Everywhere you look these days, central planning just can't stop reaping failure after failure. First it was Japan's Q3 GDP rising just 1.1%, well below the 1.9% in the previous quarter and the 1.6% expected, while the Japanese current account posted its first decline since of €128 billion (on expectations of a JPY149 billion increase) since January. What's worse, according to Asahi, Abe's approval rating tumbled to 46% in the current week, down from the low 60s as soon as early 2013, while a former BOJ member and current head of Japan rates and currency research, Tohru Sasaki, said that the high flying days of the USDJPY (and plunging of the JPY respectively) is over, and the USDJPY is likely to slide back to 100 because the BOJ would not be able to expand monetary easing by enough to repeat this year's "success." He definitely uses that last word rather loosely.
Continuing to praise the success of central planners everywhere, China's trade balance soared from a revised $31.1 billion to $33.8 billion, which was the largest trade surplus since early 2009, which happened even as November CPI of 3.0% declined both from and the 3.2% October print, and below the 3.1% expected on supposedly lower than expected food inflation . So much for China's reform spurring internal demand and shifting away from mercantilism. Then again, the above assume Chinese trade data is reported accurately which by now everyone understands it isn't, and even Bank of America this morning ominously reminds us that "exports data were greatly over-reported between end-2012 and April 2013." We are well aware.
Finally a quick look at central planning in Europe indicates more of the same, with Greek Nov. CPI declining once again, dropping from -2.0% to -2.8% on expectations of a modest bounce to -1.8%. This happened even as Greek Q3 GDP printed at -3.0%. One can't wait to see just what data Greece will have to manipulate to post its first positive GDP print in 2014 as it has been promising constantly for the past year. Finally, confirming that a soaring Euro is actually disastrous for the economic dynamo in the heart of Europe (much to the ECB's confusion), Germany reported Industrial Production which declined for the second month in a row, and after sliding -0.7% in September, dropped another 1.2% in October on expectations of a 0.7% increase. Just growth, hope and prosperity all around.
Finally, in the US there is little on the central-planning calendar, although a lot of central planners do speak ahead of the Fed's blackout period which starts tomorrow with Lacker (12:30), Bullard (13:05), and Fisher (14:15) all taking the good Fed cop, bad Fed cop routing to the next level. And yes, no central-planning day could be complete without not one but two POMOs, which today we have, the first being $1.5 billion and the second around $3.3 billion.
In light of all this data it is shocking the centrally-planned futures aren't limit up.
Even though there is a distinct lack of risk events this week, the traditionally observed Santa Claus rally has failed to materialise and instead stocks traded mixed in Europe this morning, with French based CAC underperforming its peer where Danone shares came under pressure after analysts at Exane downgraded co. rating to underperform from neutral. Also of note, London listed Tullow Oil weighed on the FTSE-100 index which traded flat for much of the session so far after the exploration group said that the Tultule-1 wildcat well in the South Omo block, onshore Ethiopia, will be plugged and abandoned as a dry hole. Looking elsewhere, EUR/USD and GBP/USD traded higher, supported by a weaker USD (USD index traded at its lowest level since late October), together with touted macro names buying EUR/JPY and GBP/JPY, which itself were also beneficiaries amid broad based JPY weakness. Going forward, although there are no major macroeconomic releases set for the second half of the session, the NY Fed will conduct two POMO ops today.
Chinese Trade Balance (USD) (Nov) M/M 33.80bln vs. Exp. 21.20bln (Prev. 31.10bln, Rev. 31.11bln) - Largest surplus since early 2009.
Exports (Nov) Y/Y 12.7% vs. Exp. 7.0% (Prev. 5.6%)
Imports (Nov) Y/Y 5.3% vs. Exp. 7.0% (Prev. 7.6%)
CPI (Nov) Y/Y 3.0% vs. Exp. 3.1% (Prev. 3.2%)
PPI (Nov) Y/Y -1.4% vs. Exp. -1.5% (Prev. -1.5%)
China's central bank on Sunday published a guideline on deposit certificates in the interbank market, another step towards fully floating interest rates.
BoJ’s Kuroda said the BoJ will continue easing until 2% inflation is stable, said inflation expectations are rising on a whole, and sees improvements in economy and markets since easing began.
Japanese GDP SA (Q3 F) Q/Q 0.3% vs. Exp. 0.4% (Prev. 0.5%)
GDP Annualized SA (Q3 F) Q/Q 1.1% vs. Exp. 1.6% (Prev. 1.9%)
BoP Current Account Balance (JPY)(Oct) M/M -127.9bln vs. Exp. 148.9bln (Prev. 587.3bln)
Trade Balance BoP Basis (Oct)(JPY) M/M -1091.9bln vs. Exp. -1005.5bln (-874.8bln)
EU & UK Headlines
ECB’s Weidmann (hawk) says the ECB has the tools to counter a possible excessive slowdown in inflation and would act if necessary.
ECB's Mersch has called summer's call for negative real rates 'fatalistic', inflation and deflation risks are evenly balanced and rates to be at, below current level for prolonged time.
