It started overnight in Japan, where Q4 GDP posted a surprising and disappointing 3rd quarter of declines, then quickly spread to France, whose Q4 GDP declined -0.3% Q/Q missing expectations of a -0.2% drop, down from a +0.1% increase, then Germany, whose GDP also missed expectations of a -0.5% drop, declining from a +0.2% increase to a -0.6% drop, then on to Italy (-0.9% vs Exp. -0.6%, last -0.2%), Portugal (-1.8%, Exp. -1.0%, last -0.9%), Greece (down -6.0%, previously -6.7%), Hungary (-0.9%, Exp. -0.3%), Austria (-0.2%, down from 0.1%), Cyprus (-3.1%, last -2.0%), and so on.
To summarize: Eurozone GDP dropped far more than expected, or posting a -0.6% decline in Q4, worse than the -0.4% expected, which was the largest drop since Q1 2009, and down from the -0.1% posted in Q3. And since this was a second consecutive negative quarter of GDP decline for the Eurozone, the technical recession (double dip? triple dip? is anyone even counting anymore?) in Europe too is now official.
Who could have possibly foreseen this disappointing development for Europe? Maybe all those who were warning that for the frail and weak continent the last thing it needed was a surge in the currency, which is precisely what it got in Q4. Sure enough, the EURUSD has tumbled over 100 pips overnight, with more fuel added to the flames courtesy of the ECB's Constancio who added out of the blue that negative interest rates are always possible, and the ECB is technically read if needed - hardly the statement one makes if one wants to push their currency higher.
Sure enough, the EURUSD was trading at just about 1.330 at last check, and likely to test recent support levels.
And since the US futures trade in lockstep with the EURUSD, please don't adjust your monitors: that odd non-green color of the futures is not a malfunction.
Some more from Goldman on the European economic collapse in Q4:
Broad-based negative surprise in largest EMU economies. The country breakdown showed that outturns in Germany, France and Italy were all weaker than expected.
Germany: -0.6%qoq in Q4 after +0.2%qoq in Q3. The statistical office does not provide a breakdown by expenditure components (which will be released on February 22), but suggested that domestic demand was mixed: both private and public consumption increased slightly, while investment probably declined strongly. The contribution from net trade to GDP was negative, with the decline of exports outpacing the decline in imports.
France: -0.3%qoq in Q4 after +0.1%qoq in Q3. The breakdown by expenditure components was somewhat more positive than the headline GDP reading. Private consumption remained resilient, growing by 0.2%qoq, and public consumption continued to support activity (+0.4%qoq). However, investment declined at a faster pace than in Q3 (-1.0%qoq in Q4 after -0.5%qoq). Overall, the contribution of total domestic demand (excluding inventory changes) was flat in Q4, down from +0.1ppt in Q4. Net trade contributed positively to growth for the second consecutive quarter (+0.1ppt after +0.3ppt in Q3), with the contraction of imports (-0.8%qoq) outpacing the contraction of exports (-0.6%qoq). Changes to inventories shaved 0.4ppt off French GDP in Q4, dragging the aggregate figure into negative territory.
Italy: -0.9%qoq in Q4 after -0.2%% in Q3. The pace of contraction of 0.9%qoq (after -0.2%qoq in Q3) in Italy was significantly more acute than expected (Cons:-0.6%qoq, GS: -0.3%qoq). A detailed breakdown of the data will not be available until March 11. The surprisingly weak GDP data come at a sensitive time in the election campaign and could potentially damage support for the existing austerity/reform programme. The parliamentary elections will be held on February 24 and 25.
Spain: -0.7%qoq in Q4 after -0.4%qoq in Q3 (already published on January 29). The outturn was also slightly weaker than Consensus and our expectations for -0.6%qoq. The preliminary data release provides no breakdown in terms of output by sector or by expenditure component (to be published on February 28). A weak quarter was, however, expected on the basis of the consumer spending response to September's VAT rise.
Smaller economies - including core countries - in negative territory. Q4 GDP in Portugal was particularly weak: it contracted sharply by 1.8%qoq after -0.9%qoq. Finnish GDP contracted 0.5% in Q4, after -0.3% in Q3, while both Dutch and Austrian outputs were down 0.2%qoq.
Some comments on the EURUSD response, and other currency pairs, after the ugly economic data via Bloomberg:
- EUR/USD correcting, with outside risk to 1.3260 area, ING’s Chris Turner and Tom Levinson say after GDP data; 1.3430/60 should be the sell area
- Widening European sovereign CDS spreads may also prove mild EUR negative; watch for interest in short EUR cross trades again with short EUR/NZD increasingly popular
- Signs of independent weakness in EUR may weigh on EUR/JPY, USD/JPY; break of 93.00 in USD/JPY risks losses to 92.00/92.20 area
- Fundamental case for weaker JPY remains, though pace of weakening may “slow substantially” vs recent months
- Cites likely candidate for new BOJ governor comments that inflation targets wouldn’t be attainable without JPY correction; USD/JPY in the 90-100 range would mark return to equilibrium
- May see additional easing linked to April 3-4 BOJ meeting with possible new dovish majority on board
- Looks for G-20 to affirm that countries’ current policies don’t represent exchange-rate manipulation
- Market underestimating negative impact of BoE monetary policy on medium-term GBP outlook, note to clients says
- EUR/GBP PPP adjusted for CPI 0.81 vs 0.75 a few years ago, wedge between unit labor costs in U.K. and euro zone increasing at even faster pace; with costs in euro zone collapsing on debt crisis, EUR/GBP PPP likely to rise “even faster” in coming years
- Gilt market/GBP correlations recently have been turning
- Targets another 5% move in trade-weighted index, looks for EUR/GBP to reach low 0.90s, GBP/USD to eventually drop to low 1.40s by year end
A more comprehensive recap of the overnight action from DB as usual:
We can't help wondering whether the G-20 summit in Moscow over the next few days will be a case of from Russia with no love to those countries that are being seen as engaging in currency de-basement. One country that is slipping slightly under the radar at the moment is the UK. Sterling continues to slide (-6.2% and -4.4% against the Euro and Dollar in 2013 and -10.4% vs the Euro since last summer's peak) with yesterday's BoE inflation report not helping.
