Overnight Sentiment: Leave It All To The Fed
News may come, and news may go, but the fiscal policy implementation vehicle known as the market, and now controlled by the Political Reserve don't care. For those who do, here is what has happened in the past few hours and what is on deck for the remainder of the week.
From DB's Jim Reid:
The risk tone in Asian equities is mostly softer overnight led by underperformance in China. The Shanghai Composite and the Shenzhen Composite benchmarks are down 1.3% and 1.7% respectively. Ongoing concerns about China’s slowdown and escalating tensions with Japan are probably weighing on sentiment. Chinese Vice President Xi Jinping re-appeared in public after a two week absence which may have helped put to bed some of the health speculations but there is plenty of focus on the transition as we navigate towards October. Elsewhere in Asia credit spreads tighten further as demand for spread products continue to rise on the back of the Fed’s latest liquidity policies. The Asia IG and Australia iTraxx indices are 3bp tighter as we type.
Recapping Friday’s move, the QE3 announcement underpinned the backdrop for a solid session for risk. The S&P500 added 0.4% even though economic data flow was mixed. Headline retail sales were marginally ahead of expectations (+0.9%mom vs +0.8%) but the core print was weak. IP (-1.2% v 0.0%) was below market consensus with broad based weakness in the detail. Headline CPI came broadly in line (+1.7% yoy) with consensus helped by the strongest monthly gain in energy prices (+5.6%) since June 2009.
Indeed energy prices have had a good run recently with Brent (+0.67%) up for the 7th consecutive day to $116.6/bbl on Friday. Brent and is now nearly 30% above the lows in June. Gold (+0.2%) edged higher to $1770/oz while the S&P GSCI index finished the week 2.6% higher. We’ve noted in earlier research how previous episodes of QE have triggered one of the strongest rallies in commodity prices coupled with one of the weakest nominal GDP recoveries through history so this is certainly a trend to watch again as we welcome another bout of liquidity.
Continuing on this theme but moving on to fixed income, long term inflation expectations were also on the rise last week as US 10yr breakevens rose 27bps to 264bp – the highest since April 2011. Nominal yields backed higher across the board led by longer-dated bonds. The 2yr, 5yr, 10yr and 30yr yield rose +2bp, +7bp , +14bp and +16bp on Friday to close at 0.250%, 0.713%, 1.866% and 3.088% respectively. In corporate credit the US primary market ended the week just under $33bn across 31 transactions which puts last week as the second largest issuance week this year.
Also helping sentiment on Friday were a number of developments from the ECOFIN meeting in Cyprus. Spain told the ECONFIN meeting that it will set deadlines for structural reforms which will be announced on Sept 28th, the same the day as the 2013 budget is published and results of stress tests of Spanish banks will be made public. An EU official was also quoted as having said that this move was a precursor to formally requesting EU aid which will likely be in the form of a "precautionary credit line" from the ESM rather than a full bailout.
Spanish 10yr bond yields closed 15bp wider on Friday (5.727%). Greece was also high on the agenda in Cyprus. IMF’s Lagarde said that Greece may get more time to reach fiscal targets under its current bailout program, saying that an extension "needs to be considered as an option". Juncker said the troika must take a decision by the end of October on how to revise the Greek programme and said there was no question of Greece leaving the euro zone.
In other European headlines, Monti and Merkel issued a joint statement saying that the past week was "very positive for Europe", likely referring to the German constitutional court's decision, Dutch elections and what they referred to as a growing "awareness of the European public that solutions to the current financial crisis should emerge from more intense European cooperation". On the topic of bank supervision, French, Belgian and Italian officials continued their calls for rapid progress on ECB central bank supervision the finance ministers from Germany, Sweden, the Netherlands and Poland are still against certain aspects of the EU’s proposals. Interestingly over the weekend Schaeuble criticised Buba’s Weidmann for his public opposition to the OMT.
