The overnight session began on a dour mood, with both the Shanghai Composite and Nikkei sliding (the former once again just barely above 2,000, latter once again dropping below 16,000), even though Chinese CPI came below expectations suggesting the PBOC has some more room to ease and not rush into liquidity extraction (which just happens to blow out repo rates like clockwork), while in Japan BOJ board member Shirai implied the Japanese QE can be extended and expanded as needed. Apparently he didn't get the Fed's memo that the cost of QE finally outweight the benefits. Leading the gains are Chinese A-shares (Shanghai Comp +0.2%) helped by another relatively benign December CPI print (2.5% YoY vs 3.0% previous and 2.7% expected). Chinese PPI fell for the 22nd straight month (-1.4%, in line with consensus and November). The BOK kept rates on hold as expected which is helping the KRW retrace earlier weakness but the BOK governor warned that the weakening yen was increasingly affecting Korean exporters.
Europe had a weak start although shortly after 3 am Eastern staged a dramatic turnaround supported by a bounce in the EUR (and ES driving EURJPY) leading to broadly higher stocks, supported by solid demand for Portuguese 5y bond syndication, as well as oversubscribed debt auctions by the Spanish Treasury which sold above the targeted amount and consequently saw SP/GE 10y spread fall to its tightest level since April 2011. At the same time, having been propped up by touted redemption flows ahead of Spanish and French bond auctions, absorption of supply shortly after 1000GMT resulted in an immediate selling pressure on Bunds. Helping lift spirits was a rumored $1 billion trade order in September S&P futures, as well as chatter by the Greek PM that the country was, like Portugal and Ireland, prepared to get back into the bond markets.
Looking elsewhere, in spite of the USD index trading lower, USD/JPY remained bid and was supported by upward traction by EUR/JPY, which itself was driven by unwind of dovish positioning ahead of the monetary policy announcement by the ECB at 7 45 Eastern. At the same time, broad based EUR strength which buoyed EUR/GBP cross ensured that GBP/USD failed to benefit from a softer USD and traded steady this morning.
Turning to the day ahead, we got the French (missed) and UK (beat) November trade reports and German industrial production (1.9%, exp. 1.5%) up first. This will be followed by the BoE’s rate announcement which was just reported as unchanged. The ECB follows shortly thereafter at 7:45 am Eastern with Draghi’s press conference 45 minutes after that. The US data docket consists mostly of jobless claims. The day will then end with the closely-watched Alcoa's quarterly earnings which marks the unofficial start to US Q4 earnings season. Consensus is for Alcoa to report net income of $60.5m on revenues of $5.3bn, but as always there will be as much focus on the company’s demand outlook as there is on the company’s historical results.
US Event docket
- US sells $13bn 30y bonds, re-open (7:00)
- Initial Claims report (8.30)
- POMO: $0.60 - $0.90 billion in the 11/15/2024 - 02/15/2031 bucket (11:00)
Overnight news bulletin from Bloomberg and RanSquawk
- Despite opening lower, European stocks are now seen higher following firm demand for Portugal's 5y bond syndication with price guidance narrowing from MS+340bps to 330bps.
- Peripheral bond spreads tighter with the SP/GE 10y spread at its tightest level since April 2011 following over-subscribed Spanish bond auctions.
- Despite the USD index trading lower, USD/JPY remains bid and supported by upward traction by EUR/JPY.
- Treasuries steady, 30Y bond yields fall by 1bp before week’s auctions end with $13b sale of the maturity; market focus on tomorrow’s jobs report (est. 195k, unemployment holding at 7.0%) as some firms raise forecasts after yesterday’s stronger than forecast ADP.
- 30Y bonds yield 3.894% in WI trading; drew 3.90% in Dec. 10Y notes sold yesterday drew 3.009%, highest since May 2011
- U.S./Germany 10Y spread at -108.9bps, widest since 2006, before ECB rate decision, Draghi press conference; will probably hold policy steady.
