In today's abnormally quiet overnight session one could hear a pin, or the USDJPY, drop: with everyone focusing on the ECB announcement in one hour, not a single algo is willing to make any big moves, or even start some momentum ignition, ahead of Draghi's announcement, which absent launching full scale QE, which it won't, will be a disappointment which means the EUR will ultimatly move higher after a kneejerk lower as the market forces Super Mario to do even more next time. As Bloomberg adds, a cut in refi and deposit rates is fully priced in and latest price action suggests investors brace for disappointment if ECB stops short of signaling asset purchases or other liquidity measures to combat deflation.
In this brave New Normal world, a Chinese contraction is somehow expected to be offset by a rebound in Europe's worst economies, because following China's latest PMI miss, overnight we were told of beats in the Service PMI in Spain (56.5, vs Exp. 54.0, a 7 year high sending the Spanish 10 Year to fresh sub 3% lows), Italy at 51.1, vs Exp. 50.5, also pushing Italian yields to record lows, and France 50.4 (Exp. 50.3). We would speculate that macro events such as these, as fabricated as they may be, are relevant or even market-moving, but they aren't - all that matters is what the JPY and VIX traders at the NY Fed do in a low volume tape, usually in the last 30 minutes of the trading day. And since the trading day today happens to be a Tuesday, and nothing ever goes down on a Tuesday, the outcome is pretty much clear, and not even the absolutely abysmal Barclays earnings report has any chance of denting the latest rigged and manufactured low-volume levitation.
After ramping in overnight trading, following the spike in Japanese stocks following another batch of disappointing economic data out of the land of the rising sun and setting Abenomics which sent the USDJPY, and its derivative Nikkei225 surging, US equity futures have pared some of the gains in what now appears a daily phenomenon. Keep in mind, the pattern over the past 6 consecutive days has been to ramp stocks into the US open, followed by a determined fade all the way into the close, led by "growthy" stocks and what appears to be an ongoing unwind of a hedge fund basket by one or more entities. Could the entire market be pushed lower because one fund is unwinding (or liquidiating)? Normally we would say no, but with liquidity as non-existant as it is right now, nothing would surprise us any more.
With the world still on edge over developments in the Ukraine, overnight newsflow was far less dramatic than yesterday, with no "bombshell" uttered at today's Putin press conferences in which he said nothing new and simply reiterated the party line and yet the market saw it as a full abdication, he did have some soundbites saying Russia should keep economic issues separate from politics, and that Russia should cooperate with all partners on Ukraine. Elsewhere Gazprom kept the heat on, or rather off, saying Ukraine recently paid $10 million of its nat gas debt, but that for February alone Ukraine owes $440 million for gas, which Ukraine has informed Gazprom it can't pay in full. Adding the overdue amounts for prior months, means Ukraine's current payable on gas is nearly $2 billion. Which is why almost concurrently Barosso announced that Europe would offer €1.6 billion in loans as part of EU package, which however is condition on striking a deal with the IMF (thank you US taxpayers), and that total aid could be as large as $15 billion, once again offloading the bulk of the obligations to the IMF. And so one more country joins the Troika bailout routine, and this one isn't even in the Eurozone, or the EU.
The key events this week are have non-farm payrolls (consensus 181K) and unemployment rate (consensus 6.7%). There is also going to be a number of speeches given by Fed policymakers. Production surveys from the US (ISM) and other parts of the world are due Monday. We also get trade balance updates from the English-speaking economies - US, UK, Australia and Canada. Finally, keep track on inflation data from Italy and Turkey: the latter is important to track given current high correlation among 'fragile' EM currencies.
It has been a relatively quiet overnight session, if with a downward bias in the EURJPY which means futures are just modestly in the red. The action however is merely deferred, with a slew of macroeconomic reports on the horizon, chief of which is the ECB rate decision, which consensus has as unchanged at 0.25%, although Draghi's subsequent conference is expected to lead to EUR weakness, even if briefly, since the central bank is widely expected to downgrade both growth and inflation forecasts. DB adds that the recent rise in eonia — which may reflect concerns about the treatment of LTROs in the end-December AQR and be encouraging the accelerated 3Y LTRO repayments — may warrant a temporary liquidity easing: a special short-term tender; temporarily easing minimum reserve requirements; or — technically possible, if politically controversial — temporarily suspending the SMP sterilization process. Concurrent with the draghi conference, we also get the second revision of Q3 GDP, which consensus now expects to rise to 3.1%, as well as this week's initial jobless claims random number generator. Later in the day the Factory Orders update is expected to show a -1.0% decline, while Fed speakers Lockhart and Fisher round off the day.
While there was a plethora of macro data (starting with some ugly numbers out of Australia which clobbered AUD pairs overnight), China HSBC Services PMI dipping slighlty from 52.6 to 52.5, Final Eurozone PMI Services (printing at 51.2 up from 50.9 and beating expectations of the same on an increase in German PMI numbers from 54.5 to 55.7 and a decline in French PMI from 48.8 to 48.0), Eurozone retail sales declining by 0.2%, on expectations of an unchanged print, and much more (see below), perhaps the most important news of the day came from Japan which many expect will be the source of much more easing in the coming months and thus serve as marginal lever to push global fungible markets higher. However, not only did various BOJ officials for the first time in a while talk down expectations of a QE boost, but the head of the Japan GPIF said that it doesn't need to sell JGBs right now as it would "rock markets" and that instead can achieve its targeted 52% weighing as bonds mature, that it may buy foreign bonds instead to raise weighting to core target (as the Fed buys Japan bonds?), and that it will be very difficult for Japan to hit the BOJ's inflation target in 2 years. Is Japan already getting cold feet on rumors of more QE and did it realize there are only so many assets it can monetize. If so, watch out below on the EURJPY which has now priced in about 700 pips of expected BOJ QE boosting in early 2014.
