Following yesterday's major market drubbing, in which the sliding market was propped up by the skin of Nomura's (and BOJ, and Fed's) teeth at 103.00 on the USDJPY, it was inevitable that with Japan returning from holiday there would be a dead cat bounce in the Yen carry pair, and sure enough there was, as the USDJPY rose all the way back up to 103.70, and nearly closed the Friday gap, before starting to let off some air. However, now that US traders are coming back online, Japan's attempts to keep markets in the green may falter, especially since it only has a couple of ES ticks to show for its efforts, as for the Nikkei which dropped 3% overnight, it has now lost all US "Taper" gains.
Recapping the violent market action, comments by Fed’s Lockhart late yesterday, together with the Nikkei 225 posting its worst one-day loss since August meant that stocks in Europe traded lower since the get-go. As a reminder, Fed's Lockhart said that it is appropriate to phase out bond buying by Fed and Dec jobs report does not change policy view. As a result, the more defensive sectors outperformed, with health-care leading the move higher in Europe, while financials underperformed amid credit spread widening. Of note, Japan’s current-account deficit widened to a record in November as imports climbed, underpinning the need for more aggressive and protracted accommodative policy stance by the BoJ. This, combined with AUD retracing yesterday’s aggressive gains boosted JPY related crosses and ensured that despite the risk averse sentiment, USD/JPY traded higher. Looking elsewhere, inflation in the UK slowed to the lowest level since November 2009, with the ONS stating that the largest contributions to the fall in inflation came from food, recreation and culture; upwards pressure from fuel.
On the macro front we get retail sales which by all looks should disappoint (in which case the weather will be blamed), unless of course, they beat, in which case it is the "stronger economy." JPMorgan kicks off the bank earnings season today with its pre-market announcement that may set the tone for the rest of the session. Analysts are expecting an adjusted Q4 EPS number that is around 15% lower than the same period last year on relatively flat revenues. As always, JPM will be seen as an important health-check for the other bulge bracket banks particularly in terms of funding and balance sheet trends and the momentum of its equities and FICC businesses. Wells Fargo’s earnings follow shortly after JP Morgan’s.
US Event docket:
- 7:30am: NFIB Small Business Optimism, Dec., est. 93.1 (prior 92.5)
- 8:30am: Retail Sales Advance m/m, Dec., est. 0.1% (prior 0.7%)
- Retail Sales Ex Autos m/m, Dec., est. 0.4% (prior 0.4%) * Retail Sales Ex Autos and Gas, Dec., est. 0.3% (prior 0.6%)
- Retail Sales Control Group, Dec., est. 0.3% (prior 0.5%)
- 8:30am: Import Price Index m/m, Dec., est. 0.4% (prior -0.6%)
- Import Price Index y/y, Dec., est. -0.6% (prior -1.5%)
- 10:00am: Business Inventories, Nov., est. 0.3% (prior 0.7%)
- 11:00am: POMO - Fed to purchase $1b-$1.5b in 2036-2043 sector
- 12:45pm: Fed’s Plosser speaks in Philadelphia
- 1:20pm: Fed’s Fisher speaks in Dallas Supply
Overnight headline bulletin summary from Bloomberg and RanSquawk
- Treasuries decline as two-day rally following weaker-than-forecast Dec. payrolls report stalls; 10Y yield holding just above 2.819% 50-DMA.
- U.K. inflation unexpectedly slowed in December, reaching the Bank of England’s 2% target for the first time in more than four years
- Japan’s current-account deficit widened to a record in November as imports climbed, underscoring challenges for Prime Minister Shinzo Abe as he tries to drive a sustained economic rebound
- Some Chinese provinces are setting lower growth targets for this year than in 2013, adding to signs that expansion will slow as the government focuses on policies to sustain the economy in the long term
- House and Senate lawmakers agreed to a $1.01t compromise to fund the U.S. government through Sept. 30, unveiling the measure days before financing for federal agencies is scheduled to lapse
- About 70% of Obamacare’s customers are 35 years of age or older, indicating that U.S. health-care overhaul is initially attracting a less healthy population that may drive up insurance premiums
- Representative Darrell Issa questioned the legitimacy of a U.S. criminal investigation into the screening of Tea Party groups by the IRS, saying that anonymous leaks had harmed the inquiry
- Three former Rabobank traders were charged by the U.S. with engaging in a five-year scheme to manipulate Libor as international probes of rate rigging escalate
- The Fed is poised to take a preliminary step toward limiting banks’ activities with commodities amid congressional scrutiny, according to three people briefed on the discussions
- The ECB is concerned that national differences in how bad debt is classified could cripple its probe into the health of euro-area banks, according to an internal ECB document
- Germany’s anti-euro AfD party is set to announce the candidacy of Hans-Olaf Henkel, a former European chief for IBM, in a coup that might help broaden its appeal in European Parliament elections
- Sovereign yields mostly lower; EU peripheral spreads tighten. Asian equity markets mostly lower; Nikkei slides 3.1%, Shanghai +0.9%. European stocks decline, U.S. equity- index futures gain. WTI crude higher, gold and copper fall
- European stocks are seen red across the board following on from heavy losses for the Nikkei 225 and Lockhart's comments during yesterday's US session.
