While traders will be focused on the ECB, and Mario Draghi, early Thursday, it is unlikely that the European central bank will announce anything overly dramatic (see preview in a subsequent post), and instead the attention will be on the ECB's inflation forecast for hints of when the ECB may accelerate tapering after its December 2016 QE cut, as Draghi scrambles to catch up with commodity inflation, if not so much core CPI, which has remained subdued.
— Maxime Sbaihi (@MxSba) March 9, 2017
However, a more pressing development as US traders get to their desks today, will be the ongoing collapse in WTI, which after crashing 5.5% yesterday, has plunged as much as 3% this morning, sliding not only below $50 for the first time since December 1, but also dropped under $49, and was trading $48.90 at last check, as a near record number of net long spec positions suddenly rush to unwind their exposure.
The fact that yesterday the DOE reported that U.S. crude stockpiles rose by another +8.2m bbl to a record 528.4m bbl, will probably not help the selloff.
After resisting oil's gravitational drag earlier, S&P futures snapped, and were trading lower by 0.2% at 2,357. Should the drop persist, this would be the longest losing streak for the index in five weeks.
Elsewhere, European and Asian stocks fell, ahead of the European Central Bank’s meeting while the Bloomberg Dollar Spot Index headed for its best back-to-back weeks since December, rising after yesterday's blockbuster ADP report and expectations that tomorrow's NFP will not derail the Fed's March reta hike, the euro and yen dropped. Speaking of the ADP report, RBC chief economist Tom Porcellisaid the report was so strong it meant the payrolls report on Friday would have to be unbelievably dire to deter the Fed from hiking next week.
"There is almost no number that would stop them," said Porcelli. "It would take an extreme event for the Fed to take a pass at this point."
Indeed, he noted the ADP surprise meant there was a real chance payrolls could beat expectations, perhaps by a lot. "On the face of it, ADP is consistent with private payrolls of about 340,000," he said. The current median forecast is for a rise of 190,000.
With a hike seemingly certain, and more likely over the year, yields on two-year Treasury notes climbed to 1.378 percent, the highest since August 2009. 10Y yields rose for the 9th consecutive day as central banks dominated markets on Thursday. The US 2Y premium over German debt widened to 220 basis points, the largest gap since early 2000. That is a burden for the euro that is likely to only get heavier as the European Central Bank seems wedded to its super-easy policy.
Jumping across the Atlantic, investors are looking for signs of an end to European stimulus during today's ECB announcement . While economists surveyed by Bloomberg predict the ECB will reiterate that its monthly bond-buying program will run until at least December, traders will be on alert for a more hawkish tone from President Mario Draghi. Still, Draghi is expected to keep QE going at least until the end of the year with underlying price pressures muted. The ECB’s policy decision will be announced at 1:45 p.m. Frankfurt time and Draghi will hold a press conference 45 minutes later.
As Deutsche writes, it's likely that the ECB meeting today contains a lot less drama. Nevertheless it does come at an interesting time what with the likely Fed rate hike next week and the surge in both the ADP and global bond yields yesterday. It's probably far too early for the ECB to announce more tapering ahead especially given that we don't start until next month. According to DB economists, the baseline of such a move is still 6 months away with the possibility of an earlier announcement in June. However they expect hints of a slow and gradual evolution to a less-dovish policy stance today. For example they could provide a less downbeat “balance of risks” to the economy, an adjustment to Forward Guidance to remove the option of reducing policy rates further and/or the removal of “very” from the statement that “a very substantial degree of monetary accommodation is needed”.
“Despite the positive outlook, risks remained skewed to the downside for now,” Anna Stupnytska, global economist at Fidelity International, said in a note. “A Brexit related slowdown could spill over via trade links, with Germany being particularly vulnerable. The heavy political timetable, with Dutch elections later this month and French presidential elections” starting in April are also reasons for ECB caution, she said.
Looking at global markets, with energy stocks on the run, MSCI's broadest index of Asia-Pacific shares outside Japan slipped 0.9 percent. Australia's main index eased 0.4 percent, while its resource sector fell more than 2 percent. Bucking the trend, Japan's export-heavy Nikkei managed to take heart from a softer yen and added 0.3%.
