Bored Markets Looks To ECB Announcement For Some Excitement

The main macro event today will be the interest rate announcement by the ECB due out at 7:45 am (with the Bank of England reporting earlier on its rate and QE plan, both of which remained unchanged as expected, which will remain the case until Carney comes on board) which is expected to be a continuation of the policy, with no rate cut despite some clamoring by pundits that Draghi should cut rates even more. Overnight, we got Chinese December trade (better than expected) and loan (slightly worse than expected) data, coming in precisely as a country which has a new communist politburo leadership implied they would. Of particular note was that the US has now replaced the EU as the largest Chinese export market: what happens when the euro weakens even further? But at least the net benefit to European GDP as a result of declining imports will, paradoxically, help. Elsewhere, Spain auctioned off more than than the expected €4-5 billion in its first 2013 auctions of 2015, 2018 and 2026 bonds, sending the 10 year SPGB yield to under 5%, or the lowest since 2010, a process driven by expectations of a Spanish bailout. Thus the incredible odyssey of Schrodinger Spain continues, whose interest rates are improving on hopes it is insolvent. Fundamentally, things got better nowhere, with Greek unemployment rising to 26.8% in October from 26.0% previously, while bad loans in Italy soared by 16.7% Y/Y to €121.8 billion, while loans to businesses dropped at the fastest pace ever. And so the scramble to offset the trade and economic collapse of Europe using central bank tools continues.

Looking at today’s calendar, the main focus will be on the ECB meeting which will be followed by Draghi’s press conference at 8:30 am. Consensus expectations are for no changes in policy from either central banks. Draghi's press conference will make for interesting viewing following his statement last month that rate cuts were "discussed". On the data front, French IP and CPI for November are scheduled. In the US, weekly jobless claims and wholesale inventories will be the main highlights;  The Fed’s Esther George and James Bullard will be speaking at separate events today. The US will also reopen its 30 year, $300 million of which were prebought by the Fed yesterday.

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Markets continued to edge up yesterday, helped by the upbeat global outlook from Alcoa the night before. This morning the latest trade numbers from China are likely to provide further short-term fuel for markets. The largest surprise was on the exports side, which increased 14.1%yoy in December (vs 5% expected) and is the highest yoy increase since May 2012 before the 3Q12 slowdown. In the detail, exports to the US rose 8.5% in 2012 while shipments to the EU fell 6.2%. Notably, the US has now replaced the EU as the largest Chinese export market. In terms of products, motor vehicle exports were amongst the best performers, rising 20% in 2012. Imports also surprised to the upside, rising 6%yoy (vs 3.5% expected) and the trade surplus widened to $31.6bn (vs $20bn expected and $19.6bn the previous month). Imports from the US gained 8.8% while those from the EU rose only 0.4%. A spokesperson for the China's Customs department said that while it was hard to quantify the loss in trade from the island dispute with Japan, exports show signs of “warming up” in Q1.

The overnight market reaction to the data has been positive with most major equity indices moving firmly into positive territory following China’s trade numbers. Gains are being paced by the Hang Seng (+0.9%), Nikkei (0.75%) and Shanghai Composite (+0.55%) with financials and resources stocks outperforming. The Australian dollar is trading 0.34% firmer against the USD after rallying 40 ticks post-trade numbers. On the fixed income side, 10yr USTs have sold off 2bp in Asian trading while the benchmark Australian IG index is 1bp tighter as we type.

Outside of the trade data, China also released its latest bank lending numbers which made for slightly less impressive reading. New loans of RMB454bn were made in December vs RMB550bn expected and RMB523bn in November. Over in Japan, the JPY is poised to close weaker for the second consecutive day against the USD following a report in the Asahi that the BoJ is weighing further easing at its next meeting, echoing a similar report from Reuters yesterday. The Asahi added that BoJ officials are considering buying assets on  an “unlimited basis”. With the focus on Japanese markets, including the Nikkei which has risen 23% since snap elections were called by PM Abe in November, the WSJ reminded its readers that there have been a number of false dawns in the past two decades. This includes the 34% rally in the Nikkei in 1990, 50% rally in 1992, 55% in 1995, 62% in 1998 and 140% from 2003 to 2007. Nevertheless even if this latest policy change doesn't amount to much, markets could still go considerable higher before being disappointed.

Recapping yesterday’s price action, the S&P500 (+0.27%) started the US earnings season on a positive note, managing to halt a two-day slide as markets took comfort from Alcoa’s relatively upbeat 2013 guidance. Interestingly though, Alcoa itself finished the day down 0.22%. 10yr UST rallied 1.5bp on the day to close at 1.853%, despite a small 2bp selloff following weaker demand for the  treasury's 0yr note auction. The VIX (+1.4%) made a new post-financial crisis low at the open of 13.22 yesterday, which was the lowest level since January 6th 2007.

Over in the US, reports suggest that President Obama is set to formally nominate White House Chief of Staff Jack Lew as his next Treasury secretary today. Lew previously served as Obama's budget director and a senior State Department official. He also was budget director during the Clinton administration and has been negotiating bipartisan compromises over taxes and spending since the 1980s, when he was a top aide to then-House Speaker Thomas O'Neill Jr. Lew will replace Tim Geithner who will likely step down by the end of the month. (Washington Post).

Staying on the political theme, the FT wrote that support for Merkel’s conservative Christian Democrat bloc is at a “record high” just nine months out from the next election, at the expense of both Merkel’s political opponents and allies. Latest opinion polls indicate that  the CDU/CSU enjoys 42% support, which is 17ppt clear of the Social Democratic party (25%) and FDP (just 2%).

In other interesting headlines, US oil production exceeded 7m barrels per day for the first time in 20 years according to data from the US Energy department. The US met 83% of its energy needs in the first nine months of 2012, which is on pace to be highest annual rate since 1991 (Bloomberg).

Before we preview the usual day ahead, we wanted to highlight that the UK National Statistician will today announce her decision on whether there should be changes in how the Retail Price Index is calculated. This series is used to calculate coupons on UK linkers. DB’s Markus Heider thinks that the National Statistician will choose to stop using the “Carli formula” for price items that use it. This would effectively reduce the RPI’s premium to CPI to a minimum, with resulting downside risk to GBP breakeven markets which have not fully priced in the potential change. Is this another form of financial repression?


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