Following yesterday's turbulent bond trading session, where the volatility after the worst Bid to Cover in a Japanese bond auction since 2009 spread to Europe and sent Bund yields soaring again, in the process "turmoiling" equities, today's session has been a peaceful slumber barely interrupted by a "better than expected" Italian and German Bund auction, both of which concluded without a hitch, and without the now traditional "technical" failure when selling German paper. Perhaps that was to be expected considering the surge in the closing yield from 0.13% to 0.65%. Not hurting the bid for 10Y US Treasury was yesterday's report that Japan had bought a whopping $23 billion in US Treasurys in March, the most in 4 years so to all those shorting Tsys - you are now once again fighting the Bank of Japan.

On the economic front we got some poor news out of China, where both industrial production and retail sales mixed (this is bullish because it means more easing may be coming), while in Europe Q1 GDP came in line as expected at 0.4% (up from 0.3%), which is also bullish because it means easing is working. Let's just ignore the arther substantial drop in Eurozone industrial production in March, which slid 0.3% on expectations of an unchanged print and down from last month's 1.1%. Just chalk it up to spring weather or something.

The overnight session started with Asian equity markets trading mixed following a tepid Wall Street close, with energy outperforming on the back of gains in crude prices. ASX 200 (+0.4%) after Australia lowered taxes for small businesses in the budget which sparked hopes of a spending spree. Nikkei 225 fluctuated between gains and losses with telecoms underperforming, following a miss on earnings from index heavyweight KDDI (-3%). Chinese markets saw subdued trade with market participants tentative ahead of the release of Chinese industrial production and retail sales data which fell short of expectations (see below).

• Chinese Retail Sales (Apr) Y/Y 10.0% vs. Exp. 10.4% (Prev. 10.2%), YTD (Apr) Y/Y 10.4% vs. Exp. 10.5% (Prev. 10.6%)
• Chinese Industrial Production (Apr) Y/Y 5.9% vs. Exp. 6.0% (Prev. 5.6%), YTD (Apr) Y/Y 6.2% vs. Exp. 6.3% (Prev. 6.4%)

European equities (Eurostoxx50 +0.9%) recovered from yesterday’s losses to reside in positive territory, with the energy sector outperforming following the drawdown in the API crude inventory (-2.1mln vs. Prev. -1.5mln) release yesterday, which subsequently supported oil prices. Meanwhile, Bunds (+76 ticks) have been buoyed by German GDP SA (Q/Q 0.3% vs Exp. 0.5%) which came in short of expectations, combined with profit taking in German paper following yesterday’s sharp declines. The upside seen in Bunds is also a continuation from gains seen in UST’s (+8 ticks) due to short covering from dealers and real money demand, coupled with the strong 3Y treasury auction.

BoE QIR said CPI is in line with returning to the 2% target in 2 years however cut CPI forecast for 2016 to 1.6%, cut 2015 and 2016 GDP forecast and sees downside risk to near term inflation which prompted GBP/USD to fall from fresh YTD highs to reverse all of its earlier gains from positive jobs data (UK Jobless Claims Change (Apr) M/M -12.6k vs Exp. -20.0k) (UK Average Weekly Earnings 3M/Y (Mar) 1.9% vs. Exp. 1.7%) which also showed a pick-up in wages. The report from the BoE was largely less hawkish than the market has previously expected. Meanwhile, EUR/USD is slightly lower after lacklustre Eurozone Industrial Production data (M/M -0.3% vs Exp. 0.0%), while Eurozone GDP came in-line with expectations 0.4%.

WTI (USD +0.57) and Brent (USD +0.48%) crude futures have been supported after API crude inventories showed a drawdown of 2.1mln vs. Prev. -1.5mln, while today’s DoE crude inventories are expected at -250K. The monthly IEA report showed that the IEA says OPEC April oil production rose by 160,000bpd to 31.2mln bpd in April, the highest since September 2012 and left their forecast for global demand unchanged. Elsewhere spot gold (unch) has traded within a tight range sitting USD 5.00 shy of the USD 1,200 despite the softer greenback.

