The grind higher in equities, and tighter in credit, continues as markets brush aside concerns about a December taper for the time being. Overnight futures levitation has pushed the Fed balance sheet driven record high S&P even higher, despite as Deutsche Bank points out, the fact that we had three Fed speakers advocate or talk up the possibility of a December taper, including the St Louis Fed’s James Bullard who is viewed as a bit of a bellwether for the FOMC. Bullard said the probability of a taper had risen in light of the strengthening of job growth in recent months. Indeed, he noted that the best move for the Fed could be a small December taper given the improving jobs data but below-target inflation readings. The Fed could then pause further tapering should inflation not return toward target during the first half of 2014.
Overnight, China saw a slew of goalseeked economic data including slightly weaker than expected November Industrial Production Y/Y 10.0% vs. Exp. 10.1% (Prev. 10.3%) and
slightly better Retail Sales Y/Y 13.7% vs. Exp. 13.2% (Prev. 13.3%). Following the disappointing German Industrial Production report yesterday, today we got the October manufacturing numbers out of everyone else in Europe, including France at -0.3%, same as September,and below the 0.1% expected. Industrial production in Italy grew 0.5%, above the 0.2% expected, while UK Industrial production met expectations of a 0.4% rise, down from 0.9%.
Among central bank speakers, ECB's Coeure said large-scale asset purchases are one option for ECB, currently sees no need for large-scale asset purchases. He also said that the ECB would offer more LTROs only when banks can lend and that the council will discuss minutes in early 2014.
Speaking of Fed speakers, there will be no more in the US until next week as the Fed blissfully entered its blackout period at midnight.
Looking at today’s calendar, the focus will be on US JOLTs job openings - a report which Yellen has previously highlighted as an important supplement to more traditional labour market indicators. US small business optimism and wholesale inventories are the other major data releases today. As mentioned above, US financial regulators are due to announce Volcker rules at some point today although as we just reported, the CFTC's meeting on Volcker was just cancelled due to inclement weather.
Overnight news bulletin from Bloomberg and RanSquawk
- Chinese Industrial Production (Nov) Y/Y 10.0% vs. Exp. 10.1% (Prev. 10.3%) and Retail Sales (Nov) Y/Y 13.7% vs. Exp. 13.2% (Prev. 13.3%).
- Fed's Fisher (non voter - hawk) said Fed should begin tapering bond buying at earliest opportunity and the cost of Fed's bond buying program 'far exceeds its purported benefits'.
- ECB's Coeure says large-scale asset purchases are one option for ECB, currently sees no need for large-scale asset purchases
- Treasuries gain, most curve spreads narrow before week’s $64b debt auctions begin with $30b 3Y notes, yield 0.645% in WI trading after drawing 0.644% in Nov.
- Final version of the Volcker Rule curbs some types of trading while largely freeing chief executives from personal responsibility
- Regulators granted a broader exemption from the ban for banks’ market-making desks, on the condition that traders aren’t paid in a way that rewards proprietary trading, according to a draft of the final rule
- Senate will try again to confirm Rep. Mel Watt (D-N.C.) to lead the FHFA, which oversees government-chartered mortgage finance companies Fannie Mae and Freddie Mac
- China’s industrial output rose less than estimated in November while retail sales unexpectedly accelerated, giving a mixed picture of growth as leaders gather in Beijing to set economic policies for the coming year
- U.K. industrial production rose 0.4% in October, matching the median estimate in a Bloomberg survey
