If yesterday morning, the key macro data was the current , and projected, weakness in China (whose record jump in FX deposits indicates fears about capital outflows are alive and well, and that the highest currency depreciation risk in 2015 is for none other than the Chinese currency), then overnight we got more economic data out of Europe that, at least for now, suggest that the collapse in the Euro is boosting European factory order, with German Industrial Production not only beating expectations, but the prior month being revised from 0.1% to 1.0% - the fifth consecutive increase in production. Spain promptly met that "beat and raise", when it also reported a better than expected 0.4% (est -0.3%) with December revised higher to 0.0%. All of which was to be expected - as we noted yesterday, the main reason for transitory European strength in a zero-sum world, is the soaring USD and the collapsing, recession-level US factory orders [36].
[37]
The question stands: how much longer will the Fed allow the ECB to export its recession to the US on the back of the soaring dollar, and how much longer will the market be deluded that "decoupling" is still possible despite a dramatic bout of weakness in recent US data. Look for the answer in today's BLS report, which - if the Fed is getting secound thoughts about its rate hike strategy in just 3 months - has to print well below 200,000 to send a very important message to the market about just how much weaker the US economy is than generally perceived.
For now, however, the ECB is getting its way, and the question of just how much European QE is priced in, remains open, with peripheral bond yields dropping to new all time lows for yet another day, while the EURUSD has plunged to fresh 11 year lows, sliding below 1.094, and making every US corporation with European operations scream in terror.
Looking at markets, US equities are just barely in the red, coiled to move either way when the seasonally-adjusted jobs data hits. it has been very quiet ahead of non-farm payrolls in core fixed income and equity markets, however peripheral curves have been bull flattening throughout the European session, with record low yields for Spanish, Portuguese, Italian and Irish 10y, while the German 10/30s curve resides at its flattest level since June 2012. Meanwhile, the EUR 5Y/5Y forward breakeven rate rose to a year high this morning, at 1.798%.
Elsewhere equity markets have traded sideways (EUROSTOXX 50: -0.03%), with many market participants looking ahead to the key event of the day, US non-farm payrolls scheduled at 1330GMT/0730CST (Exp. 235k). According to the latest Fed stress tests, all 31 US banks passed after exceeding minimum requirements, for the first time since the tests began in 2009. However, Goldman Sachs (GS), Morgan Stanley (MS) and JP Morgan (JPM) were among the five banks with the lowest readings for a capital ratio of at least 5%.
FX markets are still seeing repercussions from yesterday’s ECB press conference with EUR/USD breaking back below the 1.1000 handle and yesterday’s low of 1.0988 to reside around its lowest level since 2003, with a large option at 1.1000 (USD 2bln) set to roll off at the 10am NY cut. Elsewhere, there are large options in USD/JPY at 120.00 (USD 2.2bln) and 120.50 (USD 1.1bln) also set to expire at the 10am NY cut. GBP/USD fell to a four week low this morning in sympathy with the EUR as well as on the back of the BoE surveyed inflation forecast for the next 12 months (1.9%, Prev. 2.5%), the lowest since 2001.
The EUR weakness sees the USD-index continue to print fresh 11 and a half year highs and is set for its best weekly performance in over a month. While during Asian hours, AUD/USD broke above the 0.7800 handle after erasing almost all of yesterday’s losses, as AUD/NZD extended yesterday’s 1% gain.
As well as the non-farm payroll report, which may be slightly delayed today due to poor weather conditions in Washington DC, today also sees comments out of Fed’s Fisher (Non-Voter, Hawk) at 1830GMT/1230CST, with Fed's Williams (Voter, Dove) stating overnight that by mid-year, the Fed should seriously discuss hiking rates and that it is safer to increase rates early and gradually than waiting and having to hike rates sharply.
The greenback’s 11 and a half year highs have weighed on the precious metals market, with gold and silver both in negative territory during the European session, while in base metals iron ore fell below USD 60/tonne during Asia hours to a 6yr low. In the energy complex, WTI crude futures trade relatively flat heading into the NYMEX open amid no major fundamental news and are on course for their first weekly gain in 3-weeks.
Today’s focus will of course be on the payroll report for February. The market is looking for a +235k print which is down from +257k in January. Indicatively everyone's favorite weatherman, DB's Joe LaVorgna, expected +250k forecast. According to Joe although inclement weather over the past month, which has coincided with unseasonably cold temperatures, may have been a factor weighing on economic activity the last few weeks, February nonfarm payrolls may have dodged most of the worst of the recent weather disruptions given that jobless claims plunged during the February employment survey week. Jobless claims for the period at 282k were 27k lower than the January payrolls survey period. As a reminder Goldman also warned that due to snow, the NFP number is likely to be weaker although "snowstorms" may push wage data higher.