- JPY is seen weaker across the board with EUR/JPY and GBP/JPY surging higher following on from yesterday's AUD inspired losses.
- The CPI reading from the UK showed that inflation in the UK has slowed to its slowest level since November 2009.
Asian Headlines
Japanese economic minister Amari said the government must exercise more caution in deciding whether to raise the sales tax to 10% than when it decided to hike rates to 8% from 5%. (BBG)
Japanese Trade Balance BoP Basis (JPY)(Nov) M/M -1254.3bln vs. Exp. -1236.4bln (Prev. -1091.9bln)
EU & UK Headlines
UK CPI (Dec) Y/Y 2.0% vs. Exp. 2.1% (Prev. 2.1%) - The lowest level since November 2009
- UK CPI (Dec) M/M 0.4% vs. Exp. 0.5% (Prev. 0.1%)
- The ONS said largest contributions to fall in inflation from food, recreation and culture; upwards pressure from fuel.
UK CPI Core (Dec) Y/Y 1.7% vs. Exp. 1.8% (Prev. 1.8%)
UK RPI (Dec) Y/Y 2.7% vs. Exp. 2.7% (Prev. 2.6%)
- UK RPI (Dec) M/M 0.5% vs. Exp. 0.5% (Prev. 0.1%)
- UK RPI Ex Mort Int. Payments (Dec) Y/Y 2.8% vs. Exp. 2.8% (Prev. 2.7%)
Eurozone Industrial Production SA (Nov) M/M 1.8% vs Exp. 1.4% (Prev. -1.1%, Rev. -0.8%)
- Eurozone Industrial Production SA (Nov) Y/Y 3.0% vs Exp. 1.8% (Prev. 0.2%, Rev. 0.5%)
ECB's Nowotny says view for Europe as a whole much better than a year ago and there are positive sign that banks are repaying long-term funding. He went on to add that he sees no immediate need for action given neither inflation or deflation is expected in short or medium term in Eurozone. (BBG)
Lautenschlaeger said low interest rates are not without risks in the long-term and although negative deposit rate is technically and legally possible, need to look at whether it would really help the economy. (BBG)
S&P's Chief European Economist Six says France is lagging the European economy and French growth in 2014 is not enough to cut unemployment.(BBG)
ECB's Mersch (soft hawk) said rates to stay low for extended period. (BBG)
US Headlines
Senate Appropriations chair Mikulski said US Senate negotiators reached an agreement on a USD 1trl US spending bill to keep the government operating through till September 30th. (RTRS)
Fitch says the Congressional resolution of the US debt-limit suspension scheduled to end Feb. 7th is a 'key date' for the nation's AAA credit rating. (BBG)
US President Obama nominated Stanley Fischer for Vice Chairman of the Fed and Lael Brainard for the Fed board. (BBG)
Goldman Sachs have said there a US rate increase is only likely for 2016 according to chief economist Jan Hatzius. (BBG)
Equities
Stocks traded lower throughout the session, with health care and other defensive related sectors outperforming. UK listed AstraZeneca outperformed the broader market, after the company said that it expects new drugs to offset a looming wave of patent expiries and return it to growth faster than analysts predict. At the same time, combination of profit taking related flow, together with credit spread widening meant that financials were among the worst performing sectors in Europe. Attention now turns to earnings report releases by JPMorgan at 1200GMT and Wells Fargo at 1300GMT.
FX
Despite the risk averse sentiment, USD/JPY traded higher, supported by the release of the latest Japan’s current-account deficit data which widened to a record in November and in turn underpinned the likely need for more aggressive and protracted accommodative policy stance by the BoJ. At the same time, AUD retraced yesterday’s aggressive gains linked to RM related selling of GBP and boosted JPY related crosses.
Commodities
The White House said it is concerned about reports Iran and Russia are negotiating an oil for goods swap and commented that such a swap if true would be inconsistent with P5+1 agreement with Iran and could potentially trigger US sanctions. (RTRS)
OPEC pumped 29.72 mln bpd of crude oil in December vs 29.70 mln bpd in November. (Platts)
Goldman Sachs forecasts 12-month oil price at USD 90 per barrel. (BBG)
Deutsche Bank's 2014 oil forecasts are USD 10/bbl lower than in 2013 with WTI crude 2014 forecasted at USD 88.75/bbl.