- ECB’s Benoit Coeure said policy makers would consider offering more long-term loans to banks only when they are in a position to lend to companies and households
- Germany softened its opposition to key elements of a plan for handling euro-area bank failures as EU finance ministers raced to break a deadlock on the proposal before next week’s EU summit
- Japan’s government retirement fund plans to invest in overseas infrastructure as it seeks to diversify its portfolio, according to two people with direct knowledge of the matter
- While Obama’s health agency said it spent $319m building an online health-insurance marketplace through October, it’s almost impossible to verify and track that spending through public records; data presented on web sites is incomplete and often contradictory, according to open government advocates
- Sovereign yields mostly lower. EU peripheral spreads narrow. Asian stocks post modest losses, European stocks, U.S. equity index futures gain. WTI crude higher, gold and copper little changed
Stocks recovered from a lower open and gradually moved into positive territory, with industrials outperforming where Weir Group shares rose over 3% amid talk that the company may be a target for General Electric. At the same time, the evident risk on sentiment ensured that the more defensive sectors have underperformed, which in turn meant that the health care heavy SMI index remained in the red. Despite the recovery in stocks, Bunds remained better bid even as supply from Spain and Austria was absorbed. Looking elsewhere, even though the 3-month Euribor rate edged up to 0.260% from 0.255% yesterday, the Euribor curve remained marginally flatter, supported by an uptick in ECB excess liquidity which rose to EUR 157bln, compared to EUR 154bln on Dec-6th, which was the lowest level in almost two years. In FX, a combination of option related flow, together with touted selling of USD/JPY by Japanese and Norwegian names, resulted in EUR/JPY and also GBP/JPY to come off the best levels of the session. Going forward, market participants will get to digest the release of the latest NIESR GDP estimate, weekly API report after the closing bell on Wall Street and the US Treasury will sell USD 30bln in 3y notes.
US Event Calendar
- 7:00am: ECB’s Draghi speaks in Rome
- 7:30am: NFIB Small Business Optimism, Nov., est. 92.6 (prior 91.6)
- 9:30am: U.S. regulators meet on Volcker Rule Supply
- 10:00am: JOLTs Job Openings, Oct., est. 3.895m (prior 3.913m)
- 10:00am: Wholesale Inventories, Oct., est. 0.3% (prior 0.4%); Wholesale Sales, Oct., est. 0.3% (prior 0.6%) Central Banks
- 11:00am: POMO - Fed purchases $1b-$1.5b TIPS in 2018-2043 sector
- 11:30am: U.S. to sell 4W bills, $25b 1Y bills
- 1:00pm: U.S. to sell $30b 3Y notes
Chinese Industrial Production (Nov) Y/Y 10.0% vs. Exp. 10.1% (Prev. 10.3%)
- Industrial Production YTD (Nov) Y/Y 9.7% vs. Exp. 9.7% (Prev. 9.7%)
- Retail Sales (Nov) Y/Y 13.7% vs. Exp. 13.2% (Prev. 13.3%)
- Retail Sales YTD (Nov) Y/Y 13.0% vs. Exp. 13.1% (Prev. 13.0%)
China 2013 GDP may be 7.7% and China 2013 CPI may be 2.6%, according to a CASS report. CASS added that it sees China's economy to expand 7.5% in 2014 and sees China exports rising 9.1% and imports increasing 8.5%
EU & UK Headlines
French Manufacturing Production (Oct) M/M 0.4% vs Exp. 0.2% (Prev. -0.7%, Rev. -0.5%)
French Industrial Production (Oct) M/M -0.3% vs Exp. 0.1% (Prev. -0.5%, Rev. -0.3%)
Italian Industrial Production (Oct) M/M 0.5% vs Exp. 0.2% (Prev. 0.2%)
UK Industrial Production (Oct) M/M 0.4% vs Exp. 0.4% (Prev. 0.9%)
UK Manufacturing Production (Oct) M/M 0.4% vs Exp. 0.4% (Prev. 1.2%)
UK Visible Trade Balance GBP/Mn (Oct) M/M GBP -9,732 vs Exp. GBP -9,200 (Prev. GBP -9,816, Rev. GBP -10,099)
UK RICS House Price Balance (Nov) 58% vs. Exp. 60% (Prev. 57%) - highest since June 2002. While, the BoE said that Q3 gross mortgage advances highest since 2008.
