Just like yesterday, it will be up to the US session to provide the perfectly expected, VIXterminating, volumeless ramp as the rest of the world just did not have it in i to take the S&P to all time highs in overnight trading.
The overnight session was marked by the now traditional sequence of events: 2-3 hours of Japanese central bankers and ministry officials jawboning the Yen, with the Nikkei reporting that new easing may happen earlier than expected under Kuroda, and the earlier news that the BOJ may even monetize derivatives. Oddly enough, this time the generic "currency talkfare" measures failed and the Yen actually gained, with the USDJPY sliding 100 pips from nearly 97 early in the morning, and pushing the Nikkei 225 lower by 0.3%, snapping an 8 day winning streak. In China, the PBOC continued to extract liquidity via repos, sending the SHCOMP lower by 1%, its fourth consecutive loss and the longest losing streak in three months. In stark contrast to Japan, assorted Chinese politicians warned once more against global currency war.
Then it was off to Europe where the script was the usual one: bad economic data, such as the Greek Industrial Production which was down 4.8%, compared to -0.9% previously (and confirming nothing is getting better in Spain), was matched by flat inflation, with German CPI printing up 1.5% as expected, and attempted to be offset by bond auctions, such as Spain selling just a tad more than expected, in this case €5.83 billion in 6/12 month bill, while €5.5 billion was the upside target. And if Spanish Bill borrowing costs fell at both auctions (6 month at 0.794% vs 0.859% previously; 12 month at 1.363% vs 1.548% previously), the situation was flipped in Italy where the country sold a total of €7.75 billion in 1 year Bills at a rate of 1.280% compared to 1.094% in the last auction. At this rate Italy and Spain will have 1 Year Bill "parity." Continuing the list of expected events, BUBA's Jens Weidmann said moments ago that the European crisis has not been overcome yet. Of course it hasn't: aside from the ECB backstopping everything, there have been no structural changes or actual austerity-driven alignments anywhere: it has all been one giant show.
Finally, with the UK continuing to do all it can to paint its economy with the most horrific of brushes in order to set the stage for much, much more QE when Carney finally does arrive, it was very much expected to see both UK Industrial and Manufacturing Production flounder, with the first printing at -1.2% on expectations of a 0.1% rise (down from 1.1%), while the latter plunged -1.5%, with consensus expecting an unchanged number.
To summarize: currency talkfare out of Asia, hope springs eternal out of Europe despite the usual spate of ugly numbers, PIIGS bond auctions backstopped by the ECB and always "that much better" than the expected, a UK economy that is just imploding to provide an alibi for more open-ended QE and a crushed pound, and with the US due to make everything better by sending the SP to its all time high (just 9 points away) on the one week anniversary of the record high DJIA, as the NY Fed clobbers the VIX to a 10 handle or lower on even more ugly, unadjusted economic data.
A quick recap of what is on FX traders (so all central banks) screens for today:
A lacklustre session yesterday saw the downgrade of Italy to BBB+ by Fitch causing only a small dent in eurozone markets with the EUR resisting selling pressure rather well since having touched a 1.2955 low vs the USD on Friday. BTPs did not take the ratings cut kindly even as BBB+ has been S&Ps rating of Italy since January 2012, and Moody's put the country on Baa2 in July last year. The announcement by Fitch is unlikely to bring an imminent breakthrough in the political deadlock but is a reminder of the minefield ahead that would reassure any investor of the greater macro visibility in the US. Former Eurogroup president Juncker (still Luxembourg PM) was pushing it when he mentioned in a Spiegel weekend interview the dangers if Europe were to return to the dark pre-war days of 1913 (Euro-Krise: Juncker spricht von Kriegsgefahr in Europa), but no one will disagree that he is striking a sensitive chord (tide of rising populism and soaring unemployment) which is forcing Europe to re-think its policy playbook. It's ECB member Weidmann's turn today to share his thoughts on the ECB decision of last week which, it transpires, seemed a much closer call to lowering rates than what has been given credit for. A staunch opponent of the OMT last year, Weidmann must take some crumbs of comfort from the fact that the ECB's OMT bazooka, which was never activated since it was put in place last autumn, has brought down funding costs for governments and has started to reduce the size of the ECB balance sheet.