In summary: European shares remain higher though off intraday highs, with the real estate and media sectors outperforming and financial services, health care underperforming. Euro-area 1Q GDP growth in line with ests., German 1Q growth below estimates, Italian, French growth ahead. BOE cuts U.K. growth forecasts through 2017, sees inflation at goal in 2 years. China April industrial output, retail sales below estimates. The French and Italian markets are the best-performing larger bourses, Swiss the worst. The euro is stronger against the dollar. French 10yr bond yields fall;  German yields decline. Commodities gain, with nickel, corn underperforming and WTI crude outperforming. U.S. mortgage applications, retail sales, import price index, business inventories,  due later.

Market Wrap

• S&P 500 (SPY) futures up 0.3% to 2102.3
• Stoxx 600 up 0.8% to 399.1
• US 10Yr yield (TNX) down 2bps to 2.23%
• German 10Yr yield down 5bps to 0.62%
• MSCI Asia Pacific up 0.4% to 152.1
• Gold (GLD) spot down 0.1% to $1193.1/oz
• Eurostoxx 50 +0.9%, FTSE 100 +0.6%, CAC 40 +1.2%, DAX +0.7%, IBEX +0.8%, FTSEMIB +1.1%, SMI +0.3%
• Asian stocks rise with the Sensex outperforming and the Shanghai Composite underperforming.
• MSCI Asia Pacific up 0.4% to 152.1; Nikkei 225 up 0.7%, Hang Seng down 0.6%, Kospi up 0.8%, Shanghai Composite down 0.6%, ASX up 0.7%, Sensex up 1.5%
• 8 out of 10 sectors rise with energy, staples outperforming and telcos, utilities underperforming
• Euro up (FXE) 0.12% to $1.1226
• Dollar Index (UDN) down 0.06% to 94.48
• Italian 10Yr yield down 8bps to 1.77%
• Spanish 10Yr yield down 9bps to 1.74%
• French 10Yr yield down 8bps to 0.89%
• S&P GSCI Index up 0.5% to 453.1
• Brent Futures up 0.7% to $67.3/bbl, WTI Futures up 1% to $61.3/bbl
• LME 3m Copper down 0.4% to $6416.5/MT
• LME 3m Nickel down 1.7% to $14100/MT
• Wheat futures up 0.4% to 482.3 USd/bu

Bulletin headline summary

• European equities (Eurostoxx50 +0.9%) recovered from yesterday’s losses to reside in positive territory with outperformance seen in the energy sector
• The Bank of England’s QIR showed a downward revision to their inflation and GDP forecast for 2015/2016 which prompted GBP/USD to give back all of its earlier gains
• Looking ahead sees the release of US Retail Sales, DoE inventories, US 10Y 24bln note auction and earnings from Macy’s scheduled at 1300BST/0700CDT
• Treasuries gain for a second day before U.S. sells $24b 10Y notes in quarterly refunding; WI yield 2.22%, highest since November, after drawing 1.925% in April.
• In EGB auctions today, Germany got bids exceeding its EU3b goal at a bund sale while Italy matched its maximum target in a separate offering of EU7b of bonds due between 2018 and 2046
• The U.S. Justice Department is set to rip up its agreement not to prosecute UBS Group AG for rigging benchmark interest  rates, according to a person familiar with the matter, taking a new step to hold banks accountable for repeat offenses
• Mark Dearlove, a Barclays Plc executive who was involved in the manipulation of Libor, was named as the U.K. lender’s head of markets for Asia-Pacific
• China’s broadest measure of new credit rose less than economists forecast in April, underscoring the case for monetary policy easing in the world’s second-largest economy
• China cleared the way for more than 1.7t yuan ($274 billion) of muni bond sales this year, allowing the notes’ use as collateral for central bank loans and releasing details of a previously announced debt-swap plan
• The Bank of England cut its growth forecasts through 2017 and endorsed investors’ view for gradual interest-rate increases that may not start until the middle of next year
• Euro-area growth rose 0.4% in 1Q; Germany rose 0.3% from 4Q’s 0.7% growth, while France expanded 0.6%, fastest pace in almost two years
• Greece’s economy went back into recession, contracting 0.2%, as a standoff with its creditors renewed doubts about its place in the euro area
• Democrats’ revolt led to defeat of Obama’s trade bill and his hopes to close and submit the Trans-Pacific Partnership to Congress for an up or down vote without amendments
• Loss was a rebuke for Obama, who in recent weeks has been in meetings, on the telephone and in personal appeals scratching for every Democratic vote
• Chicago may have to pay banks as much as $2.2 billion after Moody’s dropped its credit rating to junk, deepening the fiscal crisis in the third-largest U.S. city.
• North Korean leader Kim Jong Un has purged his defense minister for dozing off at a rally in the latest removal of a senior official under his rule, a South Korean lawmaker said
• Sovereign bond yields fall.  Asian stocks mostly higher, European stocks, U.S. equity-index futures decline. Crude oil higher, gold little changed,  gold, copper higher

