With all three major non-Fed central banks on the tape today, all economic data will be merely "noise" as the market digests what the central-planners' intentions are. The BOJ came and went, and following its substantial balance sheet expansion announcement, which many called "shocking and awing" the USDJPY has pushed higher by 2.5 big figures, although not reaching the 96 levels seen prior to Kuroda's actual announcement. In fact, from this point on there is likely downside as Japan's biggest export competitor, South Korea, has no choice but to join the race to debase which in turn will be JPY-positive. The Bank of England is next, which as expected did nothing moments ago, and will keep doing nothing until Carney joins officially this summer. In some 45 minutes, the ECB headlines will hit the tape where Draghi may bur more likely may not lower deposit rates, and instead will focus on recent deterioration in the economy. None of this will be surprising, and the EUR continues to trade sufficiently weak in line with sub-200DMA levels seen in the past few weeks. What we look forward to the most will be Draghi once again discussing the legal term-sheet details of the ECB's OMT program. His answer will be amusing as there still is no answer, and the OMT is for all intents and purposes the biggest straw man ever conceived by a central bank.
In actual economic news, we had the monthly Service PMIs out of Europe, which one again missed and declined at the headline level, dropping from 47.9 to 46.4, below expectations of 46.5. This time, unlike the Mfg PMIs earlier, it was the periphery that did better than expected (Spain 45.3, Exp. 44.7, 21st straight month of contraction; Italy 45.4, Exp. 43.5, Last 43.6) and the core that deteriorated (Germany 50.9, Exp. 51.6, Last 54.7; France 41.3, Exp. 41.9, Last 43.1). The only good news, if any, come from the UK, whose Service PMI rose from 51.8 to 52.4, above expectations of a drop to 51.5. Expect the UK economy to deteriorate substantially in the coming months in order to justify the massive QE that will be unleashed by the Goldmanite when he finally arrives.
SocGen summarizes the key events to watch out for today:
The currency market is positioned short EUR andd GBP going into today but could the announcements and knee-jerk reaction be hijacked by the announcement tomorrow of a surprise increase in the US unemployment rate? The ‘battle of the balance sheets' saw the BoJ announce bold plans to switch its policy focus to a doubling of the monetary base and upscale its asset purchase well above the previous Y101trn 2013-end target and this has vindicated JPY shorts who have been accumulating positions pretty much all year. USD/JPY rallied over 95.50 overnight and EUR/JPY motored back over 122.50. The BoJ move should extend the secular bear trend for the JPY even if doubts exist whether the 2% inflation target will be achieved.
The other side of the equation is that the Fed will stay a formidable force for at least a few months and by the looks of the last two ISM surveys, discussions about tapering asset purchases could soon move to the back burner. Declines in the non-manufacturing ISM employment index may not correlate perfectly with private sector payrolls growth but for a market that is overexposed USD long and short UST, the danger of squeeze is not negligible. Come in ECB (and BoE). There will never be enough time for president Draghi to answer all the questions today pertaining to future bank recovery and resolution, capital controls, bail-ins by bondholders and uninsured depositors, but let's hope he lets markets walk away with a transparent and clear message of where the ECB stands. Whether that's enough to comfort the minority of EUR bulls and force shorts to scramble is another question. Eurozone data released over the inter-meeting period has worsened, so more discussions of lower rates are likely to have taken place. Not ideal to get a rebound going unless the compression in rate spreads is led by the US. For EUR/USD, erasing a first significant hurdle at 1.2890 would be a first step.
DB's Jim Reid with the full overnight recap:
After months of so-called “verbal intervention” from PM Abe and various Japanese officials, the BoJ has decided to expand asset purchases to JPY7 trillion/month, above expectations (Bloomberg) of around JPY5 trillion. The decision, which was announced as we went to print, will see the BoJ target a
doubling of the monetary base to JPY270trillion by the end of 2014. The BoJ intends to double the average remaining maturity of JGB purchases (including purchases of 40yr bonds) to seven years and asset purchases will include ETFs and J-REITs. The central bank has set a two year target of achieving its 2%
inflation target. The enlarged asset purchase program was approved by unanimous vote. In terms of qualitative actions, the BoJ has temporarily suspended the “bank note rule”. The market reaction following the announcement has seen USDJPY yen up 1%, 10yr JGB yields rally 5bp to 0.49% (the lowest since 2003) while the Nikkei has pared back earlier losses of -1.6% to trade at -0.4% on the day.