Greece's Parliament early Sunday approved the 2014 budget, backing spending cuts that the government says would help it meet deficit targets but that have been criticized by its international creditors for not going far enough. In related news, according to an EU Commission source, Greece deal before January 2014 is unrealistic.
Eurozone Sentix Investor Confidence (Dec) M/M 8.0 vs. Exp. 10.0 (Prev. 9.3)
German Industrial Production SA (Oct) M/M -1.2% vs. Exp. 0.7% (Prev. -0.9%, Rev. -0.7%)
German Industrial Production WDA (Oct) Y/Y 1.0% vs. Exp. 3.1% (Prev. 1.0%, Rev. 0.6%)
German Trade Balance (Oct) M/M 17.9bln vs Exp. 18.3bln (Prev. 20.4bln, Rev. 20.3bln)
- German Exports SA (Oct) M/M 0.2% vs Exp. -0.5% (Prev. 1.7%, Rev. 1.6%).
- German Imports SA (Oct) M/M 2.9% vs Exp. 1.1% (Prev. -1.9%).
German Current Account Balance (Oct) M/M 19.1bln vs Exp. 17.1bln (Prev. 19.7bln, Rev. 20.0bln)
Bank of France Business Sentiment (Nov) M/M 101 vs Exp. 98 (Prev. 99, Rev. 100) - French GDP expanded 0.5% in Q4, Bank of France estimates.
WSJ Fed watcher Hilsenrath says that Federal Reserve officials are closer to winding down their controversial USD 85bln-a-month bond-purchase program, possibly as early as December, in the wake of Friday's encouraging jobs report.
Fed’s Evans (voter, dove) said is confident bond purchases will end before hitting 6.5% unemployment threshold. Evans said will have open mind on tapering at coming meeting, but still not convinced time to taper as needs to see more data on jobs and inflation.
Stocks traded mixed in Europe, with French based CAC index underperforming its peer where Danone shares came under pressure after analysts at Exane downgraded co. rating to underperform from neutral. Elsewhere, weekend press reports that HSBC is looking to partially IPO its UK retail/commercial bank were denied, though heading into the North American cross co. shares are seen marginally lower. Same goes for Standard Chartered, with CNBC reporting mid-way through the session that the bank has denied reports that it could consider a rights issue to shore up balance sheet.
Barclays overweight Europe, EM stocks and underweight US.
Broad based JPY weakness, combined with touted macro names buying EUR/JPY and GBP/JPY meant that in spite of firmer JPY spot rate, both EUR/USD and GBP/USD traded higher this morning. Still, should the upside price action continue by GBP/USD, there is talk of offers from Asian accounts at 1.6420. Looking elsewhere, M&A related flow may pick up pace and have a more pronounced impact on CAD and GBP related cross amid reports citing sources that Glencore Xstrata has revived its interest in bidding for the Canadian iron-ore operations that Rio Tinto Group is seeking to sell.
Citi commodity strategists have made changes to their oil price forecasts for 2014 and 2015 lowering their Brent forecast to USD 97.5bbl and USD 92.5bbl respectively. This move primarily reflects an improving supply picture through 2014 and lower geopolitical risks.
Barclays says geopolitical risk in oil is still high amid Iran thaw, with risks of a price spike some time in 2014 being higher than that of a move lower.
Iran are said to increase their gas exports to Iraq to USD 17bln per year as reported by IRNA, citing the head of the Iran Gas-Export Co.
According to CFTC, hedge funds are the least bullish on gold since 2007. The net-long position in gold fell 16% to 26,774 futures and options in the week ending December the 3rd. Short bets rose 6.2% to 79,631. Net-bullish wagers across 18 U.S. traded commodities climbed to a four week high.
* * *
DB's Jim Reid concludes the overnight recap
Given Friday's payrolls beat (more below) the market probability of the FOMC tapering next week went in the opposite direction to England's chances as markets seem set for a fascinating pre-Xmas run in. According to Bloomberg, 34% of economists surveyed after payrolls expect the Fed to begin tapering at the Dec 17th-18th meeting, which is an increase of 17 percentage points from a November 8th survey. On the other hand, 40% of the 35 economists think that tapering will begin in March, which is 13ppt lower than the previous survey. So there has definitely been a shift in opinion towards a December taper, but March still appears to be the favourite consensus call for now.
In terms of the payrolls report itself, November nonfarm payrolls rose by 203k (or 18k higher than consensus), which is effectively in line with the +200k print in October. Back revisions to the prior two months totaled +8k, after which the running 3 month average is now 193k. November private sector job gains were +196k which is higher than the +180k expected by the market. The unemployment rate fell by a larger-than-expected amount in November (7.0% vs. 7.3% previously), as unemployment in the household survey fell by 365k. The fall in unemployment came despite an increase in labour force participation which partly recovered from last month’s government shutdown-related distortion (63.0% vs. 62.8% previously). Outside of the job gains, the nonfarm workweek increased a tenth to 34.5 hours. Average hourly earnings rose +0.2% vs. +0.1% previously. One thing pulling back the chances of a taper next week was the YoY core PCE rate which reversed course, dropping from 1.2 to 1.1%, relative to a Fed goal of 2.0%. Indeed this is an important part of why DB's Peter Hooper thinks they don't taper in December.
