Just like a week ago, when the futures experienced an unprecedented event when they actually slid overnight (only to recoup all the losses and then some, in the US trading session), so today sentiment appears to be driven by China which over the weekend once more posted its worst economic numbers to start the year since 2009, with purposeful economic weakness telegraphed by the politburo coupled with higher than expected inflation in what is a harbinger to the end of the global reflation, just as it was in 2011. The Shanghai Composite closed down 0.3%, while the Nikkei was in a world of its own, closing up 0.5%, tracking nothing but the USDJPY nowadays.
Additionally, while the US stock market took Friday's downgrade of Italy in stride, and in fact Getco's algos used it to catalyze a late day ramp to close the DJIA just around the "psychological" 14,400 (just like Dow 36,000 is apparently psychological), Europe is less sanguine, and so far Italian bonds have been pressured compared to the rest of PIIGS, rising with yields rising to 4.65%, hitting 4.694% earlier. That's ok though: as we reported over the weekend, there is nothing for widening BTP spreads that a few hundred billion in Fed reserve reallocations to European banks can't fix. And with no macro events or news on today's calendar, perhaps the most notable event so far is the lack of the overnight ramp, which we have all grown to love and expect almost as much as the mysterious 3:30 pm intraday clockwork DJIA ramp.
Quick recap of market action so far:
- S&P 500 futures down 0.1% to 1543.00
- Stoxx 600 falls 0.2% to 294.8
- US 10yr yield 2.05%
- German 10yr yield 1.5%
- MSCI Asia Pacific up 0.7% to 136.5
- Gold spot up 0.1% to $1579.85/oz
- 15/19 sectors fell, led by banks, real estate
- German exports increased in Jan. to aid economic recovery
- Asia stocks mixed, with Shanghai Composite leading declines after China data shows weaker start to 2013
- Nikkei 225 up 0.5%, Hang Seng little changed, Kospi down 0.1%, Shanghai Composite falls 0.3%, ASX up 0.5%, Sensex declines 0.1%
- Euro little changed at $1.3005
- Dollar Index up 0.1% to 82.74
- Italian 10Yr yield 4.7%
- Spanish 10Yr yield 4.7%
- 3m Euribor/OIS unchanged at 13bps
Recapping the boring Monday morning trading and the past two boring days is DB's Jim Reid:
Asian markets have started the week lacking any firm direction as a relatively disappointing set of weekend data from China offset last Friday’s US payrolls which were ahead of expectations. As we type, gains are being seen by the Hang Seng (+0.3%) and ASX200 (+0.46%), but the Shanghai Composite (-0.55%) and KOSPI (-0.13%) are lagging the broader region’s moves.
In terms of the Chinese data, both industrial production (9.9%yoy vs 10.6% expected) and retail sales (12.3%yoy vs 15.0%) for the first two months of this year missed market expectations. DB’s Chief China economist Jun Ma highlighted that the deceleration in retail sales was weighed by the catering industry (-3.3%yoy in Jan-Feb), clearly reflecting the impact of the government’s anticorruption campaign in his view. Fixed asset investment was up 21.2%yoy (vs 20.7% expected) in Jan-Feb, led by real estate investment which was up 22.8%yoy (+6.6 ppts from 2012) and new housing starts (14.7%yoy vs last year’s -7.3%). In terms of inflation, CPI accelerated to 3.2%yoy in February from January’s 2%, slightly higher than the market consensus of 3%. Jun Ma points out that the bounce was mainly due to the food prices, which have subsequently reversed after Lunar New Year. DB expects CPI inflation to fall back to 2.0- 2.5%yoy in March. Also out over the weekend, the PBoC announced that new local currency loans increased by RMB620bn in February which was below market expectations of RMB700bn - various media outlets have reported that the central bank remains focused on withdrawing liquidity from the banking system following the Lunar New Year holidays.
Staying in Asia, BoJ governor nominee Haruhiko Kuroda has told an upper house parliamentary committee that he will do whatever it takes to defeat deflation. He reiterated that the BoJ’s current asset purchases are insufficient to meet the 2% price target, but he was cautious about the idea of scrapping interest paid on excess reserves at the central bank, saying that further debate on this subject was needed. The Nikkei is among the outperforming Asian indices this morning (up 0.3% as we type) and the yen is another 0.1% weaker against the US dollar.
Briefly recapping Friday’s payrolls, the February employment report showed broad-based strength, as headline payrolls topped expectations (236k vs. 165k Bloomberg consensus), the unemployment rate dropped (7.7% vs. 7.9%), the nonfarm workweek increased a tenth (to 34.5 hours) and earnings rose 0.2% (or 2.1% year-on-year). DB’s Joe LaVorgna did note however that the drop in unemployment was driven by a further drop in the labour force participation rate (63.5% vs. 63.6% previously). The employment-population ratio, a metric which Chairman Bernanke has cited on several occasions, remained unchanged at 58.6%.
Joe’s view is that until this ratio increases and employment levels rise closer to their pre-recession levels, the dovish camp at the Fed will remain keen to stay in easing mode.
In terms of markets the S&P500 (+0.45%) finished higher for the sixth consecutive session and the Dow Jones closed at a record high for the fourth day in a row. US markets largely shrugged off Fitch’s downgrade of Italy to BBB+ (negative outlook), which hit the wires after most European markets had closed on Friday. Fitch said that the increased political uncertainty in Italy constitutes a “further adverse shock to the real economy amidst the deep recession”.
Italian 10yr bond yields were essentially unchanged on Friday although they did sell off more than 7bp into the market close - so it will be interesting to see how they open this morning.
Elsewhere the dollar index rose to its strongest level in 7 months, while 10yr UST yields finished 5bp higher at 2.04% and have added a further 1bp this morning. The US IG19 index closed 2bp tighter.
Turning to today’s calendar, we have a fairly quiet day and week ahead as is typical following US-payrolls. French IP and German trade data are the main data releases today. Looking across the rest of the week, UK industrial production and trade data (Tuesday), Euro-area industrial production (Wednesday) and euro-area employment/inflation (Friday) are the highlights in Europe. The Italian parliament will be holding its first session on Friday, after which formal consultations with President Napolitano on forming a new coalition government can begin. Ahead of that, Jens Weidmann presents the Bundesbank's annual report for 2012 on Tuesday. The EU leaders' summit begins on Thursday.
In the US, the Senate will this week consider a bill that will extend the government's spending authority until September. The Fed is scheduled to announce results from its annual bank Capital Analysis and Review on Thursday, detailing which US banks have the ability to pay dividends or buy back shares. In terms of data, Wednesday's retail sales will provide an important update on the state of consumption amidst concern on the effect of the fiscal drag.
That aside, Friday looks to be a key day for US data with IP, CPI, the Empire Manufacturing Survey and UofMichigan consumer confidence reading due.