ECB's Coeure says large-scale asset purchases are one option for ECB, currently sees no need for large-scale asset purchases. He also said that the ECB would offer more LTROs only when banks can lend and that the council will discuss minutes in early 2014.
- EU is closing in on funding compromise that could break stalemate on single resolution mechanism, according to officials who added that EU governments consider separate treaty to share costs of bank wind downs.
Italy buys back total of EUR 3.99bln of bonds. The Treasury was scheduled to buyback the 3/15 and 4/15 BTPs and the 12/14 and 9/15 floating rate CCTs and the 9/17 inflation-linked BTPei’s. Domestic buying supported the Italian curve this morning, particular the 5y sector.
Fed's Fisher (non voter - hawk) said Fed should begin tapering bond buying at earliest opportunity and the cost of Fed's bond buying program 'far exceeds its purported benefits'.
Manpower Survey: US employers outlook is strongest since Q1 2008.
Heading into the North American open, stocks in Europe are seen broadly higher, albeit marginally and with heath care under performing which in turn resulted in the SMI index in Switzerland under performing its peers. The move higher was led by industrials, where Weir Group shares rose over 3% amid talk that the company may be a target for General Electric.
S&P says ECB's Eurozone bank review to have limited rating impact because they already recognise weakness in capital and asset quality in current ratings, and would expect some banks to adjust regulatory capital positions before the October 2014 announcement of results.
In FX, a combination of option related flow, together with touted selling of USD/JPY by Japanese and Norwegian names, resulted in EUR/JPY and also GBP/JPY to come off the best levels of the session. Elsewhere, AUD/USD trended higher throughout the session, supported by touted buying by mining names, rising above the 10DMA line in the process.
Deutsche Bank sees bearish global crude market next year, cut 2014 brent crude price forecast to USD 97.50/bbl, cut 2014 WTI crude price forecast to USD 88.75/bbl and expects OPEC to cut production to defend prices. At the same time, analysts at Commerzbank said that Brent-WTI spread is to narrow in coming months.
Deutsche Bank sees 'ongoing downside risks' for gold prices, favours lead and zinc and recommends long copper trade. China October gold output is at 39.84 tons, according to the industry association.
The US chemicals industry is planning a sharp increase in its exports as a result of the cost advantage created by the shale gas boom, putting pressure on competitors in Europe and Asia, according to the FT.
DB's Jim Reid concludes the overnight recap
The grind higher in equities, and tighter in credit, continues as markets brush aside concerns about a December taper for the time being. Indeed, the S&P 500 (+0.18%) reached another record high yesterday despite the fact that we had three Fed speakers advocate or talk up the possibility of a December taper, including the St Louis Fed’s James Bullard who is viewed as a bit of a bellwether for the FOMC. Bullard said the probability of a taper had risen in light of the strengthening of job growth in recent months. Indeed, he noted that the best move for the Fed could be a small December taper given the improving jobs data but below-target inflation readings. The Fed could then pause further tapering should inflation not return toward target during the first half of 2014. DB’s Joe Lavorgna highlights that this is a bit of change in stance from earlier in the year at the June FOMC meeting, when Bullard dissented because he wanted the FOMC to “signal more strongly its willingness to defend its inflation goal in light of recent low inflation readings”. So the fact that Bullard is now floating the idea of a December taper on the table is quite telling. The Dallas Fed’s Fisher, a voter next year, was his usual hawkish self and advocated that the Fed should taper at the earliest opportunity and he opposed any changing of the Fed’s unemployment threshold for rate hikes. The Richmond Fed’s Lacker, a hawk, commented that the Fed should telegraph the path of QE tapering and that he was wary of changing the pace of Fed asset purchases frequently.
