The key event overnight was the release of European Q3 GDP data, which saw Germany averting a recession by the narrowest of margins when following a -0.2% drop in Q2 economic growth, Germany grew by the smallest amount possible in Q3, or 0.1%, in line with expectations, thus averting two consecutive quarters of decline, the technical definition of a recession.
As Goldman notes, Germany's statistical office did not release at this point any detailed figures but hinted in its press statement that private consumption was a main contributor to growth as private households increased their spending "strongly". Net trade was also a positive factor as exports rose stronger than imports. However, machinery investment was down "significantly" and inventories also contributed negatively. Although we don’t have the detailed figures yet, the breakdown of GDP demand components seems to be consistent with a "confidence shock" that hit the German economy during Q2 - reflecting the tensions in the Ukrainian/Russian conflict - and that led to a decline in investment spending (the most volatile and most sensitive part of the economy). But this also suggests that the economy should resume its growth momentum as the negative confidence shock fades out. Of course, if the recent re-flaring of the Ukraine situation persists, look for German Q4 GDP to once again contract, with a handy "scapegoat" once again readily available.
In fact this increasingly appears probable, especially when moments ago this hit:
- GERMANY WEIGHS BACKING FURTHER RUSSIA SANCTIONS: WIRTZ
The French economy likewise posted a modest increase in Q3, although one wonders how aggressively the data had to be fudged for a country whose PMIs all indicate a -1% or greater contraction.
Italy however was less creative with its use of "hookers and blow", and continued its recession with a 3rd negative print, contracting at -0.1% as expected, while Portugal also missed third quarter growth estimates.
In any event, European markets have played little attention to the slew of Eurozone GDP releases which revealed a beat on expectations for the core (France & German) while showing that weakness still remains in the periphery as Italy slipped back into recession and Portugal fell short of expectations, as equities trade in relatively mixed territory with volumes particularly thin thus far. Furthermore, On a sector specific basis for equities, energy names continue to underperform as WTI prices head for their longest weekly decline since 1986. Elsewhere, the utilities sector continues to feel the squeeze, with RWE under further selling pressure (-2.8%) with participants speculating over whether the Co. will cut their dividend. Fixed income products reside in positive territory with no fundamental news being attributed to the move, it is also worth noting that volumes in the Bund are particularly thin with just over 100k contracts having gone through at the time of writing.
All eyes continue to be on WTI and Brent, which were trading just above $74 and $78 respectively. Another bout of liquidations may take the West Texas contract to a $60 handle soon enough and with it raise the specter of widespread HY defaults, which would break the relative 6 year calm the space has experienced thanks to ZIRP.
In more relevant for HFT algos overnight developments, price action centred mostly on USD strength which sent USD/JPY to its best levels since 18th Oct’07. The move higher was attributed to Japanese corporate seller positions taken out by Asia-based hedge funds and European names buying to trigger stop-losses above 116.10. However, during the European session USD has traded in a relatively rangebound manner with USD briefly coming off its best levels and thus providing some reprieve for its major counterparts, notably GBP/USD which earlier struck its lowest level since September 2013. Elsewhere, price action for EUR/USD may see some magnetism towards 1.2450 where there is 1.1bln in option expiries due to roll-off at 1500GMT NY cut.
In the energy complex WTI Crude futures have seen a bid in recent trades on bargain hunting following selling seen throughout the week, and after WTI finished lower by USD 3 at the NYMEX pit close yesterday. Do note that yesterday crude futures finished at session lows after a technical break below USD 75.00 in WTI and ahead of the Dec Brent December futures expiry. News that Libya's Hariga oil port had reopened also weighed on prices, as well as lacklustre Chinese data on Wednesday night which indicated a slowdown in consumption. In terms of energy newsflow the IEA released their monthly report and said pressure on OPEC to reduce production is building but it appears no clear consensus on a supply cut yet. Elsewhere, precious metals markets have traded in a relatively rangebound manner throughout the European session, with participants looking ahead to the US retail sales and Univ. of Michigan confidence releases.
On the US calendar today we have US retail sales, which this time will probably disappoint on a drop in nominal values of car and gas transactions even if the control group is expected to remain steady (although based on disappointing commentary by retail chains in this earnings season, the US consumer is seriously hunkering down ahead of the winter), as well as the Univ. of Michigan confidence and any comments from Fed’s Bullard and Fischer.
Bulletin Headline Summary from RanSquawk and Bloomberg
- European equities trade in relatively mixed territory with participants not reading too much into the latest GDP releases.
- Eurozone GDP releases revealed a beat for the core (France & German) while showing that weakness still remains in the periphery as Italy slipped back into recession and Portugal fell short of expectations.
