Overnight Sentiment: On Fumes
Following a blistering two days of upside activity in Europe and a manic depressive turn in the US in the past 48 hours, the rally is now be running on fumes, and may be in danger of flopping once again, especially in Spain where the IBEX is tumbling by over 3% to a fresh 3 year low. Still, the Spanish 10 year has managed to stay under 6% and is in fact tighter on the day in the aftermath of the repeatedly irrelevant Bill auctions from yesterday, when the only thing that matters is tomorrow's 10 Year auction. Probably even more important is that the BOE now appears to have also checked to Bernanke and no more QE out of the BOE is imminent. As BofA summarizes, "The BoE voted 8-1 to leave QE on hold at their April meeting: a more hawkish outturn than market expectations of an unchanged 7-2 vote from March. Adam Posen - the most dovish member of the BoE over the last few quarters - took off his vote for £25bn QE, while David Miles judged that his vote for £25bn more QE was finely balanced (less dovish than his views in March)." Even the BOE no longer know what Schrodinger "reality" is real: "The BoE judged that developments over the month had been relatively mixed, with a lower near-term growth outlook, but a higher near-term inflation outlook. However, they thought that the official data suggesting very weak construction output and soft manufacturing output of late were “perplexing”, and they were not “minded to place much weight on them”." Naturally, this explains why Goldman's Carney may be next in line to head the BOE - after all to Goldman there is no such thing as a blunt "firehose" to deal with any "perplexing" issue. Finally, the housing market schizophrenia in the US continues to rule: MBA mortgage applications rose by 6.9% entirely on the back of one of the only positive refinancing prints in the past 3 months, which rose by 13.5% after a 3.1% drop last week. As for purchases - they slammed lower by 11.2%, the second week in a row. Hardly the basis for a solid "recovery."
Full recap from BofA:
Following US markets higher, Asian equity markets enjoyed a solid rally overnight with the MSCI Asia Pacific Index rising 1.1%. The biggest rally was in the Japanese Nikkei which rose 2.1% on speculation that Japan might take new measures to spur its domestic economy. The Shanghai Composite was a close second up 2.0% while the Hang Seng was a distant third up 1.1%. The Korean Kopsi enjoyed a solid 1.0% gain while the Indian Sensex only rose 0.2%.
After two straight days of gains in Europe, the rally appears to have petered out. Investors are tempering their expectations ahead of tomorrow's 10-year bond auction in Spain. A poor auction measured either by weak demand or higher than expected yields on the new issues should cause spreads on peripheral debt to widen and send equity markets lower. In the aggregate, European equities are down 0.3%. At home, futures are pointing to a 0.1% lower opening for the S&P 500.
In bondland, Treasuries are flat across the curve. The 10-year Treasury yield is currently 2.00%. Except for the UK, yields are falling across Europe. In the ten-year sector, German bunds are down 1bp to 1.74% while in Spain yields are 9bp lower at 5.74%. After the more hawkish than expected BoE minutes today, the UK's gilt is up 4bp to 2.13%. Absent a major shock ahead of the May BoE meeting, the market is now expecting an end of asset purchases to be confirmed.
The dollar is rallying sharply in the currency markets. The DXY index is up 0.4%. WTI crude oil is unchanged at $104.23 a barrel and gold is down $3.15 an ounce to $1,646.43.
Overseas data wrap-up
Yesterday, both the Bank of Canada (BoC) and the Chilean central bank (BCCh) left their respective monetary policy rates unchanged. The BoC left its benchmark interest rate unchanged at 1.00% for the 13th consecutive month. The statement from the bank was relatively hawkish implying rate hikes will be likely in the near term due to reduced slack in the economy and firmer underlying inflation. In Chile, the central bank left its benchmark interest rate unchanged at 5.00% for the third consecutive month. The tone of the accompanying statement was slightly more dovish than the prior month's; however, unlikely consensus our LatAm team expects no rate hikes in 2010 as inflation expectations are well anchored and global risks remain high.
Today, the central bank of Sweden, the Riksbank, left its monetary policy rate unchanged at 1.50%. The Riksbank is likely in a wait and see mode as it watches for risks to the country's growth outlook due to the recession in the euro area.
In the UK, the labor market improved marginally as the ILO 3-month unemployment rate fell 0.1pp to 8.3% from 8.4%. Consensus was looking for no change. Despite the drop in the unemployment rate the rise in average weekly earnings over that same time period was slightly less than expected up only 1.1% instead of the expected 1.2% increase. Below trend growth of just 0.6% this year will help push up the unemployment rate higher and keep earnings weak. That will cause consumer spending to underperform in the UK growing just 0.2% yoy in 2012.
There is nothing on the economic calendar today.