Japanese data show signs of green shoots too


MAJOR HEADLINES – PREVIOUS SESSION

  • US Apr. Durable Goods Orders out at +1.9% m/m vs. +0.5% expected and revised -2.1% prior

  • US Weekly Initial Jobless Claims out at 623k vs. 627k expected and revised 636k prior

  • US Weekly Continuing Claims out at 6.788m vs. 6.75m expected and revised 6.678m prior

  • US Apr. New Home Sales out at 352k vs. 360k expected and revised 351k prior

  • US Q1 Mortgage Delinquencies out at 9.12% vs. 7.88% prior

  • NZ Apr. Building Permits out at 11.2% m/m vs. 2.2% expected and revised -1.7% prio

  • UK May Gfk Consumer Confidence out at -27 vs. -25 expected and -27 prior

  • JP Apr. Jobless Rate out at 5.0%, as expected, vs. 4.8% prior

  • JP Apr. Household Spending out at -1.3% y/y vs. -0.7% expected and -0.4% prior

  • JP Apr. CPI out at -0.1% y/y vs. -0.3% expected and -0.3% prior

  • JP Apr. Industrial Production out at +5.2% m/m vs. +3.3% expected and +1.6% prior

  • AU Apr. Private Sector Credit out at +0.1% m/m, +4.6% y/y vs. +0.2%, +4.5% expected resp.

  • JP Apr. Housing Starts out at -32.4% y/y vs. -22.0% expected and -20.7% prior


THEMES TO WATCH – UPCOMING SESSION

  • GE Retail Sales (0600)

  • UK Nationwide House Prices (0800)

  • Denmark Unemployment (0730)

  • Sweden Q1 GDP (0730)

  • EU Euro-zone M3 (0800)

  • EU Euro-zone CPI (0900)

  • EU ECB’s Trichet speaks (0915)

  • Swiss Kof Leading Indicator (0930)

  • CA Current Account Balance (1230)

  • US Q1 GDP (1230)

  • US Personal Consumption (1230)

  • US Chicago PMI (1345)

  • US Michigan Confidence Index (1400)

  • US NAPM – Milwaukee (1400)

Market Comment:

The third tranche of US Treasury auctions did not quite match the upbeat results from the previous two, but was broadly in line with market expectations. The bid/cover ratio for the $26 bln worth of 7-year notes on offer was 2.26 times (YTD average 2.3 times) while indirect participants soaked up 33% of the issuance. US bond yields were very much in the spotlight again overnight, recouping some of the losses from the previous session with the 10-year yield dipping 11bp to 3.61%.

In the wake of the successful auction this week, Fed’s Fisher, a non-voting member of the FOMC this year, squashed the recent market chatter that there had been continued demand from foreign central banks for longer-term maturities and this was borne out by the auction results. He also maintained his more cautious approach to the economic outlook, reiterating his view that the unemployment rate could reach 10%. Following his recent visit to China, he also commented that there was little evidence that China wants to significantly shift its dollar portfolio, adding that China had no desire to harm the US’ financial markets as the interests of both parties were inter-connected. As an aside, note that this morning South Korea’s National Pension Fund said would reduce its exposure to US bonds and diversify onto other assets. However, the Pension Fund’s current holdings of US bonds account for 83% of its foreign bond holdings which only total $8.5 bln. Fisher also believed that the US’ coveted AAA rating, which has grabbed a few headlines of late, was not at risk of a downgrade and attributed the recent steepening in the yield curve to possibly supply concerns but also on increased confidence towards the economy.

The slew of economic data out of Japan was a mixed bag again. Unemployment was on the rise, up to a 5-1/2 year high of 5.0%, though in line with expectations, and this probably impacted household spending which showed at 0.9% m/m slump in April and down 1.3% y/y. However on the production side of things, data showed more signs of potential green shoots for Japan. The latest PMI data showed its fourth monthly gain in a row, rising to 46.6 from 41.4 but still hovering below the key 50 mark. Industrial production showed more positive tendencies, rising for the second straight month at +5.2% m/m and well-beating forecasts of just +3.3%. It will be interesting to monitor the related exports data to see whether the rebound is mere inventory re-building or whether external demand is picking up.