Deutsche Bank sees USD biggest risk for gold in 2014 and forecasts 2014 avg. at USD 1,141/oz. (BBG)
China November gold output 44.487 tons, while China Jan-Nov gold output was at 392.141 tons (China Gold Association)
Finally, we conclude as always with Jim Reid's overnight recap
The last 24 hours has been pretty interesting on no real news. After a fairly positive European session where the Stoxx600 closed 0.35% higher driven by outperformance in banking stocks (+1.6%, after the Basel Committee’s changes to the leverage ratio), sentiment turned sharply at around the midpoint of the US session. The S&P500 (-1.26%) and Dow (-1.09%) weakened into the close and saw their worst day in two months and four months respectively. Some blamed the Fed speak and it did appear that the equity sell-off gathered steam as the Atlanta Fed’s Lockhart began hitting the newswires. In saying that, there wasn’t too much ‘new’ news in Lockhart’s comments as he said he advocated $10bn in QE tapering per meeting during the course of 2014 as a result of his “growing confidence” in the economic outlook – which is something similar to what the Fed has been saying for the last month. Lockhart has been dovish-leaning in the past, so perhaps markets were surprised that he wasn’t more cautious following last week’s payrolls miss. Others suggested that yesterday’s selloff was a delayed reaction to last week’s payrolls miss while a couple of brokers suggested that equity valuations had become stretched following a strong Q4.
With risk better offered, UST yields rallied to a one month low of 2.826% (-3bp) and the 1% drop in crude led to a 2% drop in Energy stocks. Though it was too late to provide a boost to equities, after the closing bell internet communications company Charter announced a jumbo $61bn takeover offer for Time Warner Cable prompting a number of media outlets to predict that 2014 may finally see resurgence in M&A activity. Together with Suntory’s pre-market offer for bourbonmaker Beam Inc, the value of announced takeover proposals this year has totaled $130bn according to Bloomberg data.
Following yesterday’s performance, the S&P500 has started the year with a YTD loss of 1.6% while treasury yields are 20bp firmer. The FT suggested that there has been a new year rotation out of US equities and into bonds citing EPFR data, driven by pension funds who have taken the opportunity to lock in gains in equity portfolios and shifted funds into fixed income to take advantage of higher bond yields.
Asian markets are trading on a weaker tone overnight though by all accounts the selling has been relatively orderly. Indeed, most regional equity indices are down by less than a quarter of a percentage point. The notable exception is the Nikkei (-3.2%) which is leading the region’s declines after reopening for the week in a delayed reaction to US payrolls and the resulting appreciation of the yen against the USD. There has also been some disappointing data - Japan posted its largest current account deficit in November (-JPY593bn vs -JPY369bn expected) driven by rising energy import costs. Government bond yields are generally tighter by 1-2bp in Asian trading, including USTs, and Asian credit spreads are about 1-2bp wider. Another theme that was prevalent yesterday was the broad-based weakness in US retail stocks (-1.5%) where only 2 out of 39 S&P500 in the sector managed to close higher. A number of consumer-discretionary stocks downgraded earnings or missed profit estimates yesterday including yogawear maker Lululemon and beverage company Sodastream, joining other consumer-focused stocks Family Dollar Stores and L Brands in downgrading forecasts in the recent month. So at the micro level, there’s certainly been some evidence that consumer demand has been soft in some segments, adding a further element of uncertainty to the start of US reporting season and to today’s advance retail sales data. Median expectations for today’s retail sales is 0.1% at the headline with DB expecting a weaker reading (0.0%) because of softness in unit motor vehicle sales.
Coming back to last Friday’s payrolls miss, our Chief International economist Torsten Slok attempted to quantify the impact of weather on Friday’s payrolls through a simple regression where payrolls is a function of the ADP report, jobless claims and number of persons who are not at work due to bad weather. The model suggests that the weather did indeed have a significant negative impact (about 75k) on Friday’s employment report. In other words, absent the weather effect, last Friday’s payroll number would likely have been closer to 150k – though we would highlight that this was still a miss relative to expectations going into payrolls of around 200k. Indeed we think it supports our case that there may be pauses in the Fed's tapering process this year.
Turning to the day ahead, we have UK/Euroarea IP and French CPI data to begin the day followed by US retail sales. JPMorgan kicks off the bank earnings season today with its pre-market announcement that may set the tone for the rest of the session. Analysts are expecting an adjusted Q4 EPS number that is around 15% lower than the same period last year on relatively flat revenues. As always, JPM will be seen as an important health-check for the other bulge bracket banks particularly in terms of funding and balance sheet trends and the momentum of its equities and FICC businesses. Wells Fargo’s earnings follow shortly after JP Morgan’s.