Today we get T-bill sales in Spain and Italy, and the first of three US benchmark auctions planned for this week. The plight of GBP will be under the spotlight once again with the release of UK industrial output and foreign trade data.
More on the last day's action from DB's Jim Reid
In quiet markets, although Europe was slightly weaker (Stoxx600 –0.1%), but the S&P 500 (+0.32%) closed up for the seventh day and is now only 9 points off its all-time high. With all the liquidity around, a no news period sees risk assets do well through weight of money. It takes negative news to derail things at the moment. Indeed, US equity funds attracted $4.9bn in the first week of March, the most in more than a month, according to EPFR Global. The dearth of negative news helped the VIX close below 12points for the first time since early 2007 yesterday while 10yr UST yields continue to inch higher, closing at 2.06% yesterday. In credit, the CDX IG index managed to close a touch below 80bp.
Coming back to the weather, our readers in London may be interested to know that after a US winter which was the 20th warmest on record (according to National Oceanic and Atmospheric Administration), colder weather is now expected later this month – which lifted natural gas prices for the third consecutive day yesterday to a 3-month high. On that note, we thought the rise in US gasoline prices since the end of December is worth a mention. The national average regular unleaded price is around $3.70/gallon at the moment, off the recent highs of $3.79/gallon but still materially higher versus the lows of $3.22/gallon seen halfway through December of last year. Indeed our US economists are keeping a watchful eye on this as the rise is also occurring at the same time that households are adjusting to a 2% increase in payroll tax. Given the focus on the domestic recovery, this is certainly a theme worth monitoring as higher energy prices effectively impose a ‘tax’ on disposable income. In trying to quantify the impact, our US economists’ have determined that, as a rule of thumb, a one cent change in gasoline prices reduces annual non-energy consumption by roughly $1 billion. At gas prices of $4.25/gallon, their growth forecast begins to deteriorate appreciably.
They believe if prices are sustained in the vicinity of $4.25-$5.00, their growth projections would likely have to be significantly reduced. Above $5.00/gallon, they see growth slowing towards stall speed and recession risks become acute. Clearly it is difficult to model the impact of secondary effects from a dramatic move in energy prices – such as the psychological impact from $5-plus gasoline prices – so they believe the actual “tipping point” is probably somewhat lower.
Overnight in Asia, major bourses have pared earlier gains to trade in the red led by losses on the Hang Seng (-0.16%) and KOSPI (-0.58%). The Shanghai Composite (-1.1%) is on track for its fourth consecutive loss, its longest losing streak in three months. At the other end of the spectrum, the Nikkei (+0.1%) is poised for its 9th straight daily gain helped by minutes from the BoJ’s February meeting showing the board had discussed various additional easing measures. The measures included buying longer maturity JGBs, increasing the size of purchases of risk assets and reducing interest on excess reserves. In addition to that, BoJ governor-nominee Kuroda was reportedly considering “surprise action” (Nikkei), which domestic media are saying could be in the form of an emergency BoJ policy meeting as soon as next week, ahead of the next scheduled meeting on April 3rd to 4th. USDJPY is up 0.2% at 96.5 overnight. In other news, European Commission president Barroso reportedly wrote a letter to European leaders urging “steadfast implementation of reforms”, apparently to counter growing criticism of European austerity.
According to the NY Times, the letter was accompanied by charts that showed Ireland and Portugal as having benefited from rigorous turnaround programs, but that also showed countries including France, Italy, Belgium and Hungary were still disadvantaged by high labor costs compared with their trading partners. On a separate but related theme, The Guardian writes that several polls have shown French President Hollande’s approval ratings to be the lowest of any modern French leader 10 months into a presidency, which the article links to poor economic growth and rising unemployment. However it’s fair to say that European sovereign fears are still fairly low. Spanish 10yr bond yields are now trading just 12bp wide to Italy – its narrowest for quite some time.
Turning to the day ahead, it should be another relatively quiet day ahead with a relatively light data calendar over the next 24 hours. The UK will report January industrial production and trade. Jens Weidmann presents the 2012 annual report from the Bundesbank. In the US, the NFIB survey and BLS JOLTS report are the main data releases.