- German industrial production rose 1.9% in Nov., first increase in three months, from -1.2% in Oct; Euro-area economic confidence rose to 100 in Dec., higher than forecast
- Bank of England announces rate decision and asset purchase target at 7:00am ET; est. 0.50% (no change) and GBP375b (no change)
- China’s producer price index fell 1.4% in Dec., the 22nd straight drop, while CPI trailed estimates at 2.5%
- Obama will call for tighter limits on U.S. spying on foreign leaders in response to a global uproar over government surveillance, according to an administration official familiar with the proposal
- U.S. Senate Majority Leader Harry Reid said he’s open to offsetting the cost of reviving long-term unemployment benefits if Republicans agree to keep the aid for a year
- Sovereign yields mostly higher; EU peripheral spreads widen. Nikkei falls 1.5%, leading most Asian stock markets lower; Shanghai Composite falls 0.8%. European stocks gain U.S. equity-index futures rise. WTI crude and gold gain, copper slides
Asian Headlines
Chinese CPI (Dec) Y/Y 2.5% vs. Exp. 2.7% (Prev. 3.0%)
Chinese PPI (Dec) Y/Y -1.4% vs. Exp. -1.3% (Prev. -1.4%)
Chinese CPI (2013) Y/Y 3.0%; PPI -1.9%
BoJ board member Shirai said it is possible to aim for 2% inflation at a slower pace than 2-year time frame and that currently there is a lot of uncertainty surrounding the time frame for the BoJ's inflation target.
EU & UK Headlines
Today's session has seen solid demand for the Portuguese 5y bond syndication, as well as auction from Spain and France with Spain selling above the indicative range, which has seen then the SP/GE 10y spread at its tightest level since April 2011. Also of note, Greek PM Samaras said that his government is weighing the possibility of a return to bond markets this year.
German Industrial Production SA (Nov) 1.9% vs Exp. 1.5% (Prev. -1.2%)
German Industrial Production WDA (Nov) 3.5% vs Exp. 3.0% (Prev. 1.0%. Rev. 1.1%)
Eurozone Business Climate Indicator (Dec) M/M 0.27 vs Exp. 0.22 (Prev. 0.18, Rev. 0.31)
- Eurozone Services Confidence (Dec) M/M 0.2 vs Exp. -0.5 (Prev. -0.8, Rev. -0.9)
- Eurozone Economic Confidence (Dec) M/M 100.0 vs Exp. 99.1 (Prev. 98.5, Rev. 98.4)
- Eurozone Industrial Confidence (Dec) M/M -3.4 vs Exp. -3.0 (Prev. -3.9)
- Eurozone Consumer Confidence (Dec F) M/M -13.6 vs Exp. -13.6 (Prev. -13.6)
UK Visible Trade Balance GBP/Mln (Nov) M/M -9439 vs Exp. -9425 (Prev. -9732, Rev. -9651); Narrowest deficit since June
- UK Trade Balance Non EU GBP/Mln (Nov) M/M -3023 vs Exp. -3500 (Prev. -3254, Rev. -3114)
- UK Trade Balance (Nov) M/M -3238 vs Exp. -2300 (Prev. -2619, Rev. -3496); Narrowest deficit since August
French Trade Balance (Nov) M/M -5680mln vs Exp. -4600mln (Prev. -4697mln, Rev. -4826mln)
- With France's Trade Minister saying that the trade balance was 'not good' due to lower aeronautical deliveries.
US Headlines
Newsflow remains light in the US following yesterday's FOMC minutes, with participants now looking ahead to tomorrow's Nonfarm Payrolls release.
Equities
Despite the recovery by major European equity indices, the move higher was led by health care related stocks, as market participants remained somewhat cautious ahead of announcements by the ECB and BoE. Of note, retailers in the UK are seen sharply lower following disappointing trading updates by Morrisons, Tesco and M&S premarket. Looking ahead, it is worth noting that Alcoa are due to report after-market today and kick-off earnings season in the US.
FX
Looming risk events (BoE and ECB monetary policy announcements) failed to support the USD this morning and instead the price action was driven by an unwind of dovish EUR positions amid positive sentiment stemming from solid demand for Portuguese 5y bond syndication. As a result, broad based EUR strength saw EUR/USD trend higher throughout the morning session, with EUR/JPY also bid which ensured that in spite of a softer USD, USD/JPY remained in positive territory.
Analysts at Goldman Sachs said they see first Polish rate increase in Q4 2014 'at earliest' adding that the Polish central bank will increase interest rates by 25bps this year and by further 75bps in 2015.
Commodities
Libya's crude production has risen to 546,000 bpd as output from Sharara field accelerates.
The first crude has started to flow through Iraqi Kurdistan's new pipeline across Turkey and the first independent exports are expected to begin at the end of the month, according to the Kurdistan Regional Government.
Negotiations between Iran and six world powers on implementing a landmark November deal to freeze parts of Tehran's nuclear program in exchange for easing some sanctions have run into problems over the issue of centrifuge research, according to diplomats.
Bank of America have lowered their Gold forecast by 11% to USD 1150/oz and lowered their Silver forecast by 21% to USD 18.38/oz.
HSBC sees gold recovering modestly in H2 of this year.
