Futures Unchanged Ahead Of Jobs Number Following First Ever Chinese Corporate Bond Default
Today's nonfarm payroll number is set to be a virtual non-event: with consensus expecting an abysmal print, it is almost assured that the real seasonally adjusted number (and keep in mind that the average February seasonal adjustment to the actual number is 1.5 million "jobs" higher) will be a major beat to expectations, which will crash the "harsh weather" narrative but who cares. Alternatively, if the number is truly horrendous, no problem there either: just blame it on the cold February... because after all what are seasonal adjustments for? Either way, whatever the number, the algos will send stocks higher - that much is given in a blow off top bubble market in which any news is an excuse to buy more.
So while everyone is focused on the NFP placeholder, the real key event that nobody is paying attention to took place in China, where overnight China’s Shanghai Chaori Solar defaulted on bond interest payments, failing to repay CNY 89.9mln (USD 14.7mln), as had been reported here extensively previously. This marked the first domestic corporate bond default in the country's history - indicating a further shift toward responsibility and focus on moral hazard in China. Whether or not this is China's "Bear Stearns" moment remains to be seen, however nearly a dozen deals were postponed or canceled in the aftermath of this development meaning that as expected the entire bond market is set for a repricing now that moral hazard may have to be taken out of the equation - the end result will be yields that are hardly lower which for a $12 trillion corporate bond market can only spell bad news. But since the market has long ago lost its discounting capabilities, expect to feel the impact of future bond defaults in real time.
In the meantime, copper (futures down over 2.0% this morning) which is heavily used for debt financing in China specifically, and Shanghai Chaori Solar's failure to repay is being seen as a warning shot that many more could follow, as the Chinese authorities pull away from their previous policy of bailing-out-at-all-costs. As such, copper prices have fallen in tandem with a declining appetite for credit in China.
Stocks in Europe traded lower this morning, with Bunds also better bid as market participants positioned ahead of the release of the latest jobs report by the BLS later on in the session. Despite the absence of apparent appetite for risk, it was the health care related stocks that led the move lower which indicates that the price action was largely result of investor positioning and not a fundamental shift in the outlook. Still, safe haven related flows supported JPY which in turn weighed on the USD and ensured that EUR/USD and GBP/USD traded in the green.
Going forward, apart from awaiting the release of the latest jobs report by the BLS, market participants will also get to digest the release of the latest jobs report from Canada.
Bulletin news summary from Bloomberg and RanSquawk
Treasuries steady, long end leads, before report forecast to show U.S. economy added 149k jobs in February while unemployment rate held at 6.6%.
The U.S. and EU put Russia’s Vladimir Putin on notice that they will be united on imposing sanctions if he’s unwilling to defuse the Ukraine crisis and pursue a negotiated solution
The crisis in Ukraine is putting the question of Poland’s accession to the euro back on the agenda as the military standoff stirs memories of the Cold War
German industrial production rose 0.8% in January, the third consecutive monthly gain and in line with median estimate in Bloomberg survey
EUR/USD rose as much as 0.35% to 1.3909, strongest since October 2011
Shanghai Chaori, a Chinese solar-cell maker failed to pay full interest on its bonds, leading to the country’s first onshore default and signaling the government will back off its practice of bailing out companies with bad debt
California Governor Jerry Brown, who decries a widening gulf between rich and poor, is campaigning for a fourth and final term presiding over a state that’s outpacing the U.S. in producing both millionaires and food-stamp recipients
Gary Cohen, the top U.S. health insurance regulator accused by congressional Republicans of misleading them before the troubled start of the Obamacare website, will resign
Sovereign yields mixed. EU peripheral spreads narrow. Asian equities mixed, Nikkei +0.9%; Shanghai Composite little changed. European equity markets decline, U.S. stock-index futures gain. WTI crude and gold little changed, copper falls
US event calendar
- 8:30am: Trade Balance, Jan., est. -$38.5b (prior $38.7b);
- 8:30am: Change in Nonfarm Payrolls, Feb., est. 149k (prior 113k); Change in Private Payrolls, Feb., est. 145k (prior 142k); Change in Manufacturing Payrolls, Feb., est. 5k (prior 21k)
- Unemployment Rate, Feb., est. 6.6% (prior 6.6%)
- Average Hourly Earnings m/m, Feb., est. 0.2% (prior 0.2%)
- Average Hourly Earnings y/y, Feb., est. 2% (prior 1.9%)
- Average Weekly Hours All Employees, Feb., est. 34.4 (prior 34.4)
- Change in Household Employment, Feb. (prior 638k)
- Underemployment Rate, Feb. (prior 12.7%) --
- Labor Force Participation Rate, Feb. (prior 63%)
- 3:00pm: Consumer Credit, Jan., est. $14b (prior $18.756b) Central Banks
- 12:00pm: Fed’s Dudley speaks in New York
- 12:30pm: Former Fed Chairman Bernanke speaks in Houston
Shanghai Chaori Solar defaulted on bond interest payments, failing to repay CNY 89.9mln (USD 14.7mln), alongside expectations. (WSJ) Despite the small size of the default, this marks the first domestic corporate bond default in the country's history - indicating a further shift toward responsibility and focus on moral hazard in China.
