Overnight Sentiment: Quiet Ahead Of Payrolls

The market is so focused on this morning's BLS number it has completely ignored the latest round of Reuters "news" (after their last two market-testing, unsourced "exclusives" about European developments were roundly refuted nobody can blame it) on how the OMT will proceed once operational (assuming of course Spain ever requests an activation of the mechanism that has allowed it to consider not requesting it). So, on to the thing of importance via BBG: expectations is for a NFP print of 115,000 and an unemployment rate of 8.2%. Any major surprises to either side will likely be risk negative. The unemployment rate has held above 8% level for 43 consecutive months; U.S. labor force participation rate last month declined to 63.5%, lowest since Sept. 1981. Back to Europe, a possible bailout for Spain is not imminent, a European Union official said, as concerns grow over the country’s ability to reach its deficit-reduction targets. The German recession accelerates as factory orders fell 1.3% in August, more than forecast. Switzerland’s foreign-currency reserves rose to a record 429.3 billion francs at the end of September from 420.8 billion francs at the end of August.Around the world: the Bank of Japan held off from more easing after adding to stimulus last month; shoppers from China’s mainland curbed spending at Hong Kong luxury stores during the Golden Week holiday.

BofAML Corporate Master Index narrows to new YTD tight 164bps as $7.33b prices; Markit IG at 95bps, YTD low 83bps. High Yield Master II at 562bps as $2.04b prices; Markit HY at 486bps; YTD low 445bps. EUR/USD little changed at $1.3012. Spanish and Italian bond yields decline, peripheral spreads mixed. Crude gains. European stocks, U.S. equity-index futures gain modestly.

Of all the data above, perhaps the most important one, and least appreciated, is the continued deterioration of the German economy (we already discussed the dramatic collapse of France in recent months) as an indication of the profound risk to the Euro core as the crisis drags on.

From Bloomberg:

German factory orders fell 1.3 percent in August, reflecting weakening immunity to the debt crisis. Car sales fell 11 percent in September, according to the Federal Motor Transport Authority. The IMF will cut its German GDP forecasts for this year and 2013 to 0.9 percent, Handelsblatt reported yesterday citing government sources.

More details on the Reuters story about how the OMT will operate once activated:

Until now, the details of how the ECB plans to conduct the bond-buying programme unveiled last month by President Mario Draghi have been murky.


Economists have questioned what the bank's exit strategy might be, or in other words how it would put a stop to "Outright Monetary Transactions" once it had begun to buy the sovereign debt of struggling euro zone countries.


The answer appears to be that the ECB would suspend its purchases on a regular basis for a period that could last up to a month or more.


During that time, inspectors from the EU or "troika" - the ECB, European Commission and International Monetary Fund - would assess whether a country is meeting the conditions of its aid programme. An aid programme is a prerequisite for the ECB to intervene in the secondary bond markets.


Once a country agreed a rescue package with its EU partners, the ECB would open a buying window of "one to two months", one of the sources said.


"After that period the ECB will stop buying and there will be an assessment phase. After that assessment it will be decided if the ECB buys more or stops," the source added. "We will go in the market heavily during the time the window is open."


A second source confirmed the procedure. Multiple officials said the Bundesbank, which opposes Draghi's OMT programme, would still participate in the bond-buying, which would be conducted by national central banks based on their share of ECB capital.


The ECB declined to comment, as did the Bundesbank.

So many "anonymous sources", so little time to gauge the EURUSD response as one after another harebrained plan pops into Eurocrats minds, only to be shelved and resurrected one year later as "brand new."

For everything else, we go to DB's Jim Reid:

Recapping some of yesterday’s other market moves, it was a strong day for Brent as a +4.08% move helped it recover all of its previous day’s losses. Tensions between Syria and Turkey perhaps drove some of the move, though the Turkish deputy PM said yesterday that Syria had apologised for the mortar strikes of the previous day. 2yr Turkish benchmark bond yields rose 18bps yesterday while the Lira weakened the most in two months. Elsewhere the region also saw a worsening of the currency crisis in Iran accompanied by further riots as widely reported by the press.

According to the WSJ, the US and EU are working on new coordinated measures intended to accelerate the recent plunge of the Iranian Rial and drain its FX reserves. The WSJ also suggested that the US and EU are also considering a de factor trade embargo early next year. The Rial has dropped nearly 40% against the USD since 24th September and a Bloomberg article also noted that Chicken prices in Iran have doubled over the past year!

While on the topic of inflation, Gold had another positive day (+0.7%) on the back of the Fed minutes. The precious metal is now only about 5% below the August 2011’s all-time highs. Platinum (+1.9% yesterday) is now up 25% since the August lows as mines in South Africa continue to struggle with labour unrest.

Back to Europe there was no lacking of Spanish headlines yesterday. Spanish 10yr bond yields finished the day 9bp higher despite a decent Spanish auction. Spain’s economy minister yesterday said that "there is a little bit of misunderstanding--Spain doesn't need a bailout at all". This proved to be a bit of a mood dampener. Touching on an earlier theme the Head of Spain's central bank, yesterday told a parliamentary budget committee that the Spanish government's 2013 budget was based on "over-rosy" forecasts for economic growth and tax revenue. He added that the government should consider further steps this year to meet next year's deficit target of 4.5% of GDP. On a more positive note, de Guindos added that the conditionality which may be imposed by the troika is "not going to be very far to the situation we have now in Spain". Schauble offered some encouraging words saying that that though they are not in a programme “what Spain and Italy have achieved is grand”. A Reuters report yesterday suggested that EU leaders are considering allowing the ESM to provide insurance for investors who buy government bonds by guaranteeing the first 20 to 30% of losses. Sounds vaguely familiar to us. Such a scheme has been flagged before and has always struggled to get off the ground.

Overnight markets are broadly firmer with the Hang Seng and ASX200 adding 0.4% and 0.8% respectively. The Nikkei is lagging the rest (-0.1%) though probably not helped by BoJ’s decision to hold off from further easing despite increasing political pressure. This was a largely expected outcome though according to Bloomberg polls. Asian credit continues to grind tighter and is set to finish the week on a firmer tone.

Moving on to the day ahead, we have a relatively light day in terms of European data. German factory orders and Spanish IP are perhaps the main prints. Rajoy, Hollande and Monti will attend the Mediterranean Summit in Malta today and the trio will probably bring up the topic of Spanish aid when they gather on the sidelines (5pm London time). However before this, all eyes will be on payrolls!