- Looking ahead, attention turns towards the release of US retail sales & Univ. of Michigan confidence and any comments from Fed’s Bullard and Fischer.
- Treasuries head for weekly decline after U.S. sold $66b of 3Y/10Y/30Y debt in quarterly refunding auctions; PPI, CPI reports due next week.
- Euro-area economy grew 0.2% in 3Q vs 0.1% median estimate in Bloomberg survey; Germany +0.1%, in line with forecasts, from revised -0.1% in 2Q; France +0.3% vs 0.1% est., revised -0.1% in 2Q
- ECB Governing Council member Christian Noyer told French daily Les Echos in an interview that the ECB could buy state or company debt if it decided that its policies weren’t having any effect
- PBOC’s targeted liquidity injections haven’t been enough to spur a pickup in lending as aggregate financing in October was 662.7b yuan ($108 billion), down from 1.05t yuan in September
- U.K. house-price growth accelerated in October as the number of properties changing hands rose to match a seven-year high, according to Acadata and LSL Property Services
- Japan’s Abe moving toward delay of sales tax increase, perhaps for 18 months from original plan of next October, according to Nikkei newspaper
- Japan’s Government Pension Investment Fund posted notice on its website soliciting transition managers for Japanese and foreign stocks as well as foreign bonds
- Russia is preparing for a “catastrophic” slump in oil prices, which it can weather thanks to a cushion of more than $400 billion in reserves, President Vladimir Putin said
- The U,.S. House of Representatives is poised to vote again to allow the Keystone XL pipeline -- this time with the promise of a Senate vote next week as Republicans and Democrats seek advantage in a runoff for the last undecided U.S. Senate seat
- Obama’s top military adviser said more U.S. troops may be needed in Iraq for a “long and difficult” fight against Islamic State, as military planners assess the shortcomings of Iraqi forces
- Sovereign yields decline. Nikkei +0.6%, Shanghai -0.3%. European stocks mixed, U.S. equity-index futures higher. Brent crude +0.7% after falling below $78/bbl yday; gold and copper lower
US Event Calendar
- 8:30am: Retail Sales, Oct., est. 0.2% (prior -0.3%);
- Retail Sales Ex Auto m/m, Oct., est. 0.2% (prior -0.2%)
- Retail Sales Ex Auto and Gasoline, Oct., est. 0.4% (prior -0.1%)
- Retail Sales Control Group, Oct., est. 0.4% (prior -0.2%)
- 8:30am: Import Price Index, Oct., est. -1.5% (prior -0.5%)
- Import Price Index y/y, Oct., est. -1.6% (prior -0.9%)
- 9:55am: University of Michigan Consumer Sentiment Index, Nov. preliminary, est. 87.5 (prior 86.9)
- 10:00am: Business Inventories, Sept., est. 0.2% (prior 0.2%)
- 10:00am: Mortgage Delinquencies, 3Q (prior 6.04%); MBA Mortgage Foreclosures, 3Q (prior 2.49%)
- 9:10am: Fed’s Bullard speaks in St. Louis
- 4:00pm: Fed’s Fischer, Powell speak in Washington
* * *
DB's Jim Reid completes the overnight recap
A theme that has built up in US markets over the last few sessions has been the battle between supportive macro data and declining energy stocks. This battle for the moment seems to be doing a good job at keeping markets in check. Yesterday the S&P closed +0.05% as the energy sector continued to drag on the rest of the index, declining 1.34%. In terms of data, the JOLTS headline figure of 4.7m job openings in September was slightly softer compared to the August reading (4.8m) however the encouraging signs came from a rise in the ‘hiring rate’ to 3.6% (from 3.4%) as well as a rising ‘quit’ rate to 2.0% from 1.8% which represents the highest level since April 2008. As we mentioned yesterday this data is on the Fed Chair Yellen’s dashboard of economic indicators and the numbers will certainly lend further support to the strengthening labour market thesis.
Offsetting this however was a further fall in the oil price. Brent declined 3.1% to $77.92 in trading last night whilst WTI was 3.9% lower to $74.21, both at the lowest levels since September 2010. The negative sentiment continues to be focused over the global supply glut and worries that OPEC won’t cut production at the meeting on the 27th of this month. Interestingly a report in the FT mentioned that Mexico has spent nearly $800m to insure against a further fall in oil prices next year, with the finance minister mentioning the need to protect public finances given the commodity funds around one-third of federal revenue. Whilst on the subject of oil, we’ve re-attached our link from yesterday to Oleg’s piece on the tipping point of the oil price in relation to the HY market, apologies for those we were unable to access it yesterday.