In summary: European shares remain mixed, though off intraday lows, with the insurance and travel & leisure sectors outperforming and telcos, real estate underperforming. German Jan. industry output above estimates. Euro drops to lowest since 2003 against dollar. The Swiss and Italian markets are the best-performing larger bourses, U.K. the worst. The euro is weaker against the dollar. Portuguese 10yr bond yields fall; Irish yields decline. Commodities gain, with silver, copper underperforming and Brent crude outperforming. U.S. trade balance, consumer credit, nonfarm payrolls, unemployment, average earnings, labor force participation, due later.
Market Wrap
- S&P 500 futures little changed at 2099
- Stoxx 600 up 0.2% to 394.6
- US 10Yr yield up 0bps to 2.12%
- German 10Yr yield little changed at 0.35%
- MSCI Asia Pacific up 0.7% to 146.2
- Gold spot down 0.1% to $1196.9/oz
- Eurostoxx 50 -0%, FTSE 100 -0.2%, CAC 40 +0%, DAX +0%, IBEX, -0.1%, FTSEMIB +0.4%, SMI +0.7%
- Asian stocks rise with the Nikkei outperforming and the Shanghai Composite underperforming.
- MSCI Asia Pacific up 0.7% to 146.2
- Nikkei 225 up 1.2%, Hang Seng down 0.1%, Kospi up 0.7%, Shanghai Composite down 0.2%, ASX down 0.1%, Sensex up 0.2%
- Euro down 0.53% to $1.0971
- Dollar Index up 0.32% to 96.69
- Italian 10Yr yield down 3bps to 1.27%
- Spanish 10Yr yield down 4bps to 1.24%
- French 10Yr yield down 1bps to 0.64%
- S&P GSCI Index up 0.3% to 415.9
- Brent Futures up 0.6% to $60.8/bbl, WTI Futures up 0.1% to $50.8/bbl
- LME 3m Copper down 0.7% to $5796/MT
- LME 3m Nickel little changed at $14205/MT
- Wheat futures down 0.1% to 480.3 USd/bu
Bulletin Headline Summary from Bloomberg and RanSquawk
- Spanish, Portuguese, Italian and Irish 10y print record low yields, while the German 10/30s curve resides at its flattest level since June 2012.
- EUR/USD has broken back below the 1.1000 handle and yesterday’s low of 1.0988 to its lowest level since 2003 with GBP/USD falling to a four week low alongside a strong USD.
- Looking ahead, US non-farm payrolls is scheduled at 1330GMT/0730CST (Exp. 235k) with Fed’s Fisher due to speak at 1830GMT/1230CST
- Treasuries steady, 10Y yields 2.115%, before report expected to show U.S. economy added 235k jobs in February while unemployment rate declined to 5.6% from 5.7%.
- Economic data reports in the U.S., including the the payrolls report, will probably be released with small delays as inclement weather delays the opening of government agencies
- Goldman sees winter weather restraining Feb. payroll growth; manufacturing surveys also signaled employment weakness
- The Fed said all 31 big banks subjected to a stress test have sufficient capital to absorb losses during a sharp and prolonged economic downturn
- ECB’s flexible approach to buying EU1.1t of euro-area bonds risks making the process more opaque for investors as the area’s 19 national central banks will have discretion over what they buy and when, in contrast to Fed, which issued a calendar
- U.K. consumers’ inflation expectations fell to the lowest in more than 13 years last month after a drop in oil costs dragged down consumer-price growth
- German industrial production rose 0.6% in January, higher than forecast
- China cut pay for top executives at its biggest banks and some other state-owned companies as part of efforts to combat inequality, said people with knowledge of the matter
- Sovereign 10Y yields mostly lower. Asian stocks gain, European stocks mixed, U.S. equity-index futures decline. Crude steady, gold and copper decline
US Event Calendar
- 8:30am: Change in Nonfarm Payrolls, Feb., est. 235k (prior 257k)
- Change in Private Payrolls, Feb., est. 225k (prior 267k)
- Change in Mfg Payrolls, Feb., est. 10k (prior 22k)
- Unemployment Rate, Feb., est. 5.6% (prior 5.7%)
- Avg Hourly Earnings m/m, Feb., est. 0.2% (prior 0.5%)
- Avg Hourly Earnings y/y, Feb., est. 2.1% (prior 2.2%)
- Avg Weekly Hours All Employees, Feb., est. 34.6 (prior 34.6)
- Underemployment Rate, Feb. (prior 11.3%)
- Change in Household Employment, Feb. (prior 759k)
- Labor Force Participation Rate, Feb. (prior 62.9%)
- 8:30am: Trade Balance, Jan., est. -$41.5b (prior -$46.6b)
- 3:00pm: Consumer Credit, Jan., est. $14.5b (prior $14.755b) Central Banks
- 1:30pm: Fed’s Fisher speaks in Dallas
DB's Jim Reid as is customary completes the balance of overnight events
A confident, yield curve flattening, high beta enhancing Draghi. More European risk out-performance but offset by a weaker FX. A payrolls preview with lots at stake. A big optical change in Euro credit spreads given index changes at the end of last month, a preview of our latest HY monthly and thoughts on the UK where yesterday the BoE saw its 6th year anniversary of cutting rates to a now 321-year low. All this and a landmark day yesterday in my year. After 5 weeks and 5 days my knee brace was allowed off. My MCL is well on the road to being healed. Now starts 3 and a half weeks of physio before I can have surgery reconstructing my ACL and then back to another 6 month rehab-ing. My wife said to me that my best feature used to be my thighs, especially given all the cycling. After 5 and a half weeks of wastage she now thinks they're my worst. They now wobble, look feeble, are weak and go alongside a right knee can only bend very slightly after all that time in a brace. So the hard work starts today.
