Ten Things for Your Radar Screen
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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