Economic data out of China continued to surprise with consumer inflation coming in well under expectations at an annual 0.8 percent, largely due to falling food prices. That however was offset by the highest PPI in 9 years, as wholesale prices surged 7.8%, higher than the 7.7% expected, the biggest jump since September 2008.
The strong doller also pressured industrial metals which deepened their losses following louder Chinese jitters after the PBOC did not conduct a reverse repo, draining net liquidity for the 11th consecutive day, and leading to concern among traders that the central bank is reall serious about tightening market conditions. Overnight everything fell,from iron ore to copper, which touched a seven-week trough. Gold fell 0.3 percent to $1,204.76 an ounce, declining for a fourth day.
- S&P 500 futures up 0.03% to 2,364.75
- WTI Futures down 2.8% to $48.87
- Brent Futures down 1.3% to $52.41/bbl
- Gold spot down 0.3% to $1,204.33
- U.S. Dollar Index unchanged at 102.07
- STOXX Europe 600 down 0.3% to 371.52
- MXAP down 0.6% to 143.28
- MXAPJ down 1.1% to 460.96
- Nikkei up 0.3% to 19,318.58
- Topix up 0.3% to 1,554.68
- Hang Seng Index down 1.2% to 23,501.56
- Shanghai Composite down 0.7% to 3,216.75
- Sensex up 0.1% to 28,938.34
- Australia S&P/ASX 200 down 0.3% to 5,741.20
- Kospi down 0.2% to 2,091.06
- German 10Y yield rose 1.3 bps to 0.383%
- Euro up 0.2% to 1.0563 per US$
- Brent Futures down 1.3% to $52.41/bbl
- Italian 10Y yield rose 6.2 bps to 2.254%
- Spanish 10Y yield fell 3.1 bps to 1.78%
Top Overnight News
- Oil Drops Below $50 for First Time Since December on Supply Glut
- ECB Said to Plan End to Long-Term Loan Offers to Banks for Now
- ECB Inflation Outlook Set to Keep Bar High for Stimulus End
- BOJ Is Said to Mull More Rate Guidance Once CPI Picks Up
- EU Court Says No ‘Right to Be Forgotten’ for Company Registers
- China Money Supply Growth Slows Amid Campaign to Contain Risk
- Marathon Buys Permian Assets From BC Operating, Others for $1.1b
- China’s Wanfeng Eyes U.S. Acquisitions Amid Trade Tensions
- GE, Borusan EnBW, Fina, Ozgul to Invest $1.3b in Turkey Wind
- Germany’s Merck Plans to Divest Biosimilars Unit by End of Year
- National Co for Maize’s Biggest Shareholder May Sell Stake
Asia equity markets traded mostly lower following a similar lacklustre lead from the US, where energy underperformed after WTI Crude futures had their worst day in over a year with losses of 5.5%. This weighed on the ASX 200 (-0.3%) with mining stocks also suffering after gold continued its declines and iron ore shed 2.9%, while Nikkei 225 (+0.3%) was kept afloat as exporters benefitted from USD/JPY's advance to above 114.00. Hang Seng (-1.2%) and Shanghai Comp. (-0.7%) were negative after the PBoC refrained from open market operations and participants digest mixed inflation figures in which CPI showed the slowest pace of increase since January 2015 while PPI was the strongest in over 8 years. 10yr JGBs tracked losses in T-notes amid early broad gains in yields across the Asia-Pac region which briefly saw the Australian 10yr yield increase to a 15-month high. Furthermore, the curve slightly flattened amid underperformance in the short end while the 5yr JGB auction failed to support as demand was weaker, with the b/c declining to 2.86 vs. Prey. 4.26 last month.
