Ten Things for Your Radar Screen

Marc To Market's picture

The week has begun off with a bang.  Follow through selling of sterling in early Asia saw its losses extended to almost $1.5070 before recovering almost a cent by early Europe to about $1.5165, filling the gap created by the lower opening in Asia.

The dollar gapped higher against the yen on reports that Asia Development Bank Kuroda may become the next governor of the BOJ.  The dollar reached a new 2-year high near JPY94.75 before coming off a big figure to JPY93.75 in the Europe. Japanese stocks liked the yen's weakness.  The Nikkei jumped 2.4%.   The gap extends to last Friday's high near JPY93.52.

Cross rate buying has lifted the euro against the dollar, and has taken out  initial resistance near $1.3250.  Intra-day technical readings warn that it is getting stretch.  European shares are higher with the Dow Jones Stoxx 600 up 0.8%, with all sectors advancing; led by technology and building materials.

The debt market is less clear cut.  Japanese 10-year government bonds and Italian and Spanish 10-year bonds are bucking the heavier tone seen in core bond markets.  On the other hand, 2-year notes are generally firmer in core Europe and Japan, but softer in Italy and Spain.

Here are 10 items that investors will be watching this week.

1. Just before the weekend, and after two weeks of persistent rumors, the UK lost its AAA rating. Moody’s cut its rating one notch to Aa1 and adopted a stable outlook. There was little market reaction to previous rating downgrades of high income countries, like the US, Japan, France and Austria. We do not expect the UK to be an exception. At the same time, our analysis suggests that the macro-economic conditions and debt dynamics are more consistent with Aa3 (of AA-). Investors should not be surprised if the other major rating agencies make good on their negative outlooks for the UK and if deeper cuts are eventually forthcoming.

2. The passive tightening of the euro area monetary conditions does not appear to be as aggressive as it had appeared and this reduces the likelihood of offsetting ECB action. The early repayment of the second LTRO was considerably less than anticipated at not even half the pace in which the first LTRO was repaid. Some 356 banks will repay 61.1 bln euros this week from the second LTRO. The large number of banks and relative small average (0.17 bln) may point to small German bank participation. On the other hand, Italian banks may have refrained given the election uncertainty.

3. Federal Reserve Chairman Bernanke provides semi-annual testimony on Tuesday and Wednesday. We expect him to help “correct” the reading of the recent FOMC minutes that some observers seemed to understand somewhat hawkishly, expecting an early end to QE3+. It was only in December that Bernanke led the FOMC to more than doubling its outright long-term asset purchases. With economy growth slowing below the pace needed to lower the unemployment rate, we see little reason to expect a change of heart. A few regional presidents disagree, but they are a minority at the Federal Reserve and especially among the voting members of the FOMC.

4. The US Congress has a few days to avert the sequester—the deep spending cuts—set to be enacted on March 1. It calls for $1.2 trillion cuts in spending over the next decade, with $85 bln to be delivered in the current fiscal year. This is on top of the $1.4 trillion of spending cuts to discretionary programs announced over the past two years. While there may be a last minute deal, as there was with the fiscal cliff, it seems a bit less likely. Assuming a 1:1 fiscal multiplier, the sequester is expected to shave US growth around 0.5%. It is possible that Congress later authorizes additional, which may mitigate the fiscal drag.

5. Results from the Italian election will likely begin around 9:00 am EST.  A tight race is expected. A center-left victory in the lower chamber is expected, but the Italian polls have a habit of projecting greater support to the center-left than actually materializes and Berlusconi appeared to be enjoying some momentum in the days leading up to the last official polls. The Senate is a different story. The center-right can block an outright PD majority, forcing a coalition, depending on how Monti does. The most dramatic market reaction may be if the center-right receives the most votes in the lower house. Grillo’s 5-Star movement, which seems largely a protest vote, is also a known unknown, to borrow a phrase. High levels of undecided voters warn of the potential for surprises.

6. The usual battery of month end data will be released. In terms of important, potentially market moving data, the week begins off slowly. We would highlight the mid-week euro area money supply and the private sector credit-creation. The continued trend toward less accommodative financial conditions will likely be evident. US January durable goods orders are expected to show a weak start to capex in Q1. The UK Q4 GDP is unlikely to be revised, but revisions of Q4 US GDP, based on the combination of trade, inventory, consumption, and construction spending will likely replace a small contraction with a small expansion. Friday is the big day with PMIs, flash euro area February inflation, US auto sales and January personal consumption and income figures.

7. On Thursday, February 28, Bankia will report its full year earnings and is expected to admit to a loss in excess over 19 bln euros, making it the largest corporate loss in Spain’s history. Its restructuring will include the divestment of substantial holdings in several large Spanish companies, including IAG Group (12% stake), Iberdola (5.3%) and Mapfre (15%)—an airlines, utility and insurer respectively. In this way, the financial crisis in Spain will lead to industrial and governance changes. At the same time, the fact that Bankia failed within eleven months of it being listed , when it raised 24 bln euros, has generated persistent protests as the Rajoy government as hundreds of thousands of small investors who bought at the IPO as looking at a 97% loss.

