Micro In Focus; Macro On Backburner; Debt Ceiling Showdown Looms
With Alcoa kicking off the earnings season with numbers there were in line and slightly better on the outlook (as usual), attention will largely shift to micro data and disappointing cash flows over the next two weeks, even as the countdown clock to the debt ceiling "drop dead" D-Day begins ticking with as little as 35 days left until debt ceiling extension measures are exhausted and creeping government shutdowns commence. There was little in terms of macro data from the US, even as a major datapoint out of Germany, November Industrial Production, missed expectations of a 1% rise, pushing higher by just 0.2% M/M (up from a -2.0% revised October print), once again proving that "hopes" (as shown by various confidence readings yesterday) of a boost to the European economy are wildly premature. This disappointing print comes a day ahead of the ECB conference tomorrow, when the governing council may or may not cut rates, although it is very much unlikely it will proceed with the former at a time when at least the narrative is one of improvement - pursuing even more easing will promptly dash "hopes" of a self-sustaining trough (forget improvement) for yet another quarter. Putting the German number in context, Greek Industrial Output slid 2.9% in November, down from a revised 5% rise, refuting in turn that this particular economy is anywhere near a trough.
There has been some weakness in European peripheral bonds, without a clear catalyst although some hints exist that the market is starting to look at Spain fundamentals, and actual net and gross funding needs which increased modestly in 2013, even as it is unclear how much of the funding in 2012 was courtesy of a ponzi capital rotation out of the social security fund and into SPGBs. Specifically Rabobank issued a report noting that Spanish banks are hamstrung by the amount of SPGBs they hold and the need to finance their own debt. It concludes that it is in doubt whether yields, lowered by the OMT promise, are sustainable, and that Spain is a "key potential trigger" to reawaken crisis tensions.
While the general overnight sessions has been a snoozer so far, and the complete recap below is from DB:
In terms of markets it was another day of consolidation as we seem to be still in search of a major catalyst following the Fiscal Cliff frenzy of the last few weeks. Indeed yesterday saw the S&P 500 (-0.32%) almost mirror Monday’s performance as sentiment was somewhat weighed by some poor European economic data and also a later-denied rumour that France’s credit rating was facing an imminent downgrade. Nine out of the ten major sector groups finished lower in the US but it was the weakness in Telecoms (-2.69%) that stood out, driven by a 3% drop in AT&T despite news that the company had sold more than 10m smartphones in the fourth quarter.
The S&P 500 finished off its intraday lows, though, as the market awaited what was eventually a decent set of results from Alcoa after the bell. The company reported an EPS of 6cps for Q4 which was in line with market consensus but with revenue numbers that were nearly 6% higher than analysts’ estimates. The forward-looking guidance was also rather upbeat. Indeed the company now sees global aluminium demand growth of 7%, up from 6% last year and running ahead of the 6.5% rate required to meet the company’s forecast. Interestingly Alcoa also stated that demand in China is “coming back”. AA stocks rallied about 1% in extended hours trading while the company’s 2021 bonds finished 7bp tighter on the day.
Yesterday’s US data made for mixed reading. The NFIB survey showed a slight improvement in overall small business sentiment for January (88.0 vs 87.5 previously) following a fiscal-cliff inspired 5.6pt drop the previous month. Our US economics team points out that current sentiment levels are consistent with those seen during recessions, although an economic downturn is not their base case.
The Federal Reserve published its consumer credit report for November which showed a $16bn increase for the month (vs $12.8bn expected) and a number of headlines highlighted the surge in student loans (+$4.9bn)
Overnight Asian markets are trading firmer probably buoyed by Alcoa’s results and the positive read-through from the CEO’s comments about Chinese demand. Asian credit markets are seeing better two-way flow following the recent rally although primary markets remain the key focus. The Australia and Asia IG iTraxx indices are 1.5bp and 1bp wider on the day as we type. The notable mover has been the Nikkei which has rallied 1.5% intraday (currently +1% as we type) buoyed by a 0.5% depreciation in the yen against the dollar. The moves come after Reuters report in which it was said the BoJ will likely adopt a 2% inflation target at its Jan. 21-22 meeting and issue a statement with the government pledging to pursue bold monetary easing steps.
Back to yesterday’s major newsflow, French 10yr spreads to Bunds finished the day virtually unchanged after having reached an intraday wides of around +65bp following reports of an imminent downgrade in France’s sovereign rating.
The reports were later dismissed by a finance ministry spokesperson (Reuters) but French OATs still underperformed Eurozone peers yesterday as Spanish and Italian 10yr spreads narrowed by 4bp and 6bp respectively. A reminder that all three major rating agencies have a negative outlook on France’s rating. S&P and Moody’s downgraded France to AA+ and Aa1 respectively last year, while Fitch maintains a AAA rating.
Turning to Spain now, ahead of its first auction of 2013 on Thursday, the Spanish treasury said that it plans to issue a total of EUR215 to EUR230bn worth of bonds in 2013, including EUR23bn in financing for the Spanish regions. The treasury chief reiterated that the country’s fiscal position is “sustainable” and added that he expects borrowing costs to fall from the 3.42% average in 2012 and 3.9% average in 2011 (Bloomberg).
Returning to fiscal cliff developments, it was interesting to note that a Washington Post-ABC News poll found that 52% of Republican voters disapprove of the way Boehner handled the fiscal cliff negotiations, a 15ppt point jump from December when the talks were still ongoing. As they were last month, Democrats are overwhelmingly supportive of Obama’s performance in the negotiations. Overall, 44% of voters approved of Congress’ 11th-hour fiscal cliff deal, while 42% disapproved (Washington Post).
Looking at the day ahead, the key data highlights are Germany’s IP print for November and the UK trade numbers. Italy will also provide an update on its budget for the third quarter. It will be a relatively quiet day in the US with MBA mortgage applications and a 10yr note auction the main highlights.