Top Asian News
- China Factory Prices Surge Most Since 2008, Boosting Reflation
- China Said to Plan Stricter Bank Capital Rules to Curb Risks
- Kim’s Missiles Force Abe to Mull Capacity to Strike North Korea
- Green Push Seen as Profit Risk for Top Philippine Coal Miner
- Chemicals Mega-Mergers Have $200 Billion Headache: Markets Live
- Wharf Mulls Separate Listing of Investment Properties Assets
- Japan Regulator to Probe Regional Banks’ Foreign-Bond Risk
- Bank Indonesia Has Had ‘Enough’ Rate Cuts, Deputy Governor Says
- Indonesia, India See Modest Gains Supported by Carry: Asia NDFs
- Aluminum Rally May Falter Despite China Cuts, Vedanta Says
- Thriller in Manila Redux Sees Mine Foe Win Nod From Pacquiao
European bourses are likewise lower, also impacted by yesterday's 5.5% plunge in oil prices, with energy names the laggard thus far in Europe. Consequently, this has led to slight underperformance in the FTSE 100, while soft inflation data out of China added to the negative tone with large fall due to falling food prices (Y/Y 0.8% vs. 2.5%).However, early morning losses in Europe has been curbed by the continued upside in financials with analysts anticipating that tomorrows US jobs report will be the cherry on the cake for the Fed to go ahead with a rate hike next week (particularly given firm ADP figures). In credit markets, outperformance has been observed in the Bund/OAT spread (tighter by 2.5bps) with the latest French election poll by Harris showing Macron extending his lead vs Le Pen in the second to 65-35 (prior 60-40), while the poll also interestingly showed Macron ahead of Le Pen in the first round.
Top European News
- Akzo Says Considering Breakup After Rejecting Proposal From PPG
- U.S. Nuclear Outlook Triggers $480 Million Loss for Europeans
- EU Gets National Request to Probe NN Group/Delta Lloyd Deal
- Etihad, Emirates Said to Talk About Possible Merger: HB
- Scots Independence Vote May Be in Late 2018, Sturgeon Tells BBC
- Orderly Decline in European Govt Bonds With Focus on ECB Meeting
In currencies, the Bloomberg Dollar Spot Index rose 0.1 percent after gaining 0.4 percent Wednesday. The British pound fell 0.1 percent as the euro added 0.2 percent. FX markets have certainly livened up since the release of the US ADP report yesterday, reinvigorating appetite for USDs as US Treasury yield moves higher again. USD/JPY has managed to work through the bulk of exporter offers through 114.50, but we continue to stall ahead of 115.00. However, the move against the EUR has been tempered to a large degree by the aforementioned Harris poll putting Macron further in the lead in the second round of the French election. Along with a market wary that the ECB may well sound a less dovish tone at the meeting and press conference today, we have seen the single unit outperforming across the board, though the view has been better expressed through the crosses. EUR/JPY has pushed through 121.00 accordingly, while EUR/CAD has been a primary target given the losses in Oil prices, with this pair now eyeing a move on 1.4300. Cable has remained under pressure through the week, and the spot rate looks destined to test 1.2100, which is the next point of support. No fresh Brexit news to contend with, but GBP remains an easy target with the triggering of Article 50 nearly upon us.
In commodities, West Texas Intermediate crude has extended yesterday's dramatic plunge, dropping 2.8% to $48.87 a barrel. It tumbled more than 5 percent the previous session to the lowest close since Dec. 7. Gold fell 0.3 percent to $1,204.76 an ounce, declining for a fourth day. Oil prices have been thrust back into the limelight in light of the latest build reported in the DoE report. While inventory has been less of a driver in recent times, amid the backdrop of fresh uncertainty of how further production agreements will play out beyond June as well as the compliance levels from non OPEC member as as well US Shale production, WTI and Brent have finally succumbed to pressure, with the former now through $49.00, so we could be on the verge of a major move given the range breakout. Elsewhere, the impact of falling Treasuries/rising USD have impacted on both precious and base metals, with Gold now eyeing a move on USD1200 and Silver USD17.15. The impact on Copper has been exacerbated by concerns over China demand, and losses here have now taken us through USD2.60 with Zinc showing similar losses on the day so far. Nickel has been a little more resilient on the day, as has Aluminium.
Looking at today’s calendar, away from the obvious focus on the ECB meeting, it's a light day for data in the US with just the latest weekly initial jobless claims print and February import price index reading due. There’s not much away from the data. ECB President Draghi’s press conference kicks off at 12.45pm GMT while EU leaders are due to start a two-day meeting in Brussels with German Chancellor Merkel amongst those speaking. The UK Brexit Secretary David Davis is also due to answer questions in the House of Commons today including likely comments on the House of Lords ruling earlier this week.
