Well, risk is on. Not so much because of the ECB, or BOE, both of which did nothing, but because everyone is hoping and praying that in two weeks the Princeton professor will unleash the 4th round of quantitative easing in the US (yes, Twist was a flow-shifting operation and thus QE3). And the reminder that China is not immune, and did its first rate cut since 2008 only validated the realization "that they have every idea just how bad it is", as Cramer would say. Sure enough, risk is ripping, although considering the world's 2nd largest economy just joined the monetary easing pants party, the 10 point ES response is oddly subdued. Where the reaction is yet to manifest itself is in gold: we expect the PBOC will take a little longer before it announces its meager 1000 tons of gold holdings have at least doubled following 100 ton/month gold imports as recently announced. But announce it will. In the meantime, China's aggressive step likely means that unless we get a global coordinated intervention at 9 am today, as was the case on November 30 after the last notable move by the PBOC, which was the first reserve cut also since 2008, there will be none this time around and Bernanke will be on his own. God save the markets if he does not deliver, either today at the JEC testimony at 10 am or at 2:15 pm on June 20, as the S&P has now priced in at least 75 points of NEW QE intervention.
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Market action
Global equity markets continue to enjoy a risk-on rally. Today's risk-on rally was sparked by Fed Vice Chairman Janet Yellen's speech last night that sounded very dovish. Overnight, all of the Asian equity markets we cover, except the Shanghai Composite (-0.7%), finished higher. The best performer was the Korean Kospi, which rallied 2.6%. Both the Japanese Nikkei and the Indian Sensex finished 1.2% higher, while the Hang Seng finished up 0.9%.
In Europe, equities are up 0.5% in the aggregate. Part of the rally in Europe is due to increased speculation that the BoE will enact more QE at today's monetary policy meeting. Shares in London are up 0.7%. At home, futures are pointing to a 0.2% increase in the S&P 500, which follows the 2.3% gain recorded yesterday.
In bondland, Treasuries are bid after yesterday's sell-off. Currently, the 10-year yield is down 3bp, to 1.63%, while the long bond's yield is 4bp lower, at 2.70%. In Europe, German bunds and UK gilts are trading flat, while yields on Spain's 10-year are down 9bp, to 6.14%.
The dollar is weakening against a basket of other major currencies. The DXY index is 0.1% lower. Commodities are trading modestly lower. WTI crude oil is trading at $84.64 a barrel and gold is currently selling for $1,615.03 an ounce.
Overseas data wrap-up
Strong job growth down under: Australia reported that full-time employment grew by 46,100 in May. That more than offset the weakness in April, when full-time employment contracted 18,000. The unemployment rate ticked up to 5.1%, as expected, from 5.0%, but a big part of that increase was due to the increase in the labor force participation rate, which rose to 65.5%.
Yesterday, the ECB was very much in line with our European team's expectations: no interest rate cuts or liquidity operation moves or announcements. They did, however, extend the 1m and 3m repo operations through the end of this year. That was widely expected by markets and does not change their monetary policy stance. The ECB did note that tensions (whether financial or economic) are not within its remit, but rather depend on policy-makers. ECB Head Mario Draghi quoted bank recapitalization, as well as the lack of a clear vision for the euro future, as responsible for current tensions in the sovereign and bond markets. He also argued that these tensions are responsible for downward risks to an economic outlook that is unchanged from March. As such, we think that these tensions cannot be addressed by a change of monetary policy - conventional or unconventional. Hence the ECB did not signal rate cuts or further non-conventional operations in any clear way, but linked any such moves to future developments. Our Euro area team does see a risk that the ECB lowers interest rates in September, once second-quarter GDP is released and banks have been recapped. To read more see: Euro Area Macro Watch, 06 June 2012.
Our Euro area economists cut Italy's GDP forecasts for 2012 and 2013 on the back of our preliminary assessment of the consequences of the earthquake damages of the past few weeks. They expect the economy to contract by 1.8% this year and by a further 0.6% in 2013, below consensus estimates of -1.5% in 2012 and +0.1% in 2013. For the full report, see Italy Economic Viewpoint, 07 June 2012.
Industrial production in Germany contracted by 2.2% mom in April, more than the 1.0% drop expected by consensus. In addition to the weakness in April, March's figure was revised lower, to +2.2% mom from the previously reported +2.8%. Overall, this is a disappointing report and implies downside risk to second-quarter GDP. Production in April was 1.0% below the Q1 average, and that was before the recent Euro symptoms flared up: Greek exit and Spanish banking system worries.