besieging Newark-on-Trent. This week, as the town prepares to elect a member of Parliament, a new insurgent force led by UKIP leader Nigel Farage is on the march
- Sovereign yields mixed. Nikkei +2.1%, leading Asia equity markets higher. European equity markets mostly higher. U.S. stock futures gain. WTI crude and copper higher, gold falls
