Quiet Markets As Algos Quiver In Anticipation Of The Flashing Jobs Headline

It's that time again, when a largely random, statistically-sampled, weather-impacted, seasonally-adjusted, and finally goalseeked number, sets the mood in the market for the next month: we are talking of course about the "most important ever" once again non-farm payroll print, and to a lesser extent the unemployment rate which even the Fed has admitted is meaningless in a time when the participation rate is crashing (for the "philosophy" of why it is all the context that matters in reading the jobs report, see here [37]). Adding to the confusion, or hilarity, or both, is that while everyone knows it snowed in December and January, Goldman now warns that... it may have been too hot! To wit: "We expect a weather-related boost to January payroll job growth because weather during the survey week itself - which we find is most relevant to a given month's payroll number - was unusually mild." In other words, if the number is abnormally good - don't assume more tapering, just blame it on the warm weather!

Here, we remind readers that the massively disappointing December NFP number sent stocks soaring. It thus goes without saying that should the January number surge and December be revised higher, that stocks naturally have only one way to go - up as well.

And while the risk on/off algos are dormant for now, the biggest piece of news overnight (aside for the BOE being in cahoots with FX manipulators - more on that shortly) is that the German constitutional court effectively said the OMT exceeds the ECB's mandate, but instead of blocking it decided to send the decision on the OMT to the European Jourt of Justice where it will summarily pass as the inverse would mean the end of the European dream (for some, nightmare for others).

As a result despite brief volatility which saw stocks move into negative territory following reports that German constitutional court says sees substantial reasons to suggest the OMT bond program exceeds ECB mandate, stocks have gradually recovered and moved into positive territory after the ECB reiterated that the OMT programme falls within its mandate. As a reminder, during the press conference yesterday, ECB's Draghi said that it is possible to buy government bonds in secondary markets which is allowed by the treaty. As a result, peripheral bond yield spreads progressively pared the initial widening, with Bunds also coming off highest levels of the session. However EUR/USD failed to recover and remains lower on the session, with analysts pointing to profit taking related flow following sharp gains made yesterday. At the same time this ensured that in spite of weaker than expected macroeconomic data from the UK, GBP/USD is seen broadly flat.

The day ahead holds in store a pretty full data calendar on both sides of the Atlantic. We have German trade numbers to start where analysts are expecting export and import growth of 0.8% and 0.9% respectively. The French trade report follows shortly afterwards before industrial production reports for Germany, Spain and the UK. The Fed’s latest consumer credit numbers will be reported today. In the world of EM, inflation updates are due from Brazil and Mexico while Hungary will report its preliminary December trade. But it’s fair to say that payrolls will dictate the tone of trade today – all eyes will be on how treasury markets react, especially the front end of the curve if we do indeed see the unemployment rate edge closer to the 6.5% threshold.

Overnight headline digest from Bloomberg and RanSquawk

Analysts expected the OMT to be declared in line with ECB's mandate in spite of the fact that the German constitutional court said sees substantial reasons to suggest the OMT bond program exceeds ECB mandate.
Stocks have gradually recovered following the initial bout of weakness and moved into positive territory after the ECB reiterated that the OMT programme falls within its mandate.
Looking ahead for the session, today sees the ever important Nonfarm Payrolls and Unemployment release from the US.
Treasuries steady, 10Y yield holding around 2.70% level before report forecast to show U.S. economy added 180k jobs in January while unemployment rate held at 6.7%.
Today’s data probably even less predictable than usual as persistently bad winter weather, the expiration of emergency unemployment aid and annual revisions will all come into play
Germany’s top court questioned the ECB’s bond-buying plan and asked the EU’s highest tribunal to rule on the legality of the program
German industrial production fell 0.6% in Dec. vs expectations for increase of 0.3%; increased 2.4% in Nov.
The worst isn’t over for emerging markets after the benchmark stock index sank to a five-month low and the nations’ currencies tumbled, said Templeton Emerging Markets Group’s Mark Mobius
Ukraine’s central bank imposed limits on foreign-currency purchases, bringing relief to the hryvnia after interventions failed to, while President Viktor Yanukovych left to meet Russia’s Vladimir Putin
Bank of England officials told currency traders it wasn’t improper to share impending customer orders with counterparts at other firms, according to a person who has seen notes turned over to regulators
Some undiplomatic language by the top U.S. diplomat for Europe has rattled relations with the EU and added more tension to the East-West strains over Ukraine’s political crisis; the U.S. suggested Russia’s intelligence apparatus was involved with leaked recording of call
Health plans allowed to continue in 2014 though they don’t comply with new Obamacare rules may be extended for as long as three years, Aetna Inc. Chief Executive Officer Mark Bertolini told investors
House Speaker John Boehner said yesterday it will be difficult to pass an immigration bill this year because fellow Republicans don’t trust Obama, whose term ends in 2017, to enforce the changes
Sovereign yields mostly higher. EU peripheral spreads steady. Asian, European stocks, U.S. stock-index futures higher. WTI crude lower, gold and copper higher

Asian Headlines

Chinese HSBC Services PMI (Jan) M/M 50.7 (Prev. 50.9), the slowest pace of growth in nearly 2½ years. (BBG)

EU & UK Headlines

Following earlier news from the German constitutional court that they see substantial reasons to suggest the OMT bond program exceeds ECB mandate; several banks have responded with their own analysis on the situation, including RBS and UBS.