US Event Calendar
- 7:30am: Challenger Job Cuts YoY, prior -38.8%
- 8:30am: Import Price Index MoM, est. 0.1%, prior 0.4%; YoY, est. 4.35%, prior 3.7%
- 8:30am: Initial Jobless Claims, est. 238,000, prior 223,000; Continuing Claims, est. 2.06m, prior 2.07m
- 9:45am: Bloomberg Consumer Comfort, prior 49.8
- 12pm: Household Change in Net Worth, prior $1.59t
DB's Jim Reid concludes the overnight wrap
I thought I'd been to the most remarkable Champions League game (the final in Istanbul in 2005) that we would ever see. However it's possible that Barcelona's stunning comeback against PSG last night runs it close. If you haven't seen the details I urge you to read the back pages today but in short they were 4-0 down from the first leg and won 6-1 in the second leg after conceding an away goal at 3-0 up. In the 88th minute they were 5-3 down and needing 3 more goals. This follows 24 hours after Craig's beloved Arsenal got knocked out after being a comparable 5-1 down from the first leg. They unfortunately lost 2-10 overall which now means every time I think of the yield curve slope I'm going to think of this tie!
Talking of European action, it's likely that the ECB meeting today contains a lot less drama. Nevertheless it does come at an interesting time what with the likely Fed rate hike next week and the surge in both the ADP and global bond yields yesterday. It's probably far too early for the ECB to announce more tapering ahead especially given that we don't start until next month. Our economists’ baseline being that such a move is still 6 months away with the possibility of an earlier announcement in June.
However they expect hints of a slow and gradual evolution to a less-dovish policy stance today. For example they could provide a less downbeat “balance of risks” to the economy, an adjustment to Forward Guidance to remove the option of reducing policy rates further and/or the removal of “very” from the statement that “a very substantial degree of monetary accommodation is needed”.
This follows a fairly dull UK budget yesterday but one interesting theme was that although the chancellor is forecasting a steady fall in borrowing there is still an annual deficit in his forecasts out to 2021-22. This will mean 20 successive years of UK deficits and it reminded us of a chart we’ve often used in our long-term studies in recent years showing the G7’s (plus Italy) annual deficits since 1950 (after the WWII impact lessens). We’ve updated this in today’s PDF. Basically in the last 25 years surpluses have been very rare outside of Canada (which ran a small surplus for 12 years from 1997 and again in 2015). In fact over this period it has only really happened in mini bubbles for the odd country like with the boom period ahead of the 2000 equity bust and the housing bubble a few years later (e.g. Spain). In fact we believe government budgets started to move towards a natural state of deficits after the Bretton Woods system broke down in the early 1970s when global currencies’ link to Gold was abandoned. Prior to this (and for most of economic history) countries running persistent deficits would have seen Gold outflows which would have destabilised the domestic economy so it couldn’t be tolerated. Outside of wars budgets tended to be balanced. In a world of fiat currencies post the early 1970s the adjustments have tended to be via weaker currencies which makes deficits easier to run. So wide-scale cumulative deficits are a modern day (last 40+ years) phenomenon.
Over in markets, as noted at the top the big theme has been another 24 hours of rising bond yields. Yields were already on the move in Europe but it was the much better than expected ADP print which really got things going. The February print came in at 298k compared to expectations for 187k with the monthly reading the strongest since April 2014. In fact the reading that month was a bumper 331k while the corresponding NFP print came in at a near-identical 329k so yesterday’s number is already fuelling expectations that we’ll get a similar strong reading at tomorrow’s payrolls.
By the end of play Treasuries had closed just off their high in yield with 10y yields up 4.2bps at 2.560%. That is the highest close this year and only just off the high mark made back in December of 2.597%. It is also the eighth session in succession that yields have closed higher which is the longest such run since March 2012. 2y yields also rose another 2.6bps to 1.354% and so extending their 8 and a bit year high. In Europe 10y Bund yields surged 4.9bps to close at 0.364% and the highest in 3 weeks. 2y Bund yields were up 2bps with some chatter of a weak 5y Bund auction (bid-to-cover of 1.1x versus 2.1x in November) as also playing a part in the overall soft day for Bonds yesterday. Peripheral yields in the 10y bucket were also up as much as 7bps while in EM we saw hard currency bond yields in the likes of Brazil, Colombia and Argentina spike between 12bps and 18bps higher.