The bank now forecasts that inflation will remain above target for three more years. DB's George Buckley points out that if this is correct it will mean a decade where its overshoots its target for 37 out of 40 quarters. Indeed since the worst global financial crisis in history starting in 2008, UK inflation has now averaged 3.3%. This is perhaps a lesson that if you have control over the printing presses and a flexible currency then inflation is always possible almost regardless of the natural deflationary forces present.
The UK has often been ahead of other countries in this cycle (and not necessarily always in a good way) and it might be the first country to test whether bond investors will tolerate a seemingly weaker inflation anchoring from the central bank. Indeed the continued regulatory demand for fixed income and the prospect of future central bank bond buying might battle it out against fears of constantly higher inflation over the months ahead. This will be a great test case for the rest of the world as to whether financial repression can continue to work in this cycle. Don't underestimate such a force but it’s fair to say that the UK continues to be an economic laboratory for the rest of the world. For the record 10 year Gilt yields rose 11bps yesterday to 2.209% and are now 77bp off last year’s lows. On the currency as much as it feels like this is a recipe for a weaker Sterling (as our FX guys think), after a month of travelling round Europe I can't help thinking that the UK is fairly cheap on a PPP basis - at least in terms of my shopping basket.
Perhaps my McDonalds on the Champs-Elysees wasn't very representative! Also currencies often overshoot for long periods so PPP can be meaningless in the short-term.
Staying on the theme of monetary policy, the Nikkei has managed to hold onto overnight gains of 0.7% after the BoJ announced that it would be keeping the pace of asset purchases and rates unchanged. This was largely expected but in its commentary, the BoJ noted that the Japanese economy had appeared to stop weakening with exports and industrial production showing signs of bottoming. The BoJ also upgraded its outlook and now expects a moderate recovery path, although near term inflation is expected to be around zero. Earlier in the session former BoJ deputy governor Kazumasa Iwata said in a statement that the Yen needs to correct for the BoJ to reach its 2% price target which helped the Yen reverse some of the earlier gains. The USDJPY is now around 93.55 as we type, off the lows of 92.83 about 24 hours ago but still off the highs of 94.46 at the start of the week as we head into the G20 meeting later today.
Iwata, who has been hailed as one of the possible successors to Shirakawa, also said there are many ways for monetary policy to boost the economy including through longer-term JGB purchases.
Elsewhere in Asia, equities are trading with a positive tone with the majority of indices a quarter to half a percent higher on the day. The KRW (+0.24%) is moderately stronger against the USD after the Bank of Korea decided to keep rates on hold overnight. The BoK governor did note that South Korea faces uncertainty due to Japan’s monetary policies. Asian credit is also trading with a firmer tone helped by the lack of new supply in the holiday-shortened week.
Turning back to yesterday it was mostly a day of consolidation for equities as the S&P 500 (+0.06%) closed marginally higher in the absence of any major catalyst. The January retail sales report was encouraging to some as the headline managed to inch +0.1% (in line with consensus) despite the significant tax increase at the start of the year. There were a few Fed speakers overnight. Plosser said that asset purchases should be tapered before interest rate rises. Lacker said that evidence of a credit market bubble arising from current Fed policy of holding long-term interest rates low with asset purchases is “ambiguous and inconclusive”. Bullard sounded more upbeat about growth and house prices but was concerned about a farmland price bubble.
In Fixed Income markets there was further selling bias in the Treasury market yesterday after a mediocre 10-year auction performance. The UST 10-year yield rose 5bp yesterday to 2.028% after the new notes were priced at a yield of 2.046% and attracted a lower bid/cover ratio of 2.68x (vs 2.83x previously). The $16bn 30-year auction later today is probably worth keeping an eye on. Elsewhere in credit the CDX IG finished the day 1.5bps tighter with the street being net sellers of bonds yesterday according to FINRA TRACE. In European credit ISDA declared two credit events yesterday. The first was a Restructuring Credit Event for SNS Bank NV and the second was Bankruptcy Credit Event with respect to Irish Bank Resolution Corp. The news didn’t affect the European senior or sub financial credit indices though, which closed 8.5bp and 14bp tighter respectively.
Looking at the day ahead, the first Q4 Euroland GDP print will be the main European economic release. Market forecasters are expecting the euro area to contract -0.4% QoQ/- 0.7%yoy versus -0.1%QoQ/-0.6%YoY in Q3. Looking at individual countries, Q4 GDP is expected to shrink -0.5%, -0.2%, -0.6% and -1.0% QoQ in Germany, France, Italy and Portugal, respectively. These are weaker numbers compared to +0.2%, +0.0%, -0.2% and - 0.9% for these countries in Q3.
Turning to the second most important event in Russia today, Bloomberg news has reported that the G20 officials will pledge in a joint statement to avoid policies that will lead to competitive currency devaluations and will also oppose trade protectionism. The ministry of finance in South Korea has also issued a statement saying that the G-20 will discuss the effectiveness of the quantitative easing measures in advanced countries and its spill over impact and policy responses by emerging countries. Elsewhere in the US we have initial and continuing jobless claims but the main focus will likely be on Euroland growth numbers and the G20 event in Russia.