In today's overnight trading, it was all about Europe (and will be with today's BOE and ECB announcements), where things continue as they have for the past six months: when it is a problem that can be "solved" by throwing bucketloads of money, and/or guaranteeing all risk, things appear to be better, such as today's EUR5.03 billion Spanish bond auction (the 0.03 billion part being quite critical as otherwise how will the authorities indicate the pent up demand by the Spanish retirement fund and various other insolvent ECB-backstopped Spanish banks for Spanish debt), in which Spain sold EUR569MM in 2015 bonds (2.632% yield compared to 2.713% on Jan 17), EUR2.03 bn in 2018 bonds (3.572% yield vs 4.123% on Feb. 3), and EUR 2.44 bn in 2023 bonds (4.917% vs 5.202% in Feb. 21). And while events that can be "fixed" with massive liquidity injections are doing better, those other events which rely on reality, and the transfer of liquidity into the real economy, are just getting worse and worse. Sure enough, today we also learned that French unemployment rate just hit a 13 year high.
"The rise to 10.6 percent is the sixth consecutive quarterly increase in the jobless rate in the French economy, which contracted 0.3 percent in the final three months of 2012. It brings unemployment to its highest since the second quarter of 1999 and is the latest bad news for a government that has admitted it will fall far short of growth and public deficit targets this year. Other data published on Thursday showed a widening trade deficit.
"It is an uncomfortable truth for (President) François Hollande and another sign that France may be joining the wrong side of the euro zone team," said Julien Manceaux, economist at ING Financial Markets, forecasting that unemployment would climb as high as 11.5 percent this year."
The dramatic split in the Eurozone core is best seen on the following chart courtesy of Dick Darlington:
It wasn't only the French economy that continued to slide into recession: Germany wasn't immune either following "surprising" news that German January Factory Orders tumbled -1.9% M/M on expectations of a 0.6% rise, down from a revised 1.1% in December. The great equalization in Europe continues, as the PIIGS, kept still on artificial life support do everything in their power to drag down the core.
The one thing, however, that will not change no matter the actual reality, are US futures, which like any other day, have ramped to overnight session highs on, what else: central bank "conviction buy" ratings for the S&P and price targets in the 2000 range.
At last check, key European markets were trading as follows:
- Spanish 10Y yield down 5bps to 4.95%
- Italian 10Y yield down 5bps to 4.61%
- U.K. 10Y yield down 1bps to 1.95%
- German 10Y yield steady at 1.46%
- Bund future down 0.04% to 145.06
- BTP future up 0.49% to 110.75
- Euro up 0.48% to $1.3029
- Dollar Index down 0.14% to 82.35
- Sterling spot down 0.14% to $1.4997
- 1Yr euro cross currency basis swap unchanged at -21bps
- Stoxx 600 up 0.2% to 293.97
And the key headlines via BBG:
- Draghi Confronts Italy Impact as ECB Seen Holding Rates
- DBRS Downgrades Republic of Italy to A (low), Negative Trend
- Euro Strengthens, Spain Bonds Gain Before ECB; Dow Futures Rise
- Bersani Clings to Premiership Goal as Allies Predict Failure
- Italy Govt Led by Non-Politician Looms
- Portugal Rating Outlook Raised to Stable by S&P on Budget Plan
- Portugal 5Y Yield Drops to Lowest Since Dec. 2010
Aside from the above, DB's Jim Reid recaps everything else "you need to know":
We've arrived at the business end of the week with today's central bank policy meetings, Draghi's press conference and tomorrow's US payroll report set to take much of the spotlight. Overnight the Bank of Japan has kicked things off by rejecting a proposal for an immediate start to open-ended asset purchases (currently scheduled for a 2014 start). They voted to leave their asset purchase fund at JPY76trn and the policy rate target of 0 to 0.1% unchanged. Another board member, Ryuzo Miyao, also proposed that the bank keep its policy rate at the current level until its 2% inflation target is in sight. Both proposals were voted down 8 votes to 1. In Governor Shirakawa's final meeting before he steps down later this month, the BoJ raised its economic assessment, saying that the economy has "stopped weakening". Attention will now turn to the BoJ's meeting next month which will likely be chaired by Haruhiko Kuroda and two new deputies.