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We conclude with Jim Reid's overnight recap, as usual
Yesterday we remarked how parts of the US were colder than the South Pole earlier this week. Well actually it transpires that there were a few places colder than even Mars!! Talking of the planets always reminds me of a DB note published back in 2008 entitled "The ECB is from Mars and the Fed is from Venus". With the FOMC minutes released last night and the ECB meeting today the differences between the two remain stark even if likely to be less extreme in 2014 than in 2013. Although the Fed suggested in the minutes that the committee saw reduced benefits of asset purchases there was nothing to suggest anything other than a measured slow withdraw of QE. Indeed if the Fed reduced bond buying by 10bn in the month after each 2014 meeting the Fed's balance sheet would still swell by $320bn in 2014 (putting aside coupons, maturities and reinvestment) after 2013 where it increased by $1.1 Tn. To put things in perspective the ECB allowed its balance sheet to roll off by around €740bn in 2013. With inflation this low and the Euro still strong can they really afford for this to be repeated in 2014?
For now though there is likely to be no fresh change in emphasis with the general expectation that the ECB will once again hold fire today. DB’s Gilles Moec and Marco Stringa believe the ECB seems to be comfortable with its current stance: they have managed to convince the market that they could do more, with their "array of instruments”. At the same time, they need a "smoking gun" to get them into action and the trickle of data released since the December meeting does not provide them with one yet. Our economists also note that Draghi was unusually straightforward in his comments in his interview with the Spiegel published on 30 December: When he was asked whether interest rates should fall further, he answered "at the moment, we see no need for immediate action" and, after commenting repeatedly on the "progress" made in the Euro area he pointed to the fact that in the Euro area inflation expectations remain well anchored around the ECB's target. Our rates strategist Abhishek Singhania also points out the ECB will take comfort that although EUR rates have sold-off along with the move in US rates, the move has been smaller (especially at the front-end) compared to the move leading up to the July ECB meeting (when the ECB to introduced its forward guidance language). This is despite the fact that Euro-area activity data as reflected via the PMIs has improved over this period. Additionally, the ECB will take comfort from the fact that Eurozone GDP weighted bond yields have actually declined despite the rise in core bond yields due to the sharp rally in peripheral bond yields. So if the ECB does indeed get forced into more aggressive action in 2014, the status quo looks likely in the near-term.
Coming back to yesterday, the S&P500 (-0.02%) closed pretty much where it was just prior to the release of the FOMC minutes, though there was a small wobble as that there was broad based agreement to gradually wind up QE towards the end of 2014 but that there was emphasis that QE had no preset course and was data dependent. This was probably no surprise to most, considering the comments from Bernanke last month. There wasn’t substantive talk on changing formal thresholds with respect to forward guidance or cutting IOER. There was a small upgrade in the forecast for GDP growth and in the forecast value of the dollar. Perhaps the most interesting excerpt of the minutes was the discussion on financial stability where several members commented on the rise in forward price-earnings ratio of small cap stocks, the rise in margin credit, increase in leveraged loans and the decline in quality of such loans. A participant seemed to suggest that the importance of financial stability considerations in the Committee’s deliberations would likely increase over time as progress is made toward the Committee’s objectives, and one said that such considerations should even be
incorporated into forward guidance for the federal funds rate and asset purchases.
Outside of equities the market reaction to the minutes was also fairly muted. 10yr UST yields ticked down by 2bp (up 5bp on the day and closing just shy of the 3.0% mark) but we did see the 2s/10s curve flatten substantially post-minutes after front-end USD rates substantially underperformed. There was a larger reaction to the ADP report which came in 38k above consensus estimates of 200k. Our US economists point out that it was the highest print since November 2012 and there was further good news in that the November 2013 print was revised higher (+229k vs. +215k). This leaves our economists predicting a top-of-the-street +250k forecast for Friday’s payrolls – with most of the street’s forecasts over the last 24 hours being revised up to the 200k to 230k range.
Speaking of US data surprises, the recent run of positive economic data has resulted in the Citi Economic Surprise index hitting a near two-year high yesterday. While that result is fairly impressive in itself, its important to highlight that the index has formed a peak at the start of each of the last three years, before hitting a rough patch in the middle of the year.
Elsewhere EURUSD fell 0.3% with most of the decline following the ADP beat, and despite another round of positive European data including Euroarea retail sales (1.4% vs 0.4% expected) and German factory orders (2.1% vs 1.5% expected) which both beat consensus. In fixed income, the Euroarea sovereign and corporate new issuance pipeline was in full swing yesterday, with Portugal announcing a tap of their 2019s following the recent Irish 10yr syndication. Bailed-out Spanish bank Bankia is also reported to be making a post-bailout comeback to the EUR senior unsecured bond market.