from Marc Ostwald
- Modest schedule to end the week, digesting weaker than expected Japan CPI,
uptick in German WPI and PPI, awaiting Canada CPI and Retail Sales;
Trade tensions and Italian politics still the key overarching themes
- Canada CPI/Retail Sales: CPI seen unchanged and around target, Retail
Sales expected to post solid gain, but NAFTA negotiations and CapEx
trends still key for near-term prospects
- Italy: recent spread widening rather more indicative of complacency
than a significant risk premium
- Charts: INR and IDR spot vs. USD; 10-yr Bund/BTP spread, Cocoa future,
BoC rate probabilities
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** EVENTS PREVIEW **
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Another week draws to a close with something of a whimper in terms of data and events. Statistically there are Japan's national CPI (below forecasts) and German PPI (higher then expceted) to digest ahead of Canadian CPI and Retail Sales, and Chile's Q1 GDP, which are accompanied by some Fed speak, and a Putin Merkel meeting that will probably achieve little. Next week's schedule is also rather sparse, with the exception of the UK that has CPI, PPI, House Prices, Retail Sales, revised Q1 GDP, PSNB and both CBI surveys, elsewhere flash PMIs and a plethora of surveys feature alongside US Durables, New & Existing Home Sales & the May FOMC minutes, while Japan has Trade and Tokyo CPI. All of which amounts to not very much, and will thus have the markets' chattering classes focussing on Italian politics; China, Asia, EU, NAFTA trade tensions with the US, the Brexit saga which increasingly looks like a dog spinning round and round trying to bite its own tail, and of course the seemingly inevitable collapse of the Iran/G8 JCPOA nuclear deal. Today's talks between Merkel and Putin will hopefully thaw relations between the two countries, this is not to say that Germany should in any way tacitly or explicitly Russian aggression, but rather to emphasize that a dialogue has always been preserved over much of the past 350 years, regardless of what the respective leaders views of their respective interlocutors.
Next week is also a very chunky week for US debt issuance (ca $270 Bln total): $99 bln of T-Notes, $16 Bln of 2-yr FRN and $ 116 Bln of 3, 6 & 12-mth Bills are confirmed, and an estimated $45 Bln of 1-mth Bills are likely to be confirmed next Monday. In respect of Italy, the word 'perspective' seems appropriate. There is plenty to be be concerned about in respect of the Lega/M5S govt's proposals, but the reaction thus far in BTPs has to be classified as very modest ('snowflakery' comes to mind. Ed). The fact is that the 10-yr Bund/BTP spread is just 28 bps wider at the time of writing than it was a month ago (see chart), and the 10-yr BTP yield just 2.11%. Let's remember at the height of the Eurozone crisis, 2-yr BTP yields were ca. 8% and 10-yr ca 7%, so this actually smacks of market complacency, in no small part due to continued ECB QE. Indeed the current 10-yr spread widening equates to around 1.7% in capital (price) terms), by comparison MPS share price is down 9% today at the time of writing. Let's remember at the height of the Eurozone crisis (2011), 2-yr BTP yields were ca. 8% and 10-yr close to 7%, so what this actually smacks of is market complacency, in no small part due to continued ECB QE. Indeed the current 10-yr spread widening equates to around 1.7% in capital (price) terms), and by comparison MPS share price is down 9% today at the time of writing (and by the way, should a German highlight this, then point them in the direction of the Deutsche Bank share price).
Last but not least, the latest Lipper Fund flow data bear closer scrutiny, with equities and Investment Grade corporate bonds seeing significant inflows, while EM bonds and equities saw outflows; the key aspect however is the fact that nearly all the inflows in the equity market were into domestic equities, marking a sea change from trends over the past year, and obviously fitting well with the strength of the USD, as well as EM related concerns.
** Canada - April CPI / Retail Sales **
- Given that comments by BoC deputy governor Schembri earlier in the week stuck closely to the policy outline at the last BoC meeting, that while the economy is operating 'close to potential' and inflation around target, the key BoC concern is sluggish business investment, which they attribute to constraint due to NAFTA related uncertainties. The timing of the next rate hike is therefore heavily contingent on an improving CapEx profile, and as such today's data is very unlikely to be a game changer. Indeed if forecasts of unchanged headline CPI (2.3% y/y) and core CPI readings (Common 1.9%, Median/Trim 2.1%), and a solid if unspectacular 0.3% m/m increase in Retail Sales are correct, then the cliché of 'move along, nothing to see here' would seem highly appropriate.
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