It was a busy session for Chinese "data" (more on the laughable validity of Chinese economic releases shortly), after China released January export and import data, which rose 25% and 28.8% from a year ago respectively. Futures were delighted by the data, until someone pointed out that January 2013 had some five more working days than 2012 due to the calendar shift of the Chinese new year, and that adjusted for this effect exports were a far more modest 12.5% while imports rose only 3.4%. Credit growth in January also rose to a record, with aggregate financing of 2.54 trillion, including new local-currency loans of 1.07 trillion, exceeding forecasts, as China dumped gobs of money into the economy, while somehow quite mysteriously inflation came right on top of the expected 2.0%. The Yen soared overnight following comments from Taro Aso who said that the Yen had depreciated too fast. Heading to Europe, the biggest news so far was the latest ECB LTRO repayment which saw some 21 banks repay €4.992 billion, less than the estimated €7.0 billion, and far less than the first announcement repayment of €137 billion.
Contrary to Draghi's promises that as a result of LTRO repayments, excess liquidity is still abundant, the excess cash in the Eurosystem is now in line with the market operation reduction, and any incremental balance sheet tightening as a result of LTRO shrinkage is priced in by now, and is offset by Draghi's inflation-cautionary words from yesterday.
Perhaps the key development that Europe is waking up to is that the upcoming Italian vote will likely be inconclusive and the risk of a second ballot is rapidly growing as Berlusconi cuts Bersani's lead (more on that shortly as well).
Finally, trading today will be slower than usual as Nemo is finally found in the shape of some 12 inches of snow blanketing the Northeast.
A quick recap of European key markets as US traders trickle in on this Nemo-shortened day:
- Spanish 10Y yield down 11bps to 5.31%
- Italian 10Y yield down 5bps to 4.53%
- U.K. 10Y yield down 1bp to 2.1%
- German 10Y yield little changed at 1.61%
- Bund future up 0.04% to 142.87
- BTP future up 0.28% to 110.92
- EUR/USD up 0.1% to $1.3412
- Dollar Index down 0.25% to 79.99
- Sterling spot up 0.32% to $1.5766
- 1Y euro cross currency basis swap little changed at -21bps
- Stoxx 600 up 0.64% to 285.69
Key events on the calendar today as summarized by SocGen:
The EUR was offered across the board yesterday as ECB president Draghi conveyed his latest views on the economy and bank liquidity. In so far as the message on the exchange rate went, Draghi never tried to deliberately stop the currency's ascent, but the assertion that the currency appreciation could alter the inflation outlook was enough to send bulls scrambling. In practice, the ECB will now mull over its inflation forecast and any changes that the appreciation may have caused will be communicated in March. That does not necessarily make the EUR a sell in the short-run, but the resistance above 1.3500 in EUR/USD, after yesterday, will have become more congested. Note the rally too in euribor and bunds and a corresponding fall in yields and narrowing in yield differentials as the EBC reasserted its commitment to tenders with full allotment. The ECB stated that excess liquidity will stay over EUR200bn after the2nd LTRO payment later this month, which caused yield differentials to compress and EUR/G10 to deflate. Unless we observe a sudden worsening in incoming macro data over the coming weeks, there should still be enough pockets of support for the EUR to stop the corrective price action from morphing into a deeper pullback. Technically, a weekly close below 1.3375 would initiate a deeper move towards 1.3250. Watch euribor futures for price leadership.
A fairly busy calendar today will see the ECB announce the weekly LTRO repayment amounts. A potentially big day for the CAD lies ahead as employment data for January are published. For the EUR/CAD, a strong jobs report would squeeze down towards 1.3200 with a return to 1.30 not an unrealistic short-term target.
Finally, the full recap of overnight events comes from DB's Jim Reid:
It was a busy day for policy makers across the globe with Draghi and Carney – as well as the Fed and the BoJ – making headlines over the last 24 hours.
Starting with Draghi whose overall message at the post-ECB press conference seemed to be that monetary policy will remain accommodative. Like last month, Draghi talked about the remaining market fragility and reiterated that credit is yet to flow to the real economy. The ECB President didn’t appear too concerned about LTRO payments, but his comments that the euro’s strength was creating downside risk to inflation and an implicit downside risk to growth was taken to be “dovish” enough to send EURUSD down 0.92%.
Interestingly, Draghi mentioned that the ECB had “taken note” of the Irish government’s proposal to liquidate the Irish Bank Resolution Corporation and swap promissory notes for longer-term Irish government bonds. The move was seen by some as a form of monetary financing, but Draghi stopped short of offering an opinion, commenting instead that “this is not the last word on Ireland”.
In the UK, BoE governor-elect Mark Carney played down suggestions that he would rapidly press for changes in the monetary policy framework at the BoE. Regarding the inflation-targeting regime, he said that the “bar for alteration is very high” but he did hint at a potential change in the BoE’s communication policy to something more akin to that of the Fed.
Turning to the Fed, Board governor Jeremy Stein made an interesting speech warning on potential overheating in some parts of the credit market including high yield bonds and mortgages. Stein made a number of observations including the fact that the annualised pace of pay-in-kind bond issuance in the fourth quarter of 2012 was comparable to the highs from 2007. Stein also mentioned that the past year had set a new record in the use of loans for dividend recapitalizations.
In Japan, the PM’s push for a new governor to lead a policy shake-up at the BoJ has run into resistance from his own cabinet, according to Reuters. The report suggests that members of Abe’s government prefer former deputy BoJ governor Toshiro Muto, who advocates more asset purchases but has also warned that excessive financing of public debt could backfire through a rise in bond yields. Meanwhile, PM Abe prefers Asian Development Bank President Haruhiko Huroda who has been a sharp critic of the outgoing BoJ governor’s policies (Reuters). The article cites a source close to Abe as saying that the final choice of BoJ governor “will be a close call with a lot of complexities involved”.
Returning to the markets, it was a rather mixed day for European equities which saw a small bounce as Draghi spoke. The Stoxx600 (-0.22%) was unable to hold into gains however, with a weak tone in US equities (S&P500 -0.2%) weighing on the European close.
Italian stocks underperformed again (MIB -1.22%) as one of the final updates before the polling blackout is due to kick in on Saturday showed that Berlusconi had pulled to within 3.6% of the pro-reform centre-left (vs a 3.7% gap on Wednesday). The ECB and BoE remained on hold as widely expected. Datawise it was a relatively quiet day. German industrial production rose 0.3% in December (vs +0.1% expected). In the US, initial jobless claims fell 5k to 366k, leaving our US economists calling for a 180k rise in non-farm payrolls this month.
Turning briefly to the overnight session where the focus has been on Chinese and Japanese trade reports. Starting with the Chinese data, December exports grew 25.0%yoy (vs 17.5% expected). Import growth also surprised to the upside (28.8% vs 23.5%) as the trade surplus grew to $29.15bn (vs $24.7bn expected). In Japan, the December current account deteriorated to JPY264bn (vs JPY144bn expected) with Bloomberg reporting that this is the first consecutive monthly current account deficit since 1981. In terms of markets, Asian equities are enjoying solid gains ahead of the Lunar New Year break with the Hang Seng, KOSPI and Shanghai Composite up 0.3%, 0.8% and 0.8% respectively, helped by the stronger Chinese trade data. The Nikkei (-1.5%) is the notable underperformer overnight weighed by the abovementioned BoJ headlines and with USDJPY 0.30% lower overnight (93.35).
Looking at the day’s data docket, the highlights include German and US trade reports. The EU leader’s summit will continue today with a goal of agreeing a medium-term budget.