Whilst we’re on the topic of HY, the latest weekly HY fund flow data shows another week of differing fortunes for US and European funds. US funds saw a 4th consecutive week of inflows ($930mn) which means they have now added just over $8.5bn in this time (3% of NAV). In Europe however we saw another week of moderate outflows ($32mn). We have now seen just 1 week of inflows in the past 7 weeks (since late September). That said we have still seen net inflows YTD of $3.5bn (9.9% of NAV) in Europe. Despite the recent inflows in the US we have still seen net outflows YTD of $6.4bn (2.1% of NAV). In my discussions with numerous HY fund managers in recent weeks, most think HY is now cheap but until there is consistency of inflows there is little incentive or ability to be too aggressive expressing that view.
Just going back to wrap up the US data yesterday, jobless claims rose 12k to 290k which was a touch higher than expectations of 280k. This has pushed the 4 week average up to 285k although we note that this still remains at historically low levels. Treasuries meanwhile were stronger, with the 10yr 4bps tighter over the day whilst credit markets largely reflected equity moves and closed flat.
Closer to home the Stoxx 600 closed +0.2% at the end of play, although traded as high as +0.6% and as low as -0.4% over the session as market sentiment fluctuated over tumbling oil prices and selected solid corporate earnings prints.
The various CPI readings in the region did little to excite the market and continue to paint a subdued inflationary environment. Germany printed in line with expectations (-0.3% mom, +0.8% yoy) along with Spain (+0.5% mom, -0.1% yoy) whilst France was the marginal positive with the country reporting flat mom reading (vs. -0.1% expected) and a better than expected +0.5% yoy (vs. +0.4% expected). More importantly perhaps was the ECB’s Coeure who touched on the topic of inflation and was quoted as saying that ‘what we see is a subdued outlook for inflation and a weakening of the growth momentum and a continuously sluggish momentum in credit dynamics, which all confirm the need for a very accommodative monetary stance for an extended period of time’. If that wasn’t enough Reuters also published a report noting that 61 professional forecasters surveyed by the ECB expect eurozone inflation of 1% next year and 1.4% in 2016 (down from 1.2% and 1.5%). Today we have the second part of the European data double header with the regional Q3 GDP prints including Germany, France and Italy as well as the wider Eurozone estimate.
Just wrapping up the news in and around Europe yesterday, Russia posted a +0.7% yoy GDP figure, above expectations of +0.3% although down on the previous reading (+0.8%). This comes after the Bank of Russia has forecasted growth of +0.3% this year before stagnating in 2015 with concerns over both geo-political tension with Ukraine and lower oil prices. The MICEX closed down 1.42% yesterday whilst the ruble extended declines, losing 2.1% versus the Dollar.
Before we take a look at the rest of the day ahead, late last night we had some headlines out of Asia with the Asian Review reporting that Japan Prime Minister Abe is moving a step closer to postponing the consumption tax. The article quotes a senior government official who was reported as saying that Abe is ‘basically moving toward putting off’ raising the tax from 8% to 10%, with a decision to be made as early as next week. It will certainly be interesting to keep an eye on proceedings next week in Japan, with preliminary Q3 GDP due late on Sunday (London time) as well as Abe hosting further meetings with mayors and business leaders early in the week. With the potential for a decision around dissolving the lower house to be made next week too, it could certainly be an eventful week for the region and one we will be keeping a keen eye on. As we type the Nikkei is -0.2% on the day whilst JPY is 0.2% weaker versus the Dollar to 115.98 on the back of the comments. Elsewhere other Asian markets are generally mixed with bourses in Hong Kong, China and Korea +0.1%, -0.2% and -0.9% respectively.
In terms of the rest of the day ahead and away from the GDP prints in Europe, we’ve also got the HICP print for the region which we don’t expect to be too far away from the market consensus of 0.4% yoy for the headline figure after yesterday’s regional prints. As well as this we’ve got ECB members Lautenschlaeger and Coeure scheduled to speak at stages during the day and closer to home we’re expecting UK construction output. Later in the day and across the pond, we’ve got a relatively packed data docket which kicks off with retail sales. DB’s Joe LaVorgna mentions that the print will be especially important to gauge the current state of consumption in the region. Joe highlights that although retail sales only account for around one-quarter of total consumer spending, the data are highly correlated with overall consumption and in point of fact, the quarterly annualized change in retail control has a nearly 0.80 correlation coefficient to overall inflation-adjusted spending. Our colleagues have a +0.4% forecast for the ex. auto and gas print which is notably firmer than the headline and ex. autos figure which they’re expecting to be flat. Post this reading we will also be awaiting the import price index print followed by Michigan confidence and business inventories shortly after. If that wasn’t enough we will also have the usual Fedspeak with Bullard (speaking on the US economic and monetary policy outlook), Fischer and Powell due today.
