This week, much of the market focus will remain on the policymakers' responses to the challenges emerging out of the, well, emerging markets. In particular, the response of the Turkish Central bank will be key. This week we also have eight MPC meetings, with the US FOMC on Wednesday standing out. Consensus expects the continuation of the tapering of asset purchases – by another USD10bn, split equally between Treasuries and MBS. Other than that, the announcement should be fairly uneventful. In India GS forecasts an out-of-consensus hike of the repo rate to 8.00% after the central bank published a report on suggested changes to the monetary policy framework. In New Zealand, South Africa, Israel, Mexico, Malaysia and Colombia, consensus expects no change in the monetary policy stance. Among economic data releases, the focus will be on consumer surveys, as well as business surveys (US, Germany and Italy). There are also inflation numbers from the US, Euro Area, Japan and Brazil. Advanced Q4 GDP data prints will come out for the US and the UK. US consumption and production numbers are due at the end of the week.
Some better than expected economic news out of Europe, Greek 10 Year yields dropping to 7.65% or the lowest since May 2010, and futures are... red? Alas, such is life in a world in which the S&P500, aka the E-mini, is simply a derivative of the Yen funding currency pairs, where the USDJPY touched on 105 after a straight line diagonal move only to sell off in recent trading. Heading into the North American open, stocks in Europe are seen mixed, with peripheral stock indices outperforming, buoyed by the prospect of Portugal echoing yesterday’s Irish NTMA return to capital markets with its 10y bond syndication. As such, despite the cautious sentiment, financials led the move higher, with Italian banks gaining for 4th session as IT/GE 10y spread narrowed to its tightest level since early July 2011. Of note, FTSE-100 index underperformed its peers since the get-go, with retailers and tobacco names under pressure. In spite of opening higher by over 3%, Sainsbury's shares have since reversed and are seen lower by almost 2% after co. CFO said that he expects FY LFL sales to be just below 1% and expects Q4 to be similar to Q3. Elsewhere, tobacco names came under selling pressure following reports that China is planning a ban on smoking in public by year's end.
In a day that will be remembered for the first major snowstorm to hit New York in 2014 and test the clean up capabilities and resolve of the city's new populist mayor (not starting on a good note following reports that JFK airport will be closed at least until 8:30 am Eastern), it was only fitting that there was virtually no overnight news aside for the Chinese non-manufacturing PMI which dropped from 56.0 to 54.6, a new 4 month low. Still, following yesterday's ugly start to the new year, stocks in Europe traded higher this morning, in part driven by value related flows following the sell-off yesterday. Retailers led the move higher, with Next shares in London up as much as 11% which is the most since January 2009 and to its highest level since 1988 after the company lifted profit forecast after strong Christmas trading performance. Other UK based retailers with likes of AB Foods and M&S also advanced around 2%.
After beating expectations for 6 months in a row, the whisper expectations for December's Manufacturing ISM was a small miss of the 56.8 consensus print. Instead, the US inventory build up in the quarter boosted the ISM for one more month with the headline print of 57.0 beating expectations modestly, if recording the first decline in seven months, down from November's 57.3. There was little surprise in the internals, which saw New Orders (64.2 vs 63.6), Employment (56.9 vs 56.5) and Prices Paid (53.5 vs 52.5) all rise modestly. The New Orders Index increased in December by 0.6 percentage point to 64.2 percent, which is its highest reading since April 2010. The Employment reading was the highest since June 2011. Like the Chicago PMI previously, inventories dipped into contraction territory, if not as violently as in Chicago, down from 50.5 to 47.0. Judging by the boost to the US economy from the government shutdown, perhaps Congress should close more often: like permanently?
Stocks dropped and bonds rallied modestly as the early subscribers received the Chicago PMI which missed expectations significantly. Seemingly, with taper in place, bad news is bad news as the 59.1 print (vs a 60.8 exp) is the biggest miss in 6 months. Under the covers things are even worse with the lowest employment index since April. Inventories also collapsed (by the most since 1977) which is a problem since New orders and production also plunged suggesting the post-government shutdown 'surprise' GDP-enhancing inventory-build is entirely a one-off event (as we noted here).