Away from that the other big story in markets yesterday was the sharp fall in the price of Oil. Having traded in just an 8% range all year on an intraday basis between $51 and $55, yesterday WTI tumbled -5.38% to $50.28/bbl which was the biggest one-day fall since February last year and the lowest closing price since December 7th. The trigger appeared to be the latest rising US crude inventory data which seems to be overshadowing the optimism built up in the wake of the OPEC production cut agreement. The EIA numbers revealed that US crude stockpiles rose 8.2 million barrels last week which was well ahead of the 1.7 million forecast in the market according to the WSJ. In fact it wasn’t just Oil which had a poor day in the commodity space. Gold (-0.62%) and Silver (-1.48%) fell sharply for the third day in a row with a Fed rate hike next week now fully bedded in according to Bloomberg’s calculator post the ADP data. Meanwhile Iron Ore (-2.91%) and Nickel (-4.18%) also had another day to forget, while Copper (-0.13%) fell for the fifth session in succession.
Oil and commodity sensitive currencies were unsurprisingly decent underperformers yesterday with the likes of the Norwegian Krone (-1.11%), Aussie Dollar (-0.78%) and Russian Ruble (-1.23%) weakening significantly. Meanwhile in equity markets energy stocks also buckled under the pressure from Oil but overall bourses held in relatively OK all things considered. The S&P 500 ended -0.23% and down modestly for the third day in a row although the energy sector was down -2.54% alone. In Europe the Stoxx 600 (+0.08%) actually managed to snap a run of four consecutive down days.
This morning in Asia the focus has once again turned over to the latest data in China and this time the February inflation numbers. The data has made for a mixed read. On the one hand PPI has surged once again, printing at +7.8% yoy (vs. +7.7% expected) versus +6.9% in January. That is the sixth positive YoY reading following 54 months of deflation, and also the fastest pace since September 2008. However in contrast CPI printed at just +0.8% yoy (vs. +1.7% expected) from +2.5% in January with the MoM reading in February coming in at -0.2% mom. Sharply lower food prices (-4.3% yoy) were to blame and much like yesterday’s trade data it appears that the timing of the Lunar New Year holiday is the chief reason for that, distorting the base effects for YoY comparison. However, it does appear that China’s credit impulse did soften slightly in any case when looking at the three-month average into February (+0.3%) compared to the same period last year (+0.9%). Our economists think that the tame CPI will limit policy tightening and thus risks intensifying the property bubble in tier 1 and 2 cities. So one to
Bourses in China are sharply lower following the data with the Shanghai Comp and CSI 300 currently -0.85% and -0.75% respectively, although that is partly reflecting yesterday’s big fall for Oil with energy leading losses. The Hang Seng is also -0.98%, the ASX (-0.45%) and Kospi -0.08%. Only the Nikkei (+0.19%) is trading firmer. The China sensitive Aussie Dollar is down -0.24% also.
With regards to the other day yesterday, in the US there were no final revisions to either Q4 productivity (+1.3% qoq) or unit labour costs (+1.7% qoq). More notable though was the one-tenth downward revision to wholesale inventories in January to -0.2% mom. The end result of that was another cut in the Atlanta Fed’s GDP tracker for Q1 to 1.2% and furthering the gap again between that and the NY Fed’s measure (currently 3.1%). The most significant data in Europe yesterday came from Germany where industrial production was reported as rising +2.8% mom in January and slightly more than expected. Following a soft December reading though the three-month average suggests IP is going nowhere.
Looking at today’s calendar, away from the obvious focus on the ECB meeting at lunchtime the only data due out is from France where we’ll get the February Bank of France business sentiment print. It’s a light day for data in the US too with just the latest weekly initial jobless claims print and February import price index reading due. There’s not much away from the data. ECB President Draghi’s press conference kicks off at 12.45pm GMT while EU leaders are due to start a two-day meeting in Brussels with German Chancellor Merkel amongst those speaking. The UK Brexit Secretary David Davis is also due to answer questions in the House of Commons today including likely comments on the House of Lords ruling earlier this week.