From listening to Mr Draghi yesterday it seems he feels the hard work is over before they've even started QE. We learnt that they will start the program on Monday and that the ECB president was in confident mood at the meeting yesterday both on growth prospects and the likely success and functionality of the QE program. Surprisingly there was a bit of market nervousness going into the meeting concerning how committed they are to QE but the council appeared fully behind the plans they announced in late January.
In terms of the technicalities, the headline that caught the eye was that ‘purchases of nominal marketable debt instruments at a negative yield to maturity are permissible as long as the yield is above the deposit facility rate’, which is currently -0.20%. This should promote flatteners as the ECB bias purchases further out the curve. It also appears that there may be some flexibility for NCB’s should purchases of govvies and agencies in their respective jurisdiction prove insufficient by making ‘substitute purchases’ instead. Our European Economics team noted that substitutes could include international/supranational institutions in the euro area or, in exceptional circumstances, the market debt instruments of ‘public non-financial corporations’ within the jurisdiction in question. The 25% issue limit meanwhile will apply for the first six months, after which it will be subsequently reviewed by the Council.
With respect to Greece, the waiver on Greek collateral was not-reintroduced with the ECB continuing to play hardball. Our colleagues noted that with respect to the current funding situation, after yesterday it appears that financing T-Bills under ELA is not an option for Greece. Instead the focus will now be on the Eurogroup meeting where by an early disbursement of funds from the EU/IMF programme may be the main hope for Greece, however this will clearly depend on Greece’s incentive to agree to the correct conditions for any disbursement.
ECB President Draghi also presented the staff forecast for HICP inflation of 1.8% in 2017 which is slightly higher than DB's forecasts. To be fair this was never going to be sub 1.5% or much more than 2% as it would indicate that their policies now aren't appropriate. So it’s a bit of a meaningless forecast at this stage but an interesting one to track. On growth, the staff forecast are for real GDP to expand by 1.5%, 1.9% and 2.1% in 2015, 2016 and 2017 respectively. The upgraded forecasts are cumulatively 1.2pp more than the Bloomberg consensus number.
Sentiment was clearly better following the headlines. Equities in Europe closed firmer with the Stoxx 600 +0.81% higher and now just a shade off the all-time highs of 15 years ago. The DAX (+1.00%) and CAC (+0.94%) also closed higher, the former in particular extending all time highs. The better sentiment didn’t appear to help markets in the US however where bourses closed relatively subdued. The S&P 500 (+0.12%) closed a touch higher with the market appearing to be in hold mode ahead of payrolls today. However, with a 0.43% depreciation for the Euro versus the Dollar to $1.103 yesterday, this explains some of the differential. In fact, over the last two days, in USD terms the Stoxx 600 has returned -0.10% and the S&P 500 is -0.32%.
The better tone in Europe wasn’t just constrained to equity markets yesterday. Credit too had a firmer day as Crossover tightened 11bps. Meanwhile, supported by the news of the ECB buying bonds down to -0.2% yields, there was a strong bid for government bonds. The Bund curve flattened in particular as 2y and 5y notes tightened 0.1bps and 2.7bps respectively whilst 10y and 30y yields dropped 3.5bps and 8.8bps. 2y Bunds were in fact one of the underperformers on the day across Europe which was unsurprising given they already trade below the -0.2% cut off for the ECB (at -0.209%). Peripherals also benefited with 10y yields in Spain (-7.9bps), Portugal (-9.2bps) and Italy (-8.6bps) all tightening – the latter two in particular closing at fresh all-time lows in yield.