The release schedule is relatively light in the current week, without major central planning meetings. Nonetheless, there will a number of speeches from US FOMC members at the annual American Economic Association meeting. In terms of economic data releases we have manufacturing surveys from the US (Tuesday and Thursday), China (Wednesday and Thursday) and Europe (Thursday and Friday). On balance, slightly softer prints are expected for most of these releases when compared to the previous data points. However, consensus expects US consumer confidence to pick up significantly in December. Also of interest: harmonized inflation numbers from Spain and Italy on Friday, as low inflation remains an issue for ECB policy. Consensus expectations are for a small increase in the former and decrease in the latter.
Today (like pretty much every other day), it will be all about the Fed and the start of its 2-day FOMC meeting, whose outcome will be influenced by today's 8:30 am CPI report as inflation (Exp. 0.1%) according to many is the only thing stopping the Fed from tapering in light of better than expected recent economic data as well as a clearer fiscal outlook. Or at least that's what the watercooler talk is. The hardliners now agree that since the Fed openly ignored the bond market liquidity considerations in September, that it will plough on through December with no announcement, and potentially continue into 2014 with zero chances of tapering especially now that we approach the end of the business cycle and the Fed should be adding accommodation not removing it. To that end, the consensus still is in favour of January or March for the first taper so markets are not fully set up for a move; conversely a dovish statement would probably result in yet another pre-Christmas, year end market surge, which in the lower market liquidity days of December is likely what the Fed is going for, instead of a volatile, zero liquidity sell off, despite Thursday's double POMO.
Those who were looking at the JPY monkeyhammering at 9:42 spotted the exact moment the November Chicago PMI number was released early to MarketNews subscribers, and also knew precisely that the number would be a beat. Sure enough, at 9:45 when the number was released for broad distribution, this was confirmed because while the headline number dropped from last month's epic 65.9 to 63.0, it was still a sizable beat of expectations of 63.0, with the Employment number rising from 57.7 to 60.9 the highest since October 2011. However, one look at the internals shows that not all was well. In fact, with New Orders dropping from 74.3 to 68.8, production sliding from 71 to 64.3 and backlogs down from 61.0 to 59.8, the forward looking metrics all dipped so it was all up to that old faithful channel stuffer - Inventories - to fill the gap. And fill the gap it did, by soaring from 48.0 to a whopping 61.1, the highest number since September 2006!
In a carry-trade driven world in which news and fundamentals no longer matter, the only relevant "variable" is whether the JPY is down (check) and the EUR is up (check) which always results in green equities around the globe and green futures in the US, with yesterday's sudden and sharp selloff on no liquidity and no news long forgotten. The conventional wisdom "reason" for the overnight JPY underperformance against all major FX is once again due to central bank rhetoric, when overnight BOJ's Kiuchi sees high uncertainty whether 2% CPI will be reached in 2 years, Shirai says bank should ease further if growth, CPI diverge from main scenario. Also the BOJ once again hinted at more QE, and since this has proven sufficient to keep the JPY selling momentum, for now, why not continue doing it until like in May it stops working. As a result EURJPY rose above the 4 year high resistance of 138.00, while USDJPY is bordering on 102.00. On the other hand, the EUR gained after German parties strike coalition accord, pushing the EURUSD over 1.36 and further making the ECB's life, now that it has to talk the currency down not up, impossible. This is especially true following reports in the German press that the ECB is looking at introducing an LTRO in order to help promote bank lending. Since that rumor made zero dent on the EUR, expect the ongoing daily litany of ECB rumors that the bank is "technically ready" for negative rates and even QE, although as has been shown in recent months this now has a half-life measured in minutes as the market largely is ignoring whatever "tools" Draghi and company believe they have left.