- UBS say that German court latest move on OMT may be beneficial long term and will be more productive in helping remove uncertainty.
- RBS say that EU court unlikely to strike down the OMT and bund move may fade.

- Citi say the German Constitution Court decision to pass OMT on to European Court Justice is negative, "as it leaves open to question whether the OMT violates the EU treaty. Citi said historically ECJ has tended to a more pro-EU interpretation of the law, which makes it likely, that it will declare OMT to be in line.

UK Industrial Production (Dec) M/M 0.4% vs Exp. 0.6% (Prev. 0.0%, Rev. -0.1%)
- UK Industrial Production (Dec) Y/Y 1.8% vs Exp. 2.3% (Prev. 2.5%, Rev. 2.1%)

UK Manufacturing Production (Dec) M/M 0.3% vs. Exp. 0.6% (Prev. 0.0%, Rev. -0.1%)
UK Manufacturing Production (Dec) Y/Y 1.5% vs. Exp. 2.3% (Prev. 2.8%, Rev. 2.2%)
German Industrial Production SA (Dec) M/M -0.6% vs Exp. 0.3% (Prev. 1.9%, Rev. 2.4%)
German Industrial Production WDA (Dec) Y/Y 2.6% vs Exp. 3.5% (Prev. 3.5%. Rev. 3.8%)
German Trade Balance (Dec) M/M 14.2bln vs. Exp. 17.3bln (Prev. 18.1bln, Rev. 19.1bln)
German Current Account Balance (Dec) M/M 23.5bln vs Exp. 21.5bln (Prev. 21.6bln, Rev. 23.3bln)

In other notable news, SSM draft gives ECB power to supervise smaller banks where necessary. ECB may impose higher capital requirements than those set out at national level.

Ahead of NIESR GDP estimate release later in the session, NIESR raised its 2014 UK growth forecast to 2.5% from 2.0% in November and expects 2.1% growth in 2015.

US Headlines

WSJ's Hilsenrath writes: "traders are pushing out their expectations for when the Fed will start raising short-term interest rates". Saying rate expectations are shifting for two reasons: First, the data have been weak lately and a weak economy means an easier Fed. Second, ever since a rate scare last summer – when investors thought an end to the Fed’s bond buying program meant rate hikes were not far behind – officials have been hammering home the message that “tapering isn’t tightening.” That drumbeat continued Wednesday, when Atlanta Fed president Dennis Lockhart said the Fed was likely to continue pulling back on its bond-buying program, but rates would stay low “well into 2015.”

Equities

Basic materials sector supported European equity indices since the get-go, with ArcelorMittal leading the move higher following earnings pre-market. At the same time, less than impressive earnings by Statoil, together with reports of an investigation into potentially improper sales practices by SBM Offshore resulted in oil & gas sector underperforming its peers. In terms of other notable movers this morning, Air France-KLM shares came under significant selling pressure after it was reported that the company said to be studying capital increase before end 2014.

The release of weaker than expected macroeconomic data from the UK failed to weigh on GBP/USD which is seen broadly unchanged and continues to benefit from lower EUR/GBP cross, driven lower by touted profit taking related flow following aggressive short squeeze yesterday amid somewhat hawkish press conference by Draghi. As a result, despite the fact that the OMT is still expected to be passed by the European Court, EUR/USD was unable to recover and heading into the North American cross over remains in negative territory.

RBA raised its June 2014 GDP forecast to 2.75% from 2.5% seen in November and also raised its June core CPI forecast to 3.0% vs. 2.5% seen in November. (BBG)

Goldman Sachs see AUD and CAD falling in the medium-term due to weak capital inflows, with AUD/USD potentially dropping to the high 0.60s in the next two years. (BBG)

Commodities

India has no plans at present to reduce import duty on gold according to a junior finance minister. This is inline with source comment on Tuesday said that India is unlikely to cut gold import duties to the original level of 4% and the rollback is likely to happen in tranches. (RTRS)

De Beers are to step up South African diamond exploration with an expanded program to start the year. (Business Day)

