Overnight Sentiment: Risk On... For At Least Another 10 Minutes
10 Minutes to go until the ECB.... very likely disappoints again. As it usually does. There is simply too much pent up hope in what Mario Draghi will say or do, as always happens at critical junctions for the insolvent continent. Recall the same happened in November, only for the world to have to bail out Europe following a non-announcement by the ECB as Europe was imploding. Finally, why should the ECB do anything, when the public debate has already started about the US bailing out Europe: why should Draghi further infurtiate Germany's taxpayers when it has a free put option on Bernanke doing what he does best in two weeks. But for now: RISK ON. For at least a few more minutes.
BofA summarizes the full overnight action:
Risk on! Global equity markets are rallying sharply as Australian GDP came in better than expected. Also, there is speculation that China will easy policy and more proposals from Euro area leaders on how to solve the region's debt crisis. Overnight, all the Asian equity markets we cover finished over 1% higher, expect the Shanghai Composite. The best performer was the Indian Sensex, up 2.7%. The Japanese Nikkei rose 1.8% and the Hang Seng lifted 1.4%. On the flip side, the Shanghai Composite slipped 0.1%.
In Europe, equities are rallying sharply, up 1.5% in the aggregate. The region's blue chips are up 2.0%, while shares listed in London are up 1.2%. At home, futures are pointing to a strong rally later today as well. The S&P 500 is set to open 1.1% higher, following yesterday's 0.6% gain.
In bondland, Treasuries are selling off, with the 10-year 3bp higher, at 1.60%, and the long bond 2bp higher, at 2.66%. In Europe, UK gilts are sharply higher, up 13bp, to 1.65%, and the German bund is up 6bp, to 1.26%. Italy and Spain are both seeing their 10-year yields fall by 4bp, to 5.57% and 6.20%, respectively.
The dollar is weakening due the risk-on trade. The DXY index is down 0.4%. Commodity prices are higher, with WTI crude oil up $1.10, to $85.40, and gold up $18.88 an ounce, to $1,635.93.
Overseas data wrap-up
Later today, the ECB announces any changes to their monetary policy stance. The market expects no change in their benchmark interest rate today, leaving it at 1.00%.
First quarter GDP for the Euro area was confirmed at 0.0% in the second release of the region's report. Looking at the details, exports played a major role in keeping the economy from falling into negative growth. Looking ahead, our Euro area economists expect the region's economy to contract 0.5% this year. Leading indicators, such as the PMIs, all point to acceleration of the region's weakness.
Kicking things off today, at 8:30 am, is the final release of the nonfarm productivity report for the second quarter. The final release of Q1 nonfarm productivity growth is likely to be revised down to -0.9% from the prior estimate of -0.5%. A decline in output implies higher unit labor costs; with compensation unchanged in the updated national accounts report, we look for unit labor costs to rise to 2.3% from the initially reported 2.0%.
Next up, at 2:00 pm, is the release of the Fed's beige book. With the macro data starting to soften more recently relative to earlier this year, the latest Beige Book report from the Fed should provide some up-to-date anecdotal information about the pace of activity. Since the start of the year, most districts have improved modestly; we will be looking for any signs that growth has started to soften or stall. We also will keep a keen eye out for any discussion of how Europe or the fiscal cliff are impacting business hiring and investment decisions, as these downside risks concern Fed officials. Finally, we look to see whether the modest inflationary environment changes; Fed officials have indicated that greater disinflationary risks might warrant a policy response.