8. The Abe government is expected to announce a new management team for the central bank. It will include the governor and two deputies. The latest reports suggest Asian Development Bank head and former MOF official Kuroda may get the nod as governor. He is moderately dovish and has advocated buying of long-term securities. He has a strong international reputation. If Kuroda does in fact become the next BOJ governor, reports suggest it will nominate Fin Min's Nakao as his replacement at the ADB.  Back channels suggest China will not compete for the completion of Kuroda's term.

9. A combination of minutes from the recent meeting and comments by the governor of the Reserve Bank of Australia suggests that a March or even April rate cut by the RBA is less likely than it appeared a couple of weeks ago. While the evolution of the economy in the coming weeks is important, it now seems that, barring a significant deterioration in economic conditions, the Q1 CPI due on April 23 may be the key to a May cut.

10. In the emerging markets we note the following: HSBC flash China PMI for February was reported overnight, and came in at 50.4 vs. 52.2 consensus and vs. 52.3 final in January, which was a two-year high. This is the first reading for February, and we note that some January data was not reported due to the Lunar New Year holiday, including retail sales and industrial production.. These two series report January and February combined as one reading. On Friday, official February PMI will be reported, with market consensus at 50.5 vs. 50.4 in January. We will also get the final HSBC PMI report on Friday. We continue to believe that everything is lined up for modestly improved China data in H1 2013. Both HSBC and official PMI readings have been above 50 for three straight months now, and that has been largely reflected in improved trade and IP data recently.

Elsewhere in EM, the Israeli central bank meets today and is expected to keep rates steady at 1.75%. Hungary's central bank meets Tuesday and is expected to cut rates 25 bp to 5.25%. Brazil reports Q4 GDP as well as February trade and PMI data on Friday. These readings will be important coming ahead of the next COPOM meeting March 5/6, where many analysts are looking for the central bank to signal a more hawkish stance in its policy statement.

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Edward Fiatski's picture

Marc, in your opinion, did the GBP/USD close the gap down today from prev week close? Still trailing along upward.

SmallerGovNow2's picture

"It calls for $1.2 trillion cuts in spending over the next decade"

...  a decrease in the planned spending increases, the projected spending curve still goes up, let's get 'er right ...

Edward Fiatski's picture

Isn't this a Known Known? Only thing being released on 28 Feb is the exact price paid.

Edward Fiatski's picture

As of 11:38 AM GMT: 

UK 10 yr yield is trading 1.4 bps higher at 2.12%, German benchmark yield trading 1.0 bps higher at 1.58%.

Edward Fiatski's picture

No 7: Marc, do you think the Bankia losses are priced in?

Marc To Market's picture

Sorry, Edward, not sure.  Tough call. 

Edward Fiatski's picture

Very interesting, not exactly a suprising result, but could lead to some price action.

Edward Fiatski's picture

No 6: Also, German unemployment data & E-Z CPI out for Jan on Thursday. HOLD ON TO YOUR PANTS (and Shorts).

Marc To Market's picture

Agree on EZ CPI, but not sure German employment data is a big mover.  Tend to think market already assumes modest German recovery after 0.6% contractionin Q4 is underway.

Edward Fiatski's picture

But Feb PMIs all came lower than the previous months. Unemployment data is for Feb also.

Marc To Market's picture

flash PMI is really France and Germany.  Other countries' details are important within the euro zone.  UK, and Nordic bloc and Switzerland too will have PMIs.  That is why I cited it. 

Cult of Criminality's picture

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I need more cowbell's picture


"4. The US Congress has a few days to avert the sequester—the deep spending cuts—set to be enacted on March 1".

Deep spending cuts? That is MSM-speak. So we "only" add about $15-20T in debt over the next decade, not $16.5-21.5?


Marc To Market's picture

I do not see it quite that way.  I see $1.4 trillion cut in spending agreed in past two years.  And sequester cuts another $1.2 trillion. I do call that sum deep spending cuts. Any yet, contrary to some opinions here, I don't see the crisis.  There is not capital strike  against the US.  I think politicians regardless of ethnicity or political persuasion, like the people they represent, are loath to make difficult choices unless they are forced to.  The combination of low interest rates, low (measured) inflation, weak growth, and a shortage of high quality paper means US politicians are not being forced to address the fiscal excesses.  The claim that the US is adding 15-20 trillion of debt is surely a mistatement.  It likely projects liabilities without making allowances for revenue.  Debt does not equaly spending, it equals revenues minus liabilities. 

Hedgetard55's picture

What "market" are you talking about? Bernanke is oprinting 85B per month and it is getting thrown into commodities, stox and bonds. There is NO fucking market, and your ten items mean shit as long as Ben prints.

suteibu's picture

Yes, and government projections always overstate revenues and understate spending.  "Past performance does not guarantee future results" is in the fine print of every forecast vomited up by this government.  The concept of "spending cuts" is merely the reduction of increased spending tied to inflated revenue projections which requires future Congresses to deal with the problem and it is simply bullshit.  And you claiming that it is a misstatement because it doesn't make allowances for increased revenue is bullshit too.  Where is that revenue coming from, Marc?

Popo's picture

Are there even any doubts that the Italian election will be rigged?

Marc To Market's picture

strong claim require strong evidence.  got any, besides cynicism ?