Dollar Retreats, Oil Rebounds

European and Chinese equity markets saw fresh record highs this week, while US equities approached record highs again. However Greek turmoil, the poor US March retail sales report and China's slate of weak March data eventually pulled markets lower. The China Securities Regulatory Commission helped vaporize a large chunck of April's gains by banning certain forms of margin trading. ECB QE and the Greece situation pulled the German 10-year yield down to all-time lows around 0.049% on Friday, while peripheral yields backed up, led by Greece. Oil prices broke out to the highs of the year on speculative bets we may have seen the peak US production figures, while the Dollar gave back some notable ground as traders unwound a portion of the recent relative strength trades tied to a more favorable US economic outlook. For the week, the DJIA lost 1.3%, the S&P500 dropped 1% and the Nasdaq was down 1.3%.

The most recent CPI inflation data appears to suggest the US inflation cycle may be turning, providing some support for Fed rate hikes sooner rather than later. On Friday, the March headline y/y CPI reading dipped into negative territory, however the core y/y CPI reading was a robust +1.8%, beating expectations by a tenth of a percent. March was the second consecutive month of gains in the core y/y CPI figure. Analysts suggest core inflation will continue higher in the tug-of-war between growing wages, lower import prices and the stronger dollar.

The advance March retail sales report missed expectations for the third month in a row, and there were downward revisions to core retail sales for January and February. The core reading, which excludes volatile categories, was up a mere 0.3%. Taken together, the data suggests the consumer was pretty weak in the first quarter, with negative implications for Q1 GDP (the advance reading is due later this month). Manufacturing data for April from the Philadelphia Fed and the New York Fed was mixed: the headline Philly Fed number was not bad while the Empire survey went negative for the first time since December. But more to the point, new orders in both reports were anemic. 

A raft of Fed speakers this week mostly took the data in stride. On balance, the Fed continued to indicate that June will be a 'live' meeting for considering rate lift off, but only if the economy shakes off the seasonal weakness seen in Q1. Fed Vice Chair Stanley Fischer summarized by saying he expects some snap back in Q2 but its not clear what magnitude, and the timing of rate lift off remains data dependent.

Relations between Greece and its European partners decayed further. On Sunday, the EU gave Athens until April 20th to preset a new slate of reforms before they would unlock the final €7.2 billion tranche of aid funds at the Eurogroup meeting on April 24th. Various officials commented that little progress was being made in current negotiations and nobody expects any resolution ahead of the Eurogroup meeting. Late in the week, the FT reported that a Greek official told the paper "We have come to the end of the road. If the Europeans won't release bail-out cash, there is no alternative [to a default]." Though European officials at the IMF conference in Washington continued to insist that they want Greece to remain in the euro zone, Greece's neighbors were instituting measures to quarantine local branches of Greek banks and peripheral European bond yields soared.

Besides a feminist protestor breaking up the press conference with confetti, Wednesday's ECB decision was a snooze. President Draghi dwelled on the early successes of QE and again dismissed fears about a possible shortage of available bonds to buy. European bond yields kept sinking under the impact of QE and the Greek situation, with the German 10-year bund falling as low as 0.049% (a record low) while Italy and Spain 10-year yields soared more than 14 basis points and headed for 1.50% on Greek contagion fears. The euro gained steadily as the greenback softened on weaker US economic data. EUR/USD was as lows as 1.0530 on Monday and touched a high of 1.0850 on Friday.

The Canadian Dollar saw its biggest moves since the BoC's surprise rate cut in January. Three months ago, the BoC cut is key rate to 0.75% due to the sharp declines in oil and the implications for Canada's inflation outlook. Governor Poloz had left the door open to more rate cuts if needed, but this week the BoC withdrew any hint that it was planning to cut rates again. The staff GDP forecast for 2015 was lowered slightly but the outlook for 2016 was raised by a hair, while the overall CPI forecast for 2015 was raised quite a bit. USD/CAD had been in a 1.2350-1.2850 range since the cut; after the decision, USD/CAD dropped out of the range to around 1.2100.

Crude prices sustained their month-long rally this week on the weak dollar and slackening inventory builds. The API crude report saw its fifth straight build and the DoE report saw its 14th straight build, although the gains were both well below expectations. Over the week, the front-month WTI contract rose from $52 to a high of $57.42, notching a year to date high. Note that OPEC's monthly report out showed March production by the cartel of 30.79M bpd, +810K bpd driven by Saudi Arabia, Libya, Iraq. Saudi production grew to 10.29M bpd from 9.64M in February.

JPMorgan and Goldman Sachs beat first-quarter earnings expectations and saw good revenue growth. Goldman's revenues rose to a four-year high and the firm's investment banking net revenues saw its best quarter since 2007. Book value per share increased $5.38 to $168.39, the largest quarterly increase in over five years. Citigroup had a very good quarter, soundly beating earnings expectations on 16% growth in quarterly profit. However, revenue missed and declined slightly y/y. Mortgage lending giant Wells Fargo's earnings were flat y/y and slightly above expectations, while the firm saw solid revenue growth. Bank of America, PNC and US Bank disclosed lackluster quarterly numbers.

GE's revenue fell short of expectations, however the headline numbers reflected the GE Capital spinoff announced last week. The core industrial operation profit +9% y/y, improved profit margins sales +3% (including FX). Honeywell's revenue fell 5% y/y on FX and the Friction Material divestiture, while income saw modest gains. Shares of Netflix soared to all-time highs after beating expectations for net subscriber additions, both at home and abroad. A host of analysts upgraded the name and lavished praise on the firm's expansion, even as its earnings and revenue remained unspectacular. 

M&A action was subdued this week. Nokia confirmed it had a deal in hand to acquire Alcatel-Lucent in an all-stock deal valued at €15.6B. Strong growth in high-speed mobile data connections for everything from driverless cars to robots was a key driver in the merger discussions. The development and rollout of 5G mobile networks will be the new firm's main objective. Activist hedge fund Jana Partners went after Qualcomm, confirming it has asked Qualcomm to consider separating its chip unit from its patent-licensing business. 

The Shanghai Composite rose higher for the sixth straight week, tacking on another 6%, making for impressive rally of over 30% for the year. Investors have been undeterred by the apparent slowdown in the economy, as showcased by Q1 GDP and the bulk of data-points for the month of March. First quarter GDP growth of 7% was right in line with consensus and matched the overall 2015 target but still marked a 6-year low. Retail sales grew just 10.2% y/y, the slowest since February 2006 and missing forecasts. Industrial output grew 5.6%, the slowest since November 2008 and well below estimates at 7%e. Fixed-asset investment grew at a 14-year low of 13.5%.

Developments on Friday may put a big dent in the Chinese rally and by extension global equities. To help cut leverage and cool equity markets the China Securities Regulatory Commission banned the margin trading arms of brokerages from taking part in so-called "umbrella trusts", raising fears of a big China equity selloff. The regulator also placed limits on margin trading for highly risky small stocks that trade OTC, and warned the small investors driving the mainland equity rally not borrow money or sell property to buy stocks.