US Event Calendar

• 7:00am: MBA Mortgage Applications, May 8 (prior -4.6%)
• 8:30am: Retail Sales Advance, April, est. 0.2% (prior 0.9%)
  • Retail Sales Ex Auto, April, est. 0.5% (prior 0.4%)
  • Retail Sales Ex Auto and Gas, April, est. 0.6% (prior 0.5%)
  • Retail Sales Control Group, April, est. 0.6% (prior 0.3%, revised 0.4%)
• 8:30am: Import Price Index m/m, April, est. 0.3% (prior -0.3%)
• 10:00am: Business Inventories, March, est. 0.2% (prior 0.3%)
• 1:00pm: U.S. to sell $24b 10Y notes

DB's Jim Reid concludes the overnight summary

Once again the overriding focus continues to be on the volatility in the bond market although this time we saw US Treasuries pare most of the intraday weakness as the 10y closed 3.1bps tighter on the day at 2.249%, having at one stage traded as much as 8bps higher in yield intraday at 2.364%. You’d have to go back to the middle of November to find the last time 10y yields finished that high. A strong 3-year auction appears to be the reason for the bounce back in the Treasury market yesterday with the auction drawing the highest demand since 2009. There was no such rebound in European bond markets however. 10y Bunds opened at 0.610%, hit an intraday high of 0.736% around lunchtime, before then closing out at 0.673%, still +6.5bps higher in yield on the day. Amazingly, 10y Bunds have now closed higher in yield 14 times in the last 16 sessions. Again the weakness wasn’t just in Bunds though as other developed and peripheral markets suffered similar such moves. We highlighted yesterday the issue with the lack of liquidity in the market at present having an influence on the volatility in bond markets. It’s also probably no coincidence that the moves higher in bond yields are coming at a time where oil markets appear to be making a decent recovery. Yesterday WTI (+2.53%) and Brent (+3.00%) closed higher at $60.75/bbl and $66.86/bbl respectively to finish more or less at their 5-month highs.

With bond market volatility appearing to show few signs of abating, it’ll be interesting to see how markets digest the various GDP indicators out of Europe this morning as well as the final April CPI print for Germany and whether or not these act as a potential catalyst for a change in sentiment.

Before we get there though, bond markets in Asia are certainly trading with a better tone this morning. 10y yields in Hong Kong (-2.1bps), Singapore (-2.7bps), South Korea (-2.0bps) and Australia (-5.2bps) are all tighter as we type. 10y Treasuries (+0.6bps) are relatively unchanged. Outside of China, equity markets are trading with a slightly better tone also. The Nikkei (+0.50%), Hang Seng (+0.15%) and Kospi (+0.63%) are all higher. The former paring back losses after Japan printed its largest current account surplus (¥2.8tn vs. €2.1tn expected) in seven years, fueled by a lower Yen. In China the CSI 300 (-0.20%) and Shanghai Comp (-0.15%) are both slightly lower as we type. It’s likely that these levels will swing around however by the time this lands in readers emails with China retail sales, industrial production and fixed asset investment data due at 6.30am GMT.

Yesterday’s continued volatility in bond markets appeared to help ignite a weaker day for equities generally. The S&P 500 (-0.29%) and Dow (-0.20%) closed lower for the second consecutive day despite energy stocks (+0.44%) taking a leg up from the rise in oil markets. The Dollar was softer meanwhile with the DXY closing -0.50%. Interestingly with all the volatility in Treasuries and with the 10y around 22bps higher in yield month-to-date so far, the Dollar has actually been relatively subdued with the DXY down just 0.07% over the same time period. The S&P 500 is +0.65% month to date with the intraday high (May 4th) to low (May 6th) range no more than 2.5%, so clearly the volatility has been isolated in bonds thus far.