EU & UK Headlines
Analysts at BNP Paribas revise their ECB QE forecast and now see QE in Q4 vs. Prev. view that the ECB would engage in asset purchases after ECB staff projections in June.
Fitch affirms ESM at AAA; outlook stable. (DJN)
UK BoE/GfK Inflation Next 12 Mths (Feb) 2.8% (Prev. 3.6%). 40% of Britons expect rate increase in the next year vs. 34% in November, rate-increase expectation at highest since May 2012. (BBG/RTRS)
According to official models from the Office of Budget Responsibility, the UK faces a GBP 20bln black hole in public finances, suggesting further austerity and throwing doubt on whether the recovery will eliminate the deficit. (FT)
Fed's Lockhart (non-voter, dove) said is prepared to consider overshooting on inflation, up 2.5%, to aid job gains. (RTRS)
Lockhart also commented that passing the 6.5% jobless rate should be a trigger to update forward guidance on forward rates and that bad weather may have cut GDP by 0.75 percentage points. (BBG)
While all ten sectors traded in the red this morning, the underperformance was led by health care and basic materials sectors, with the latter driven by concerns over potential implications that the first corporate bond default in China will have on the use of metal to finance debt. This also saw copper futures fall over 1.5%, with other precious and base metals also trading lower.
With little in the way of major macroeconomic releases during the first half of the session this morning meant that the price action was largely driven by positioning ahead of the upcoming release of the latest jobs report by the BLS. As a result, risk off related flows weighed on USD/JPY and weighed on the USD. Consequently, despite cautious comments by RBA governor Stevens who stated that AUD/USD over 0.90 is higher than the RBA's assessment, together with lower gold prices, meant that AUD/USD remained bid.
Copper (futures down over 2.0% this morning) is heavily used for debt financing in China specifically, and Shanghai Chaori Solar's failure to repay is being seen as a warning shot that many more could follow, as the Chinese authorities pull away from their previous policy of bailing-out-at-all-costs. As such, copper prices have fallen in tandem with a declining appetite for credit in China.
US House Speaker John Boehner said the US should open gas exports in order to counter the actions of Russian President Putin. (WSJ) Boehner believes a lifting of the de-facto ban on exporting US produced LNG would lessen dependence on Russian gas exports across west and eastern Europe.
CME lowered natural gas Henry Hub futures for specs by 18.5% to USD 4,400 per contract from USD 5,225. (RTRS) Russian NatGas and crude oil transit flows via Ukraine are uninterrupted and at normal levels, according to Gazprom. (BBG)
BP is seen to be skirting the US oil export ban, by taking on at least 80% of the capacity in the new USD 360mln Splitter mini-refinery that will produce just enough to escape restrictions on sales outside the US. (BBG) Meanwhile, the Co. has warned that fines over the Gulf of Mexico oil disaster in 2010 could exceed the USD 18bln it is braced for. (Telegraph)
ANZ said that gold consumption growth in China is slowing and that Indian gold demand remains robust. ANZ also raised its gold forecast for 2014 by 5.5% to USD 1339/oz and raised its spot silver forecast by 8.3% to USD 22.20/ oz, but added that gold may drop below USD 1300/oz in the near-term as China demand wanes. ANZ has also stated that platinum 'has room' to rally against gold. (BBG)
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We conclude with the overnight summary from DB's Jim Reid
It’s fascinating that in this period where the S&P 500 is 277% higher, nominal and real GDP are only 11% and 19% higher respectively and the average monthly payroll has only been 72k. It clearly shows how important the Fed (and other central banks) have been. We still think markets will be a lot more challenging once the Fed’s balance sheet starts to level off but for now it’s still increasing at $65bn/month. Talking of payrolls it’s that time of month again. After two disappointing numbers for December (+75k) and January (+113k) and disappointing readings from Wednesday’s ADP (+139k vs +155k expected) and the ISM non-manufacturing employment component (47.5 vs 56.4 last month) the market consensus is for a February figure of +149k whilst DB is forecasting +120k. The consensus may actually be lower than this but maybe not everyone has updated their forecasts after this week’s data. Consensus is expecting the unemployment rate to hold steady at 6.6% whilst
DB’s US Economists expect it to fall -0.1% to 6.5% although they note a larger decline is possible due to the expiration of extended unemployment benefits last December. Whilst the consensus NFP number would mark an improvement on January, a +149k reading would represent a sharp discount from the +204k averaged through the first eleven months of 2013 so it easy to see how bad weather is playing a role here even if the size of the impact is difficult to calculate. As DB’s Joe LaVorgna notes, if weather really is weighing on the numbers then we would expect to see a jump in the number of people who have a job but did not report to work because of “bad weather” which is data the BLS provides within the Household Survey. Even accounting for the past few month’s numbers, DB continues to expect average monthly payroll gains of around +240k in 2014. This would be some pick-up on the post crisis average of 72k discussed above.