Syria's Deputy Foreign Minister said today the government would take part in a second round of peace talks on Syria's civil war in Geneva, according to state media. (RTRS)

Rosneft Oil are to increase supply to China by 9mln tonnes for 2014 and continue talks to increase Eastbound crude supplies. (BBG)

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DB's Jim Reid rounds out the overnight news summary

If someone gave you today's payroll number and unemployment rate in advance would you know how to trade it? It’s possible that the answer to this question would be different today than it might be in a couple of months time. Although this week has seen a recovery in risk, especially yesterday, markets are still uneasy enough that the relief of a stronger number would probably outweigh any yield rising or tapering worries for now. Although if DB is correct on the unemployment rate hitting 6.5% today, the Fed will have a communication issue to address even if a declining participation rate is the main cause. Maybe Yellen helps clarify this next week at her first major outing as Fed Chair? For the record DB is expecting +175k on payrolls today with the market at 180k. In terms of the unemployment rate, DB's 6.5% compares to the market's 6.7%. Clearly we have to watch out for the impact of weather again including any revisions to last month's surprise big downside miss. Indeed, Bloomberg highlights that looking at previous jobs reports from the past 18 major winter storms, the BLS has revised upwards its initial estimates two-thirds of the time. There has also been a debate as to the extent of the weather impact in January given that average temperatures in the survey week were the most mild out of the whole month. Although some parts of the US were colder than Mars in January, the survey week was a bit more earth like!

The employment report follows the other main event of the week, namely the ECB meeting. When you look at the price action over the last 24 hours you could be forgiven for thinking Draghi must have cut rates yesterday as the Stoxx 600 (+1.49%) had its best day since December 19th and the S&P 500 (+1.24%) its best day since December 18th. However the ECB decided to hold fire which helped the Euro hit a 1-week high ($1.359). Our economists now think their move will come next month alongside the ECB publishing their latest staff forecasts for 2016. The forecasts for 2016 are coming nine-months earlier than usual which creates additional ambiguity. If projected inflation by 2016 remains significantly below the ECB's definition of price stability, then the ECB would be required, in DB’s view, to act. However our economists see risks that such a forecast may unanchor market inflation expectations. Alternatively, the ECB could opt for an inflation forecast close to target, but argue that the downside risks around this projection are so significant that this warrants pre-emptive action now. Looking at Draghi’s press conference yesterday, the ECB President surprised a few with his cautiously upbeat economic outlook. Draghi appeared to talk down the disinflation risk saying that core inflation was being dragged lower by the decline in prices from the four programme countries, signalling a relative price adjustment in those countries rather than broader deflation. The suspension of sterilization of SMP bond purchases was not discussed specifically but Draghi mentioned it was a tool being considered (consistent with recent media reports).

Overnight markets are trading with a firmer tone, helped by the strong lead from Wall Street. The only exception are onshore Chinese equities (Shanghai Composite -0.25%) after they reopened for the first time since the Lunar New Year holidays. The Nikkei (+2.0%) is leading the region’s gains although still poised to close lower for the week after a volatile few sessions for Japanese equities including Tuesday’s >4% drop. There's been some focus on the RBA who released their latest Statement of Monetary Policy with a relatively upbeat assessment of economic growth in 2015 and 2016. The AUDUSD initially appreciated 0.3% following the RBA’s Statement, but this move was quickly pared. Asian credit is trading a few basis points better but there is some caution after EPFR funds flow data (Bloomberg) suggested another large outflow from global EM.

While we're on EM it's worth highlighting our latest GEM equity strategy note from JP Smith. JP has been consistently underweight EM vs DM since he joined DB 3 years ago and although he thinks that EM might be a little oversold near-term he still feels the structural negatives remain which are much to do with corporate and sovereign governance. In particular he asks in the note whether the authorities in China can ease policy in the months ahead without increasing moral hazard to an extent where it becomes counter-productive and triggers major outflows? JP even talks about if his bearish scenario begins to materialise, there may be increased talk of a RMB devaluation through 2014, which would be bearish for China and GEM. From a macro point of view it seems that one read through from the report are that dis-inflationary forces will continue to come from EM this year. For us this may influence DM central bank policy as the year progresses.

Yesterday’s US data provided little direction though we noted that the US December trade balance widened (-$38.7B vs. -$34.6B previously) mostly due to a decline in exports (-1.8% vs. +0.8%). Compared to what the BEA had assumed for Q4 real GDP, the slightly wider trade balance subtracts a couple of tenths from the initially reported 3.2% growth number according to DB’s US economist Joe Lavorgna. Elsewhere US jobless claims declined to 331k last week, a five week low. Outside of the data, US house speaker John Boehner said that that no decision has been made yet on conditions for approving an increase in the debt ceiling, but confirmed that the Republicans will not force a default.