Following Friday's employment report it will be an interesting 24 hours of Fed speak coming up with Lacker, Bullard and Fischer all scheduled to discuss their updated thoughts. Today's Fed speak line up is also relatively interesting because we have one dove, one in the centre and one hawk speaking. This will also be the final time we will hear from Fed officials before they go into a "blackout" period on Tuesday ahead of next week’s FOMC.
Onto markets and the positive effects of last Friday’s payrolls and better Chinese data over the weekend and today have combined to create a firm start to the week for markets. Chinese exports rose 12.7% yoy in November, up from 5.6% yoy in October and much higher than the consensus estimate of 6.5%. On the other side of the ledger, November imports rose 5.3% yoy, which is slower than last month’s 7.6% increase. However, DB’s Jun Ma points out that the seasonal adjusted November import growth accelerated to 9.3% yoy, up from 2.7% yoy in October. The trade surplus rose to USD33.8bn in November which is the highest monthly trade surplus since early 2009. This morning’s Chinese inflation data for November was fairly benign with consumer prices rising 3.0% YoY in November (vs 3.1% expected, 3.2% previous) and PPI falling 1.4% YoY (-1.5% expected).
Asian equities have opened stronger, and credit spreads are rallying overnight. The Nikkei (+2.2%) is leading the region’s gains and India's SENSEX (+1.6%) has hit a new record. News that Thailand’s PM Yingluck has dissolved parliament and called for fresh elections in response to recent anti-government protests has led to underperformance in Thailand’s SET index (-0.15%). Asian credit spreads are trading tighter - there is also a firm bid for Indonesian government bonds following the strong performance of EM credit post-payrolls on Friday when the CDX EM index rallied by 8bp in its best performance in two weeks. Indonesian sovereign CDS is about 15bp tighter this morning. USDJPY is stable at 103, after gaining more than 1% on Friday off the back of US payrolls. 10yr UST yields are stable at 2.85%, or unchanged from where they finished on Friday. The strength in risk markets post the US data seems to have been explained by the argument that either the whisper number was higher than consensus or that the numbers don't merit aggressive tapering over the coming months even if they do decide to go for December.
Coming back to China, DB’s Jun Ma has published his latest China 2014 outlook. Our economists expect GDP growth to continue its recovery towards 8.6% in 2014, after accelerating to 7.8-7.9% yoy in 2H 2013 from 7.5% in Q2. They see five major drivers for the recovery in 2014: 1) reduced overcapacity; 2) deregulation in sectors with massive under-capacity; 3) effectiveness of the government’s efforts to “reactivate money stock”; 4) rising external demand; and 5) a pro-cyclical fiscal policy. Risks to his 2014 growth outlook include: 1) weaker- than-expected external demand recovery; 2) faster-than-expected property price inflation in China, which may result in harsher policy reactions from the government; and 3) unexpected shocks that lead to higher inflation, which may prompt earlier-thanexpected policy tightening.
On a related topic, our EM strategists have published a piece on Sovereign Credit in 2014. They believe that while EM assets are likely to face continued headwinds in 2014, the dramatic negative shift in the wider perception of EM debt cannot be repeated in 2014 given the return of EM risk premium. With continued taper risk, they recommend a neutral overall exposure. However, as rate uncertainty recedes after the initial taper shock and Fed continues with its dovish guidance as we foresee, they believe EM sovereign spreads have potential of some moderate tightening, offsetting the rise in US yields and offering about 6% return in 2014. The team recommends an overweight exposure to Colombia, Russia, Poland, and Hungary, underweight exposure to Brazil, Indonesia, and Ukraine.
Previewing the week ahead, as we mentioned previously we have the last bit of Fed speak today before the Fed goes into a self imposed silence. The US data flow is relatively light which is typical of a post-payrolls week but it’s worth noting wholesale inventories on Tuesday and retail sales on Thursday. Importantly US House and senate negotiators are supposed to come to an agreement on a budget before the December 13th deadline. A lot of optimism has been expressed thus far from members of congress, and there are reports that a budget deal will be unveiled this week.
In Europe, a two day Eurogroup/ECOFIN finance ministers’ meeting begins today – discussion of a Single Resolution Mechanism for banks is a top item on the agenda. The BoE’s Carney will be speaking at the Economic Club of New York today, and Draghi will be speaking at a conference in Rome on Tuesday. Looking at the data docket, German trade and industrial production data are scheduled for today. French, UK and Italian industrial production and UK trade data are the major data releases on Tuesday. Eurozone’s industrial production, France and Italy’s CPI are due on Thursday. In China, industrial production, new bank loans and retail sales (Tuesday) are the main point of focus.