Moving back to the other big event of the week, the ECB yesterday kind of told us that they are only going to act when absolutely necessary as they yet again missed an opportunity to be proactive in the fight against future possible low inflation/deflation. It now seems last November’s pre-emptive rate cut was an anomaly and not part of a new policy trend for the ECB. Overall our economists thought it would be difficult for the ECB to publish an inflation forecast materially below its own definition of price stability without providing more accommodation. However, this is indeed what they chose to do. They now think the ECB seems to be “hoping for the best”, and in their call for a cut yesterday they acknowledged they may have underestimated the Governing Council’s lack of room for manoeuvre. They now expect policy rates to be unchanged throughout 2014 given this. Given the above it wasn’t a surprise to see the Euro trade at the highest point since October 2011. Indeed will their lack of action be the spur for a sustained strong currency which continues to put downward pressure on inflation and forces them to act later in the year? Our bias remains that it will but yesterday proved that the ECB will need hard facts for them to be able to act.
After a mid-week lull, Ukrainian and Russian headlines increased yesterday, but for now global markets have been able to weather the newsflow. That isn’t to say that there haven’t been pockets of volatility as Russian equities (MICEX - 0.97%) and Russian fixed income (10 year +13bp) had a week day. On Thursday, Crimea’s parliament decided overwhelmingly to “enter into the Russian Federation with the rights of a subject of the Russian Federation” in a non-binding parliamentary vote. The parliament also set a referendum for March 16th for Crimean voters to decide if they wanted the peninsula to join Russia. If the move is approved by the referendum, all state property would be “nationalised”, the Ruble adopted and Ukrainian troops would be treated as occupiers and forced to surrender or leave, according to the Vice Premier of Crimea. Obama described the proposed referendum as a violation of the Ukrainian constitution and a violation of international law and announced potential sanctions against Russian officials who are involved in military action in Ukraine. The EU also looks set to follow with targeted sanctions. So the crisis doesn’t look like it’s over even if markets have become a bit more sanguine about the endgame.
Looking at overnight markets, Asian equities are trading with modest gains led once again by the Nikkei (+0.8%), mirroring a similar gain for the S&P 500 on Thursday (+0.17%). Onshore Chinese equities are once again lagging today possibly due to the news of China’s first corporate bond default (more below). In Asian currencies, the Indian Rupee (+0.15%) is adding onto yesterday’s 1.04% gain, further cementing its spot as one of the best performing currencies of late in Asia and the EM world. In China, domestic Chinese interbank rates continue to range around multi-month lows and both CNY (+0.05%) and CNH (+0.05%) are on track for one of their strongest weeks in two years.
On the topic of China, according to the WSJ the country’s first onshore corporate bond default has occurred earlier today in the form of Shanghai Chaori Solar Energy’s missed/incomplete RMB89.8m coupon payment. As we have written over the last couple of days, the bond is relatively small (RMB1bn or US$160m in face value) and the issuer is small (US$1.2bn in assets) but it’s an interesting case for a number of reasons. Firstly, it’s a bond where the majority of bondholders are retail investors (WSJ, citing company management) which widens the scope of the impact from the market’s typical institutional investor base. Weibo, China’s version of Twitter, is showing photos of retail investors at a local Shanghai government office protesting the authorities’ lack of action in assisting the issuer (21st Century Business Herald). Secondly, it should be highlighted that Shanghai Chaori avoided a default on its annual coupon payment last year due to the intervention of a local Shanghai government who persuaded banks to roll over loans. This time around, the policy appears to have changed with no last-minute assistance on the cards. Indeed, state-affiliated news agency Xinhua wrote in an opinion piece that a default would be the “the market playing its own decisive role”. Interesting, given that the Chinese solar energy market was heavily subsidised by the Chinese government in recent years. The Xinhua article also commented that Chaori was not going to be China’s “Bear Sterns moment”. In addition, domestic media are reporting that the company’s bankers and bond underwriters will not be helping the company make interest payments (21st Century Business Herald). Though this is a relatively small bond, there are potentially wider ramifications. Bloomberg reports that China’s renewable energy industry faces US$7.7bn in bond maturities this year, and already three domestic bond issuances have been postponed or cancelled in recent days
according to Reuters. This is certainly a macro story to watch in 2014.
Looking at the day ahead, the main focus will be on US payrolls due out at 1:30pm London time which will dictate the tone for the rest of the day. US trade numbers for January will also be released at the same time as payrolls and US consumer credit numbers will be published towards the end of the US session. Ahead of payrolls, Europe will be focused on French trade (January) and German industrial production. Over the weekend, China will publish its February inflation and trade reports. The trade report will be closely watched in light of January’s Chinese exports which were significantly above consensus possibly due to Lunar New Year effects or potential invoicing distortions. For the record, consensus is expecting February export and import growth of 7.5% and 7.6% YoY respectively.
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