Previewing the rest of this week’s events, we have a bumper week of US data over the next five days, in part making up for two days of blackout last week for Thanksgiving. Aside from Friday’s nonfarm payroll report, the key releases to look for are manufacturing ISM and construction spending (today), unit motor vehicle sales (tomorrow), non-manufacturing ISM (Wednesday), preliminary Q3 real GDP and initial jobless claims (Thursday), as well as personal income/consumption and consumer sentiment (Friday). Wednesday’s ADP employment report will, as usual, provide a preamble for Friday’s payrolls.
Asian equities have gotten off to a rocky start to the week despite some initial optimism around the twin-Chinese PMI beats at the start of the session. That optimism has been replaced by selling in Chinese equities, particularly small-cap Chinese stocks and A-shares after the Chinese security regulator issued a reform plan for domestic IPOs over the weekend. The market is expecting the reforms to lead to a higher number of IPOs in the coming quarters, and the fear is that this will bring a wave of new supply of stock to an already-underperforming market. Indeed, the Chinese securities regulator expects about 50 firms to complete IPOs by January 2014 – and another 763 firms have already submitted their IPO applications and are currently awaiting approval. A large number of small cap stocks listed on Hong Kong’s Growth Enterprise Market were down by more than 5% this morning, while the Shanghai Composite is down by 0.9%. The Hang Seng (+0.4%), Hang Seng China Enterprises Index (+0.8%) are performing better on a relative basis, and other China-growth assets including the AUDUSD is up 0.5%. The Nikkei (-0.1%) is also a touch weaker after Japan’s Q3 capital expenditure numbers came in well below estimates (1.5% YoY vs 3.6% forecast). Elsewhere Sterling continues to forge new multi-year highs against the USD (+0.3% overnight).
Credit Suisse's head of US rates, Carl Lantz, is a usual suspect when it comes to dispensing bond market commentary. What we did not expect him to do, is also analyze last night's off-cycle political results. He does both in the note below: "Perhaps this is the start of the Democrat version of the Tea Party - both are reactions in some measure to widening income inequality and a frustration with politics as usual. The proposed solutions couldn't be more different, however, and it seems that despite talk of a victory for moderates the country remains very polarized"... and ... "we prefer steepeners into the refunding auctions next week - announcement at 8:30AM today. We wrote this up on Monday and have seen interest in the trade which has moved about 1.5bps in our favor. Steepening during the sell-off yesterday was a reasonable indication that supply is starting to weigh as generally speaking 7s and 10s lead moves to higher yields."
In the worst possible news for the wealth effect and stocks (recall JPM's warning yesterday), moments ago the Non-manufacturing ISM printed at 55.4, beating expectations of a 54.0 print and above September 54.4 number proving once again that all the fire and brimstone about the government shutdown having an adverse impact on the US economy was nothing but hollow propaganda. As for the actual print, this is horrible news for those betting on ongoing US economic collapse as it means the Fed may, just may, reduce its $85 billion in monthly flow some time in the future. Sure enough, stocks kneejerked lower, as did gold and the EURUSD, while 10 Year yields spiked to 2.664%. And while the bulk of internal numbers also rose, those who live and breathe the destruction of the US economy to send the S&P to recorder highs, can find solace in a New Orders print of 56.8, down from 59.6, which was the lowest number since July.
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.
Something very curious caught our eye in today's Non-manufacturing ISM. It wasn't the "unexpected" drop in the data, which we reported on previously, but what one of the respondents said far in the back of the report. It was the following:
- "The federal government's spending is increasing greatly as agencies execute their final budgets and utilize fiscal year 2013 appropriated funds prior to their expiration on September 30th. This has caused a major increase in procurement activity for goods and services. Budgets are uncertain for fiscal year 2014, so some items requiring funding in future years are not being purchased." (Public Administration)
This begs the question: is the only reason why the economy tends to pick up momentum dramatically as the summer ends just a function of a surge in government spending permeating the broader economy as agencies scramble to spend all the money they have before the end of the September 30 Fiscal Year End (just so they get allocated the same or greater budget in the coming fiscal year), which subsequently plunges or is outright halted as the case may be right now?
So much for the summer sugar rush. While last month's Non-manufacturing ISM print, and yesterday's Mfg ISM set the stage for a blowout expectation in today's September Non-Manufacturing ISM update, nobody expected a tumble from 58.6 to 54.4, resulting in the biggest miss in the index since April 2011, the lowest print since June 2013 and even the ISM's Nieves reporting that there has been "significant slowing." To be sure, this follows last month's spike to the highest print of the second Great Depression, but the drop shown below, shows this was all largely a one-time aberration. The leading Business Activity index cratered from 62.2 to 55.1 confirming the August spike was merely an a mirage, but what's worse is that the all important Employment Index (and remember: Services are far more important to the US economy than manufacturing) tumbled from 57.0 to 52.7, the lowest print since May, and biggest one month drop since March 2009!
In the upcoming week markets will continue to focus on these fiscal issues in the US, now that a temporary Government shutdown past Tuesday is assured. Still on the fiscal side but outside the US, look forward to Prime Minister Abe announcing his final decision on the VAT hike as well as unveiling a widely anticipated economic stimulus package. Finally, fiscal policy also played a role in the Italian political instability with four ministers resigning from the coalition Government. The backdrop to these events is a rapid deterioration of the political climate after former PM Berlusconi was convicted of tax evasion by a High Court.