In a big central bank day, after Japan, focus will move to the ECB's meeting. Our European economists expect no change in the policy stance from the ECB though they do acknowledge that the risk of a refi rate cut has risen. Draghi’s post-ECB press conference may be of more interest where our economists expect a tough line of questioning around the ECB’s handling of the Cypriot crisis. The expectation is that Draghi will try to keep his comments very generic on this matter apart from repeating Benoit Coeuré’s statement that Cyprus is not a “template” for the future management of banking crises in Europe, distancing the central bank from the Eurogroup’s recent comments.
Our economists expect Draghi to have stronger words to say about capital controls. The ECB logically should consider that capital controls are ultimately
a sovereign decision by Cyprus itself, but also that the ECB is ready to provide the liquidity that could be needed should these capital controls be removed. Draghi may also have some words to say about the flow of credit to the business sector, especially SMEs. Indeed there has been some talk over the last couple of days suggesting that the ECB collateral rules may be eased to reduce borrowing costs for medium sized companies.
Whilst the ECB is clearly the main focus today, US data flow was a key driver for markets yesterday. We kicked off the New York session with a disappointing ADP Employment print (+158k v +200k) which was followed by another softer-than-expected non-manufacturing release from the ISM (54.4 v 55.5). DB's Joe LaVorgna has trimmed down his NFP forecast on the back of this. The unusually cold weather in March may have dampened building and hiring activity with DB now looking for a 160k headline print for tomorrow, down from an earlier forecast of 200k. The median Bloomberg estimate remains around 195k, but more recent estimates compiled over the last 12 to 18 hours have been in the 160k to 180k range.
The ADP miss yesterday was its first in 6 months but we also observed that March has seasonally been a weaker month for ADP relative to market consensus. Indeed the ADP has fallen short relative to estimates 6 out of the 7 March months, which is also the most out of all months since Bloomberg polling started in August 2006. In comparison Novembers and Decembers had historically been better months with the series having only missed once in the last 7 years - and both of those happened in 2008 after Lehman.
US data is clearly interesting to watch from now on as the market will perhaps start pointing to the fact that if data momentum continues to slip it would be the fourth successive year that data has surprised on the downside at this time of the year. Indeed the seasonal pattern in US data had been fairly consistent in the last three years where we usually see data beats in the final quarter of the year before momentum starts to weaken in Spring.
Coming back to yesterday’s markets, both the Stoxx600 (-0.9%) and the S&P500 (-1.1%) recorded their 4th worst days of the year. Weakness was broad based, all industry sectors closed lower across both indices with weakness in financials leading the losses on both sides of the Atlantic. 10yr UST yields closed 5bp firmer at 1.81% and are another 1bp lower overnight. Despite the widespread concern about rising rates, 10yr UST yields are back at their opening levels of the year. Gold (-1.14%) continued its downward trend, trading through the $1550/oz level overnight after breaking through the $1570/oz level yesterday.
Given the weakness in equities, credit markets outperformed yesterday with the European Main index managing to close broadly unchanged on the day. The European senior and subordinated financial indices which closed both closed around 5bp tighter, continuing the reversal of some of its recent underperformance. This was in spite of Euro banking stocks (-1.8%) being one of the worst performing sectors on the Stoxx600 yesterday. The US IG index closed a touch wider (0.5bp), a surprisingly firm performance given the 16pt drop in the S&P 500.
With the recent focus on global QE and potential competitive devaluations, it’s interesting to see the resurgent interest in Bitcoin, a virtual currency. The FT reported yesterday that the events in Cyprus have led to a “buying frenzy” which has sent the value of Bitcoin’s monetary base to $1.5bn, while the price of the single Bitcoin has doubled in less than two weeks. The currency was created 4 years ago by an unknown computer scientist and the stock of “coins” grows according to a predetermined algorithm. Proponents of Bitcoin note that it is not controlled by any central bank or government authority.
Turning to Asia, outside of the BoJ, the focus is on North Korea as tensions on the Korean peninsula continue to escalate. The North Korean army has reportedly been granted “final approval” to launch a nuclear attack and the South Korean Yonhap news agency reports that North Korean forces have been spotted in the process of moving a long-range missile by train towards the Sea of Japan. The United States said on Wednesday it would soon send a missile defense system to Guam to defend it from North Korea, as the US military responds to what US Defense Secretary Chuck Hagel has called a "real and clear danger". In terms of market reaction, the KOSPI (-1.3%) is poised to close lower for fourth consecutive session and the Won is 0.5% weaker against the dollar.
Markets elsewhere in Asia have been relatively quiet with Hong Kong, Taiwan and mainland China closed for holidays. Asian credit markets are trading marginally wider off the Korean headlines.
In terms of the day ahead, attention will be focused squarely on the ECB meeting at 12:45pm London time. Draghi’s press conference follows 45 minutes later. The BoE announcement is due at midday. US weekly jobless claims and European services PMIs are the main data points of note