In fitting with the pre-holiday theme, and the moribund liquidity theme of the past few months and years, there was little of note in the overnight session with few event catalysts to guide futures beside the topping out EURJPY. Chinese stocks closed a shade of red following news local banks might be coming under further scrutiny on their lending/accounting practices - the Chinese banking regulator has drafted rules restricting banks from using resale or repurchase agreements to move assets off their balance sheets as a way to sidestep loan-to-deposit ratios that constrain loan growth. The return of the nightly Japanese jawboning of the Yen did little to boost sentiment, as the Nikkei closed down 104 points to 15515. Japan has gotten to the point where merely talking a weaker Yen will no longer work, and the BOJ will actually have to do something - something which the ECB, whose currency is at a 4 year high against Japan, may not like.
Looking ahead at the week ahead, data watchers will be kept fairly occupied before Thanksgiving. Starting with today, we will see US pending home sales with the Treasury also conducting the first of 3 bond auctions this week starting with a $32 billion 2yr note sale later. We will get more housing data tomorrow with the release of housing starts, home prices as well as US consumer confidence. Durable goods, Chicago PMI, initial jobless claims and the final UofM Consumer Sentiment print for November are Wednesday’s highlights although we will also get the UK GDP report for Q3. US Equity and fixed income markets are closed on Thursday but US aside we will get the BoE financial stability report, German inflation, Spanish GDP and Chinese industrial profit stats. Expect market activity to remain subdued into Friday as it will be a half-day for US stocks and bond markets. As ever Black Friday sales will be carefully monitored for consumer spending trends. So a reasonably busy, holiday-shortened week for markets ahead of what will be another crucial payrolls number the following week.
Another day, another carry currency-driven futures melt-up to daily record highs (the all important EURJPY soared overnight on the return of the now standard overnight Japanese jawboning of the JPY which sent the EURJPY just shy of a new 4 year high of 138 overnight), and another attempt by the ECB to have its record high market cake, and eat a lower Euro too (recall DB's said the "pain threshold" for the EUR/USD exchange rate - the level at which further appreciation impairs competitiveness and economic recovery - is $1.79 for Germany, $1.24 for France, and $1.17 for Italy) this time with ECB's Hansson repeating the generic talking point that the ECB is technically ready for negative deposit rates. However, with the halflife on such "threats" now measured in the minutes, and soon seconds, the European central bank will have to come up with something more original and creative soon, especially since the EURJPY can't really rise much more without really crushing European trade further.
An overview of recent developments, include the political developments in the US Senate, that may weigh on the dollar in the days ahead.
This morning US futures are an unfamiliar shade of green, as the market is poised for its first red open in recent memory (then again the traditional EURJPY pre-open ramp is still to come). One of the reasons blamed for the lack of generic monetary euphoria is that China looked likely to buck the trend for more monetary policy support. New Premier Li Keqiang said in a speech published in full late on Monday that adding extra stimulus would be more difficult since printing new money would cause inflation. "His comments are different from what people were expecting. This is a shift from what he said earlier this year about bottom-line growth," said Hong Hao, chief strategist at Bank of Communications International. Asian shares struggled as a result slipping about 0.2 percent, though Japan's Nikkei stock average bounced off its lows and managed a 0.2 percent gain. However, in a world in which the monetary tsunami torch has to be passed every few months, this will hardly be seen as supportive of the "bad news is good news" paradigm we have seen for the past 5 years.
So much for the government shutdown - as one of the just released manufacturing ISM respondents so candidly put it, "The government shutdown has not had any impact on our business that I can determine, nor has it impacted any supplier shipments." And speaking of the ISM itself, it naturally rejected everything that the Markit PMI noted, and printed at 56.4, beating expectations of a 55.0 print, the 5th beat in a row, and the highest print since April 2011. Sadly, it was not 66.4 or 76.4 to at least partially "confirm" the Chicago ISM surge. So while virtually all ISM components rose, with exports spiking by 5 points to 57.0, it was the employment index that dipped yet again, from 55.4 to 53.2, the lowest since June, but in the New Normal who needs jobs when one has Schrodinger diffusion indices to confuse everyone on a daily basis. Either way, while stocks did not like yesterday's exploding Chicago PMI and dipped on fears of a December taper, today's 2 years ISM high is one of those good news is good news instances, and ES soars as usual.