With major policy meetings now out of the way, the focus for the remainder of the week should return to economic fundamentals and dataflow. In the US, manufacturing and housing will be the main focus. Key data include the Empire State Manufacturing report today followed by housing starts, building permits and existing home sales on Wednesday. The Markit US PMI Preliminary and the Philly Fed survey are due on Thursday. We also have several Fed speak throughout the week. Bellwether Fedex’s Q1 earnings tomorrow should be interesting. Meanwhile, it will be a relatively data-light week in the EU but the focus will probably be the Euroland, German and French flash PMIs on Thursday. That aside we get euroland trade data for July today, the German ZEW survey and UK retail sales tomorrow followed by the BoE minutes on Wednesday. Data side ECB’s Nowotny and Coene will speak at separate events today on the topic of challenges facing the euro-area. French finance minister Moscovici is also due to speak at the LSE on the outlook for French policy.The Dutch 2013 budget is due for submission to the new parliament for approval tomorrow. In Asia, all eyes will be on HSBC's flash manufacturing PMI for China on Thursday. Events wise Chinese Premier Wen will meet EU’s Van Rompuy Barroso in Brussels on Thursday.
And, to follow, a summary recap of this week's key events via GS:
Monday 17 September
- India: RBI meeting. Consensus and we expect rates to remain unchanged at 8% and 7%. The RBI will consider the impact of a less-than-normal monsoon on food prices in the next few months. Liquidity conditions have eased considerably, and with the announcement of QE3 by the Fed on Thursday, can be expected to ease further. Therefore, we do not see any reason for the RBI to inject further liquidity into the system through changes in cash reserve requirements.
- Also of interest: Korean department store sales, Philippines remittances, Euro area balance of payments, US Empire survey
Tuesday 18 September
- Australia RBA minutes: While we do not sense that a rate cut was seriously entertained at the last meeting (which kept rates unchanged at 3.5%), it will be interesting to see if the central bank flags a meaningfully heightened concern about the consequences of recent falls in bulk commodity prices and/or the peak in the investment cycle. In addition, we will be trying to gauge from the Minutes whether the RBA feels that its earlier rate cuts have gained sufficient traction on demand and sentiment.
- UK CPI (Aug): Consensus expects a reading of 2.5%yoy after 2.6% previously.
- US Current Account (Q2): The Bloomberg consensus expects a narrowing of the deficit to US$127bn from US$137bn previously, as do we. We will also be paying attention to the US BBoP. It has been in persistent deficit, a situation which we expect to continue and this is a key underpinning of our dollar bearish views.
- US TIC data (Jul): The data will provide the latest evidence of foreign appetite for US assets. Foreign buying of USTs has been strong, but appetite for other assets has been relatively weak. In addition, US investors have been repatriating small amounts of foreign assets.
- Also of Interest: India CPI
Wednesday 19 September
- Malaysia CPI (Aug): The Bloomberg consensus and we expect an unchanged print of 1.4%.
- BoJ Meeting: Will they react to QE3 and the recent appreciation of the yen? At this point we think they will keep policy unchanged.
- Sweden: Riksbank minutes.
- UK: BoE minutes.
- Also of Interest: NZ Balance of Payments, Philippines Balance of Payments.
Thursday 20 September
- China: HSBC Flash PMI (Sep). Last reading was 47.6.
- New Zealand Q2 GDP: The Bloomberg consensus expects a rise of 0.4%, which is a slower growth rate than the 1.1% in Q1. We expect a rise of 0.3%qoq.
- Taiwan Monetary Policy Meeting: The Bloomberg consensus expects rates to remain on hold at 1.875%. The bank faces the task of navigating between very weak exports and high inflation.
- Taiwan Export Orders.
- Euro area Flash PMIs (Sep): The Bloomberg consensus expects a rise to 45.5 from 45.1 on the manufacturing index and a rise to 48.5 from 48.3 on the services index.
- UK Retail Sales (Aug): The Bloomberg consensus expects a rise to 3%yoy from 2.8%yoy.
- US Philadelphia Fed survey (Sep): The Bloomberg consensus expects a rise to -3.3 from -7.1. We expect a slightly higher rise to -2.0.
- Also of interest: Japan trade balance (Aug), Swiss trade balance.
Friday 21 September
- Euroarea: Spanish PM Rajoy and Italy's Monti scheduled to meet in Rome.
- Canada CPI (Aug): The Bloomberg consensus expects an unchanged reading of 1.3%yoy.