After a blistering October for stocks, drunk on yet another month of record liquidity by the cental planners, November's first overnight trading session has been quiet so far, with the highlight being the release of both official and HSBC China PMI data. The official manufacturing PMI rose to 51.4 in October from 51.1 in September. It managed to beat expectations of 51.2 and was also the highest reading in 18 months - since April 2012. October’s PMIs are historically lower than those for September, so the MoM uptick is considered a bit more impressive. The uptrend in October was also confirmed by the final HSBC manufacturing PMI which printed at 50.9 which is higher than the preliminary reading of 50.7 and September’s reading of 50.9.
The breakdown of the PMI data is shown below: NBS PMI
[36]
And HSBC/Markit:
[37]
The Chinese data has helped put a floor on Asian equities overnight and S&P 500 futures are nudging higher (+0.15%). The key laggard are Japanese equities where the TOPIX (-1.1%) is weaker pressured by a number of industrials, ahead of a three day weekend. Electronics-maker Sony is down 12% after surprising the market with a profit downgrade with this impacting sentiment in Japanese equities.
Over in Europe, the EUR continues to be pressured this morning following yesterday's stunningly weak European jobs and inflation data. Also of note, as had been leaked previously, RBS announced the creation of an internal $61 billion "bad bank [38]."
Looking at the US day ahead, today’s ISM will be a major focus particularly following the bumper Chicago PMI yesterday. The first of the post-FOMC Fedspeak begins today with Bullard speaking on monetary policy in St Louis. In the UK, the manufacturing PMI is the only data of note.
US data docket
- US: ISM Mfg, cons 55.0 (15:00)
- US: Fed speakers: Bullard (14:10), Kocherlakota (16:15) and Lacker (17:00)
Market Recap from RanSquawk
The release of an encouraging set of macroeconomic data from China, together with yet another decline in money market rates in China failed to encourage flows into riskier assets this morning as market participants were seen booking profits ahead of the weekend. Like an old flame it was really the case of breaking up is hard to do for RBS and the UK government, after the bank unveiled plans for GBP 38bln internal bad bank and also launched a review of its businesses, IT operations and organisational structure aimed at improving its focus on customers. As a guide, co. shares fell over 5% this morning.
Looking elsewhere, EUR weakness was observed across the board, with the Euribor curve undergoing further bull flattening as market participants continued to re-price interest rate expectations following yesterday's release of softer than expected Eurozone CPI data. As a result, the USD index advanced to its highest levels since mid-October and tested the 50DMA line. However in spite of a firmer Greenback and softer USTs, USD/JPY failed to benefit from favourable interest rate differential flows and instead the price action was largely a by-product of EUR/JPY weakness. Going forward, market participants will get to digest the release of the latest ISM Manufacturing report, as well as earnings by Chevron.
Overnight news bulletin from Bloomberg and Ran
- Chinese Manufacturing PMI (Oct) M/M 51.4 vs. Exp. 51.2 (Prev. 51.1) - 18 month high.
- UK Manufacturing PMI (Oct) M/M 56.0 vs. Exp. 56.1 (Prev. 56.7, Rev. 56.3).
- Going forward, market participants will get to digest the release of the latest ISM Manufacturing report, as well as earnings by Chevron.
- Treasuries steady, 10Y yields little changed on the week after 2Y/5Y/7Y auctions, FOMC statement that contained few surprises; ISM Manufacturing report in focus today after yesterday’s stronger than expected Chicago PMI.
- Draghi is facing down a deflation threat with few options left to fight it as consumer prices in euro area are rising at the slowest pace in four years
- Analysts are shifting views on ECB rates, with cuts seem more likely; BofAML, UBS and RBS see a refi rate cut at next week’s meeting, SocGen, BNP and JPM look for a move in Dec.
- The IMF joined the U.S. Treasury Department in rebuking Germany’s trade surpluses, rebuffing the claim of Merkel’s government that booming exports are a sign of economic health
- Royal Bank of Scotland Group Plc expects to post a “substantial” full-year loss after transferring GBP38.3b of its worst loans to an internal bad bank under government pressure
- Sovereign yields and EU peripheral spreads mixed. Nikkei -0.9%, Shanghai +0.4%. European stocks fall, U.S. equity- index futures gain. WTI crude little changed, gold lower, copper gains
Asian Headlines
Chinese Manufacturing PMI (Oct) M/M 51.4 vs. Exp. 51.2 (Prev. 51.1) - 18 month high.
Chinese HSBC Manufacturing PMI (Oct F) M/M 50.9 vs. Exp. 50.7 (Prev. 50.2)
New Export Orders (Oct) 51.3 (Prev. 50.8) - 11 month high.