Despite all the talk of tapering, it was a relatively soft day for the US dollar on Monday (Dollar index -0.23%) which is a theme that has continued in overnight trading. Indeed, GBPUSD (+0.15%) and EURUSD (+0.1%) are both higher as we type, and this follows a 0.50% and 0.24% rise in both USD crosses yesterday. The GBPUSD is now at its highest level since Q3 of 2011 and EURUSD is at its highest level since late October. Some of the overnight strength in GBP has come after Mark Carney warned of risks to the UK housing market from the BoE's stimulus, in comments on Bloomberg's Charlie Rose show. Outside of equities and currencies, we also had a fairly strong day for credit both in DM and EM on Monday, which is a theme that has persisted since Friday. As we mentioned yesterday, the strength in risk markets (and softness in the dollar) post the US payrolls 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. It’s worth reiterating that the PCE inflation number fell from 1.2% to 1.1% on Friday. This side of the dual mandate gets far less attention.
Elsewhere overnight, Asian equities have been in consolidation mode with falls in the Hang Seng (-0.2%) and Nikkei (-0.2%) offset by better risk sentiment in Chinese A-shares (+0.2%) and a few Asian EM bourses such as Indonesia (+1%) and Thailand (+0.4%). 10yr UST yields are little changed in Asian trading (2.84% as we type) while Asian and Australian credit spreads continue their slow grind tighter (1-2bp tighter today). In China, the government has started the annual Central Economic Work Conference, which will outline economic priorities for 2014. There is talk that the government may lower its GDP growth target to 7% from 2013’s 7.5% at this meeting. The Chinese yuan continues to strengthen against the USD, with USDCNY setting another record low overnight. As we go to print, Chinese industrial production data (10.0% YoY vs 10.1% forecast) for November have been released which was roughly in line with consensus, while retail sales numbers have managed to beat estimates (13.7% YoY vs 13.2% expected).
It’s been a fairly eventful year out of Capitol Hill but we still have the significant issue of the US budget to address before the House adjourns for the year on Friday. Also worth watching from Capitol Hill is the long-awaited final version of the Volcker rule, which is due to be released by US financial regulators today. According to the WSJ who have reportedly reviewed a draft of the rule, banks will be required to provide a “demonstrable analysis of historical customer demand” for financial assets for which they make markets on. The rule is designed to prevent banks from engaging in proprietary trading, but the draft apparently contains multiple new rules designed to discourage proprietary trading including changes in “compensation arrangements” so that they “do not reward or incentivise prohibited proprietary trading”. The Washington Post describes the rules as “tougher-than-expected”. Three of the five regulators involved - the Federal, the Federal Deposit Insurance Corp and the Commodity Futures Trading Commission – will vote on the final rule at public meetings. Meanwhile, the Office of the Comptroller of the Currency and the SEC will not conduct public meetings. The rules have been in the works for quite a while, but it will be interesting to see whether they have an impact on how the US broker dealers trade today.
Staying in the US, there were a couple of interesting snippets in the Fed’s quarterly flow of funds data released late yesterday. Firstly, household wealth increased $1.9 trillion to $77.3 trillion in the third quarter, the highest level ever, probably driven largely by equity and housing market gains. It was the ninth straight quarter of wealth increases. Secondly, the FT points out that US household balance sheets have notched up a post-financial crisis milestone by recording their first rise in mortgage debt since 2008. After reducing debt for 21 consecutive quarters, US households increased their net mortgage liabilities at an annualised rate of 0.9% in Q3. Total mortgage debt of $9.4tn is now 12% below its peak in the first quarter of 2008. Although outstanding mortgage debt rose, it is now down to 56% of GDP compared with a peak of 74%. The outstanding stock of government debt grew an annualised pace of just 1.5%, reflecting the government’s spending cuts and tax rises this year.
Looking at today’s calendar, French, Italian and UK industrial production and UK trade are the major data releases in Europe. Draghi speaks in Rome today. Across the Atlantic, the focus will be on US JOLTs job openings - a report which Yellen has previously highlighted as an important supplement to more traditional labour market indicators. US small business optimism and wholesale inventories are the other major data releases today. As mentioned above, US financial regulators are due to announce Volcker rules at some point today.