On the third year anniversary of the flash crash, and in a week in which earnings season unwinds and in which there is very little macro news, the bulk of the newsflow happened overnight, starting with a drop in the Chinese Service PMI, which tumbled from 54.3 to 51.1, the lowest in two years, then we got Australian retail sales which dropped -0.1% on expectations of 0.4% gain, indicating that the Chinese slowdown is dragging down the entire Asia-Pac region further. Afterwards, we got a barrage of European non-manufacturing PMI data starting with Spain, at 44.4, down from 45.3, the lowest since December (although one wonder if Spain has finally opened a branch of the BLS, reported that unemployment actually dipped by 46.1k, on expectations of just a 2k decline, and down from 5k the prior month: how curious the timing of the "end of austerity" and the immediate "improvement" in the economy), then Italy Service PMI printing at 47.0, up from 45.5, on expectations of a 45.8 print, the highest since August 2011, French Services PMI rising modestly from 44.1 to 44.3, Germany's up from 49.2 to 49.6, on expectations of an unchanged print, all of which leading to a combined Eurozone PMI at 47.0, up from 46.6, and beating expectations of a 46.6 print. And while the Service PMI data in the Eurozone came modestly better than expected if still posting the 15th consecutive monthly contraction, the retail sales data posted yet another drop of 0.1% in March, and a decline of 2.4% compared to last year, on expectations of "just" a 2.2% drop.
Elsewhere, we had ECB member Coeure saying the central bank can cut rates again if the economy worsens, France made sure to antagonize Germany even more as FinMin Moscovici declared the era of austerity is over on German flexibility. "We’re witnessing the end of the dogma of austerity” as the only tool to fight the euro debt crisis, Moscovici said yesterday on Europe 1 radio. “We’ve been pleading for a growth policy for a year. Austerity on its own impedes growth." Of course it does absent reforms, and so far still not one single country in Europe has actually implemented spending-cut reforms as anyone who looks at the soaring budget deficit of France for example can witness. But who cares about reality when you have soundbites. Finally, don't assume for a second that the German people themselves are fine with the perception of keeping the Eurozone afloat even as the citizens of the periphery revel in a newfound spending spree.
Finally, Merkel made some headlines earlier, paraphrasing what our readers know very well, such as for example a Euro breakup "would have high political cost" , and that Greece has done a lot to meet Troika’s goal. All of this likely in the aftermath of Oskar Lafontaine's recent statement that it is high time for the Euro to break apart. She also refused to predict when euro crisis will end, saying “years” are needed to stamp out debt crisis. Finally, on the topic of austerity, she added that EU countries must live within their means and that Europeans disagree on analysis of debt crisis. The last is quite important, as it shows just how little even sovereigns understand the "magic" of shadow/repo money creation, and where the more debt one issues, the more risk securities one can buy, until, like in 2008, there is a run on the shadow bank.
And that roughly summarizes the otherwise boring and overnight session starting a holiday-shortened week. There are no major US economic releases on the calendar today, so absent war breaking out in the middle east, today's $2.75 - $3.50 billion POMO starting at 10:15 am will be the biggest news for the headline-scanning algos.
Some more on today's macro outlook from SocGen:
The rally in risk assets came through the first three days of May unscathed, and the stronger than expected US employment report on Friday will fuel hopes that the sizzling rally in stocks can extend its seven-month stretch in May. The S&P blasted through 1,600 on Friday and the Dow scaled 15,000, pretty elevated levels if you consider the distance travelled since the onset of the crisis nearly six years ago. To put things in perspective, over the same period core inflation has dropped by a full percentage point to 1.1% and there are still 2.5m fewer people working in the US than there were before the summer of 2007. The US economy on the other hand is 3% bigger than it was six years ago. In other words, there is more work to be done to get all the jobs back that were lost, but the Fed is of course a key ally as the rebuilding and reflating efforts continue. There is no doubt that even if tapering of asset purchases does happen later this year, the support of financial and non-financial assets will not disappear. The question mark is how soon and how quick the normalisation of US yields will take place. The first rise in cash yields and swaps in three weeks may well mark a turning point from April as we near the half way point through Q2. There is some 30bp to go before we return to the levels of March. A turn in the US macro surprise index was confirmed last week and could be all that is needed for the bond market to realign from overbought territory with higher yields to boot. Supply is a bearish consideration this week, but the corrective price action could be tempered by the return of Japanese buyers after the Golden Week holiday who find yields at more attractive levels.
The AUD was the second-worst performer in G10 last week and participants will now brace for the RBA decision tomorrow. Speculation has built in certain quarters that a 25bp cut in the Cash Target rate to 2.75% could be forthcoming (SG call unchanged) and this could make a fresh dent in the currency. With the UK slowly turning the corner and the MPC set to keep rates and the APF target unchanged this week, GBP/AUD is the one to watch. Having failed to close above the 200d ma at 1.5160 in two attempts last week, a third try could be successful and launch a move towards 1.55.