The market reaction has been relatively minimal reflecting the broad expectation that the BoJ would stay put today - the yen is trading marginally higher against the greenback (+0.1%) following the BoJ announcement and the Nikkei (+0.3%) has
pared earlier gains.
Turning to today's ECB meeting, the market consensus is for rates to remain unchanged. DB's Mark Wall and Gilles Moec think that the risk is tilted more in the direction of easing of policy, but not in the form of standard interest rate policy. Rather, they think an easing of non-standard, 'credit-easing' liquidity policies is more likely within the next few months. Since last month, certain financial conditions have eased including the EUR which is off its highs and also a second wave of LTRO repayments which were lower than forecast. The expectation is for Draghi to maintain a cautious tone in his post-meeting press conference.
Across the Channel, DB's Chief UK Economist expects no change in policy from the BoE today (as does Bloomberg consensus) but he underscores that the risks to this view are high. The BoE minutes from the February meeting showed that three of the nine-strong MPC Committee - including the Governor himself - voted for additional asset purchases meaning just two other MPC members are needed to join Messrs King, Fisher & Miles for further QE to be sanctioned.
Interestingly the FT is carrying a story this morning suggesting that the UK budget (March 20th) will include the Chancellor overhauling the BoE remit. The paper suggests that a move to a FED style dual mandate or some kind of nominal economy target rather than just an inflation one might be being considered. This might excite the pound bears again after a few days of stability. Central banking is seemingly changing and is slowly becoming less independent around the world.
Returning to yesterday's markets, the Dow (+0.3%) closed at a new high for the second day in a row while the S&P500 (+0.11%) inched ever closer to reaching its October 2007 record of 1565.15. Earlier in the day, comments from the Philly Fed's Charles Plosser (non-voter) that the Fed should end asset purchases before year-end weighed on equities towards the end of the European session. Indeed, the Stoxx600 sold off more than half a percent from the early highs to finish 0.25% lower on the day.
In that context, European credit indices had a relatively good day with Crossover and Europe Main managing to close 5.5bp and 1bp tighter at 431bp and 111.5bp respectively on decent volume; while the clear outperformer was the subordinated financials index which closed 12bp firmer (248bp).
In terms of data, the February ADP employment report showed a +198k gain in private payrolls (vs +170k expected) after the prior month was revised up +23k (to 215k). Following the ADP report, DB's Joe LaVorgna has raised his forecast for this Friday's payrolls to +180k from +125k previously and expects a two-tenths decline in the unemployment rate (to 7.7%).
In other data, US factory orders for the month of January were down 2%mom (vs -2.2% expected) weighed down by decreases in military hardware and commercial aircraft orders. The tone in the Fed's Beige Book was little changed with economic activity described as having "generally expanded at a modest to moderate pace".
Turning briefly to overnight markets, risk sentiment has been relatively mixed outside of the Japanese markets. The Hang Seng (-0.3%) and Shanghai Composite (+-0.8%) are mostly in consolidation mode following the solid gains over the last two days. The KOSPI (-0.9%) and ASX200 (-0.15%) are also lower, the latter weighed by a wider than expected Australian trade deficit for January (-$1.057bn vs -$500m expected).
In other overnight news, S&P revised Portugal's BB rating outlook to stable from negative. The rationale was that S&P expects Portugal's official European lenders to lengthen the maturity profiles of their loans which will reduce Portugal's public sector refinancing risks. They also expect the troika to adjust Portugal's fiscal consolidation path to allow for weaker-than-previously-assumed economic performance which should make the adjustment process "more sustainable".
Turning to the day ahead, German factory orders and trade data for France are the main data releases in Europe. In the US, the January trade report, jobless claims and consumer credit are main highlights on the data docket. But the focus will be on the BoE announcement at midday London time, followed by the ECB's announcement at 12:45pm (London) and Draghi's press conference at 1:30pm.