EU & UK Headlines
UK Manufacturing PMI (Oct) M/M 56.0 vs. Exp. 56.1 (Prev. 56.7, Rev. 56.3) - Factory export orders sub-index rises to 56.5 from 53.6, highest since February2011.
The pace of hiring fell to its lowest since June and inflationary pressures eased marginally, with increases in raw material costs and factory-gate prices slowing slightly RBS changes its ECB rate forecast to now see a 25bps cut in November, citing unexpectedly weak inflation for forecast change.
The Troika are to return to Athens for a bailout review by November 5th according to officials.
US Headlines
Senate Democrats failed to get enough votes on Thursday to advance the nomination of US Congressman Mel Watt to head the agency that oversees Fannie Mae and Freddie Mac the mortgage groups.
Equities
Stocks traded lower, as market participants booked profits ahead of the weekend and also a slew of major risk events which are due to take place next week (BoE, ECB and NFP). RBS shares fell over 5% this morning after the bank unveiled plans for GBP 38bln internal bad bank and also launched a review of its businesses, IT operations and organisational structure aimed at improving its focus on customers. Elsewhere, Vodafone shares advanced, as market participants in Europe reacted to reports from late yesterday that AT&T is said to explore Vodafone takeover as soon as next year.
FX
EUR/USD and GBP/USD trended lower throughout the session, with GBP/USD breaking through the key 1.6000 level, which now opens up the door for prices to test the 50DMA level at 1.5938. EUR weakness was observed across the board, with the Euribor curve undergoing further bull flattening as market participants continued to re-price interest rate expectations following yesterday's release of softer than expected Eurozone CPI data.
Commodities
The UBS commodity index has cut the weight of natural gas by 1 percentage point for 2014, reduced WTI Crude by 0.7 percentage points and increased Brent by 0.7 percentage points.
US Senators Robert Menendez and Mark Kirk are set to push forward their legislation which is set to propose further sanctions on Iran despite attempts by the Obama administration to convince them to put their bill on hold.
A Syrian base near Latakia was hit by Israel according to reports. A US official later confirmed that Israel conducted an airstrike into Syria.
Sales of coins and bars may decline to as little as 25 percent of purchases a year earlier, according to the All India Gems & Jewellery Trade Federation. According to Bombay Bullion Association (BBA) estimates, demand for gold coins and jewelry declined by 75% and 60% respectively in the two weeks leading to Dhanteras, compared with the same period last year.
SocGen's key macro event recap:
'December tapering is not off the table' is the message that some market participants gleaned from Wednesday's FOMC statement, boosting the USD and UST yields in the process. But is this interpretation correct? The market may simply have erred in pricing a first reduction in asset purchases for March 2014 and is now reassigning a greater than zero probability that tapering could still happen before year-end. Even so, SG's economics team does not believe the balance of probability has shifted much as we still look for a tapering start in March, and USD bulls need to be mindful that any decision to start winding down bond purchases comes with a precondition for the Fed of seeing ‘more evidence of an improving economy'. Without better non-farm payroll numbers in November and December, tapering will be a story for next year.
A very weak flash Eurozone HICP inflation figure of 0.7% yoy (consensus at 1.1% and SG forecast of 0.9%) was reported yesterday and delivered a serious but not fatal blow for EUR enthusiasts. Unsurprisingly, the EUR fell against all G10 counterparts (barring SEK), and its performance against EM currencies was no less lacklustre either, with EUR/TRY down 0.92% and EUR/THB down 0.8%. After the inflation figure hit its lowest level since November 2009, speculation about further ECB policy easing has increased. In December, we expect the ECB to mark down its 2014 inflation forecast from the current 1.3% rate. A more detailed analysis of the latest inflation data can be found here “Low inflation puts pressure on the ECB” (link). EU 10y swaps also fell sharply in reaction to the inflation numbers, registering a dip below the 1.94% mark before correcting to 1.97% in Asia. As a result, the US/EU 10y spread has now widened sharply to 74bps, marking a 17bps spike from its weekly low of 57bps.
In Asia, the BoJ kept its policy unchanged yesterday and maintained that the 2% price stability target is likely to be achieved sometime during the latter half of its projected period, i.e. between October 2014 and March 2016. We expect additional QQE sometime during Q2 2014, as we forecast weaker FY14 real GDP growth than the BoJ has projected due to the consumption tax hike. More details on this by our economics team can be accessed through our research piece “Japan: additional easing needed by BoJ during Q2 2014” (link).
The USD performance so far has been relatively strong gaining against most G10 peers, greenback also strengthened vs most of the EM currencies, and 10y yields are up 3bp at 2.70%. Markets today will look to private sector employment inputs from ISM manufacturing as they hunt for hints on how the federal shutdown impacted the US economy. Also on the agenda today are a trio of Fed speakers, a series of PMI releases from the Europe and industrial production figures from Brazil.