Also late yesterday we had the results of the Fed stress tests which showed the 31 largest banks meeting the necessary capital requirements under various hypothetical scenarios. It was in fact the first time since tests started in 2009 that all participating banks passed. The banks will now face a second round on Wednesday which will test the strength of a bank in returning money to shareholders. The WSJ reported that two banks in particular, Goldman Sachs and Zions Bancorp, had ratios close to the Fed’s minimum level which could well limit shareholder payouts.
Staying in the US, today’s focus will of course be on the payroll report for February. The market is looking for a +235k print which is down from +257k in January. Our US colleagues have a slightly more bullish +250k forecast. They argue that although inclement weather over the past month, which has coincided with unseasonably cold temperatures, may have been a factor weighing on economic activity the last few weeks, February nonfarm payrolls may have dodged most of the worst of the recent weather disruptions given that jobless claims plunged during the February employment survey week. Jobless claims for the period at 282k were 27k lower than the January payrolls survey period. They note that the four-week moving average for the February survey week was lower as well (283k vs. 307k in January) and in fact the third lowest for a payroll survey week since going back to April 2000.
Yesterday’s more subdued performance in the US appeared to be as a result of slightly softer macro data and also a decline in oil stocks. On the latter, the energy component (-0.62%) was the notable underperformer following a decline for WTI (-1.49%) and Brent (-0.12%). In terms of data, it was the jobless claims print which caught the eye with the 320k print well ahead of the 295k expected. The reading was in the fact the highest in nine months although it’s likely that the recent bad weather played its part. Elsewhere, factory orders (-0.2% mom vs. +0.2% expected) for January were softer than expected although both unit labour costs (+4.1% vs. +3.3% expected) and nonfarm productivity (-2.2% vs. -2.3% expected) surprised modestly to the upside.
Away from yesterday’s price action and looking more closely at credit markets we quickly wanted to highlight the impact on the EUR cash indices of the recent rating downgrades for both Gazprom and Petrobras, which have seen their bonds exit the iBoxx IG indices and join the HY indices. In total €6.75bn (notional outstanding) of Gazprom bonds and €6.9bn (notional outstanding) of Petrobras bonds have transitioned. Having been in the top 30 of issuers in the IG index they are now the 3rd and 4th biggest issuer in the HY index. But perhaps of more interest is what this has meant for index spread levels. First of all the impact on IG. The overall corporate index is now 6bps tighter as a result while the non-financial index has tightened by 9bps. However the most notable move comes in BBB non-financials where spreads are now nearly 20bps tighter. The addition of these names to the HY index has obviously seen indices widen, particularly the BB non-financial index, which is more than 30bps wider post the addition, while overall non-financial are around 20bps wider. Clearly all this is only optical but it’s a nightmare for us strategists as when we use spread charts we're now clearly not looking at a consistent series. Woe is us.
Staying with credit, yesterday we published our latest HY monthly where we revisit our EUR vs. USD HY cross currency analysis. At a broad index level USD BBs appear to offer more yield and spread than EUR BBs while for single-Bs yields are at broadly similar levels while EUR single-B spreads still offer reasonable upside. These trends are also broadly present when we look at the analysis at a more micro bond level. So higher rated bonds spreads look more attractive in USD than EUR but as we move down the credit spectrum the EUR bonds offer the wider spreads. Therefore it’s difficult to come up with a definitive conclusion and any investment decision may actually be driven by factors other than simply relative valuations with implications of divergent monetary policy and the energy sector likely to play an important role.
Back to monetary policy, outside of the ECB, the BoE kept rates unchanged yesterday as was of course expected on what was the 6th anniversary of them cutting rates to 0.5%. In today's EMR we repeat a well used graph of ours showing the UK base rate back to 1694 - the longest series for any global base rate. Prior to this current period, the lowest rates were hit was 2%. So it’s easy to forget in these days of negative yields just how unusual the whole interest rate situation is. There is no historical context for what has been seen in recent years. Interestingly in a conversation with George Buckley yesterday, he reminded me that at the start of this 6 year period the BoE suggested that rates couldn't go lower than 0.5%. With the release of the last minutes they seemed to have changed their mind and left the door open for lower rates if the need arises. Just by doing nothing the BoE has gone from a low yielding early mover 6 years ago to now being a higher yielder in Europe. Interesting times.
Quickly refreshing our screens this morning, Asian bourses are generally firmer ahead of today’s data. The Nikkei (+1.03%), Shanghai Comp (+0.09%), Hang Sang (+0.06%) and Kospi (+0.68%) are all higher.
In terms of the day ahead, focus will of course be on payrolls this afternoon however before that we get more details on the Q4 GDP print for the Euro-area (market expecting +0.9% yoy) as well as industrial production out of Germany and trade data for France. Along with payrolls in the US, we get the usual associated employment indicators including unemployment, hourly earnings and the labour force participation rate. Consumer credit rounds off the calendar.