Moving on, there wasn’t too much to take away from yesterday’s data. The April NFIB small business optimism survey rose +1.7pts to 96.9 (vs. 96.0 expected) while the March JOLTS job opening report was a tad below market (4.99bn vs. 5.11bn expected) and declined from 5.14bn the previous month. In the details, the hiring rate was unchanged at 3.6% while the quits rate edged up one-tenth of a percent to 2.0%, matching January’s 7-year high. Meanwhile the April Monthly Budget Statement showed that the US had a surplus of $156.7bn, up from $106.8bn in March and more or less in line with market expectations ($155.0bn).

There was some more chatter out of the San Francisco Fed’s Williams yesterday, who again reiterated the dependency on data for a first rate move but did note that ‘I see a safer course in a gradual increase, and that calls for starting a bit earlier’. Williams also suggested that the Fed’s ability to delay a rate hike is ‘more limited’ before adding that he’s now ‘reasonably confident’ that inflation will move back to 2%. Meanwhile, the NY Fed’s Dudley took a more cautionary stance saying that he was unsure on the timeframe for liftoff. Dudley did however acknowledge that ‘lift off will signal a regime shift even though policy would only be slightly less accommodative after lift-off than it is before’, then going on to warn that ‘I expect that this will have implications for global capital flows, foreign exchange valuation and financial asset prices even if it is mostly anticipated when it occurs’.

European risk assets certainly had a softer day yesterday as the Stoxx 600 (-1.31%), DAX (-1.72%) and CAC (-1.06%) fell. Credit markets were also weaker as Crossover closed +11bps wider. As mentioned the weakness appears to be more of a spillover effect from the bond market than anything else after what was a very quiet day data wise. French business sentiment for April printed in line at 98 while in the UK both industrial (+0.5% mom vs. 0.0% expected) and manufacturing (+0.4% mom vs. +0.3% expected) production came in above market.

Aside from the news that the ECB has approved a further €1.1bn in ELA funding for Greek banks (with no apparent changes to haircuts on collateral), there wasn’t a whole lot of new information following Monday’s Eurogroup meeting for Greece. With the €750m IMF repayment now also out of the way – which the FT reported was funded via a tap of its IMF Special Drawing Rights - talks are set to continue this week with PM Tsipras yesterday briefing his cabinet on the state of talks where he told ministers that the government will continue to stick to its ‘red lines’ before then going on to say that it’s now time for Greece’s creditors to ‘make the necessary steps in order for them to prove in practice their respect towards the democratic mandate’.

According to Bloomberg, one other situation which looks set to drag on is the Ukraine debt restructuring talks. With a June deadline set for the restructuring of $23bn of Ukrainian bonds, Ukraine’s finance ministry yesterday issued a statement implying their creditors of a ‘lack of willingness to engage in negotiations’. The apparent disagreement appears to lie in the details of the restructuring with Ukraine finance minister Jaresko saying that a combination of principal and coupon cuts, as well as maturity extensions are needed to meet IMF targets, while Ukraine’s creditors are looking for just a maturity extension.

Before we take a look at today’s calendar, upgraded global oil demand forecasts out of both OPEC and the EIA yesterday appears to have given some support to oil prices. OPEC now expects global demand to grow by 1.18m barrels a day for 2015 which is slightly up from 1.17m previously. The EIA has also raised its forecasts suggesting that demand will grow by 1.2m barrels a day this year and 1.3m barrels next year.

It’s a busy calendar data-wise for the market to digest today. The aforementioned Q1 GDP reports out of the Euro-area and regionally in Germany, France and Italy will be important while the final April CPI reading for Germany will be closely watched. We also get CPI for France, Italy and Spain as well as industrial production for the Euro area. In the UK meanwhile, we get employment indicators including the unemployment rate and average weekly earnings. The Bank of England inflation report will also be of some interest. In the US this afternoon, April retail sales is the primary release while the import price index and business inventories round off the prints.