The overnight event summary concludes with Jim Reid's recap
One interesting development this week has been the much lower than expected European inflation rates which in most cases are taking the YoY growth back down to levels only previous seen in the modern era (for a few months) in 2009. Spanish CPI was 0.3-0.4% lower than expected on Wednesday with the straight CPI number in technical deflation at -0.1% YoY. German numbers came in around 0.2% below expectations on the same day (1.2% YoY) with Italy yesterday seeing 0.7% YoY inflation against 1.1-1.2% expected. The overall Eurozone number showed similar declines. It’s difficult to know what to think about this though. It has certainly helped the Euro come off its recent peak (1.382 earlier this week to 1.355 as we type) as the market considers the possibility of ECB rate cuts again. Higher than expected Euro unemployment (12.2% vs 12.0% expected) helped on this front too. Simultaneously it seems the Fed isn't going to guarantee us no taper before March even if that eventually materialises. So the liquidity perception balance between the two regions has shifted a bit over the last 48 hours. But back to Euro inflation, our experts think there are some one-offs in the numbers and expect the rate to tick up over the coming months. One can also argue that low inflation in the likes of Spain is a sign of improving competitiveness. Nevertheless there are worries and it certainly ties in with the arguments made in our long-term study from September "A Nominal Problem" where we highlighted how we were having a global problem with both low real GDP and inflation. The combination not being great when you still have a high debt burden. Europe really doesn't need the threat of deflation with so many structural issues still to deal with. Although inflation is expected to edge back up from here we are getting to low enough levels that the behaviour of participants in the economy might start to be influenced by the prospect of falling prices and they may hold back purchases/investments. This is why central banks generally aim for at least 2% on inflation and not zero. You tend to want to make it positive enough that deflation doesn't ever become an imminent risk. So this is one to watch going into 2014. In the nearer-term keep an eye out for the survey of professional forecasters release in the middle of this month. The ECB is very sensitive to the 2-yr ahead reading as a measure of inflation expectations and it may influence their policy stance to some degree at the December meeting and into 2014.
On a more positive note, the latest activity data from China continues to improve. The official manufacturing PMI rose to 51.4 in October from 51.1 in September. It managed to beat expectations of 51.2 and was also the highest reading in 18 months. DB’s Jun Ma highlights that October’s PMIs are historically lower than those for September, so the MoM uptick is therefore a bit more impressive. The uptrend in October was also confirmed by the final HSBC manufacturing PMI which printed at 50.9 which is higher than the preliminary reading of 50.7 and September’s reading of 50.9. The Chinese data has helped put a floor on Asian equities overnight and S&P 500 futures are nudging higher (+0.15\%). The key laggard are Japanese equities where the TOPIX (-1.1%) is weaker pressured by a number of industrials, ahead of a three day weekend. Electronics-maker Sony is down 12% after surprising the market with a profit downgrade with this impacting sentiment in Japanese equities. While EURUSD continues to be pressured this morning, the sentiment is firmer in AUDUSD (+0.2%) driven by the Chinese PMIs.
In the US, a surprisingly strong Chicago PMI print set the tone early in the day. The PMI surged 10.2 points to 65.9 which was almost 11points above consensus estimates. Our economists point out that this was the largest monthly increase since July 1983 (+12.7) and the highest level since March 2011 (67.6). Initial jobless claims of 340k were broadly in line with estimates of 338k. The S&P 500 traded down to a session low of 1755 shortly after the Chicago PMI release which triggered further chatter of December tapering, but the dip proved to be brief and equities quickly recovered from those levels. Towards the end of US trading, equities once again gave up those gains to finish near the month on a sour note (S&P500 -0.38% on the day). Financials weighed on the index for much of the day and closed at the lows. A Bloomberg report suggesting that AT&T would make a tilt at Vodafone next year, saw telcos also weigh on equity markets in the final minutes of trading. If the acquisition were to go ahead, it would create the world’s largest telecom company with a market cap exceeding $250bn with more than 500 million subscribers worldwide (Bloomberg). Elsewhere, after the initial post-Chicago PMI selloff, 10yr UST yields drifted back down to be a little higher (2.554%,
+1.6bp) on the day – bucking the trend in Europe where core and periphery bond yields fell on the back of the lower inflation numbers.
Looking at the day ahead, today’s ISM will be a major focus particularly following the bumper Chicago PMI yesterday. The first of the post-FOMC Fedspeak begins today with Bullard speaking on monetary policy in St Louis. In the UK, the manufacturing PMI is the only data of note. RBS is due to report its FY13 results and the expectation is that Chancellor Osborne may speak shortly after to detail options for dealing with the bank’s problem loans. The FT reports that the bank will announce the creation of an internally managed bad bank, refocus on UK retail and business lending and pull back from its overseas operations.