"Better Than Expected" European Data Sends Implied Dow Jones Open To All Time High

If Friday and yesterday it was Europe's reporting of ugly and below expectation economic data that pushed US stock futures ultimately higher, today it will be Europe's modest economic data beats that will send futures, where else, higher, and result in the Dow Jones breaking its nominal all time highs at the open or shortly thereafter. Following the Chinese economic update in its State of the Union address, which as we reported earlier, saw China set more moderate growth targets for itself resulting in the SHCOMP nearly wiping out Monday's losses, it was Europe's turn to shine which it did following the report of various Service PMI, which unlike last week's horrible manufacturing PMI data, were better than expected with the natural exception of Spain which printed at 44.7, well below the January 47.0, the first drop since September driven by the sharpest job losses since March of 2009, and Italy which dropped from 43.9 to 43.6, same as expected. The core countries' Services PMI beat: France coming at 43.7, on expectation of an unchanged print from last month's 42.7, and Germany printing at 54.7 vs also an expectation of an unchanged 54.1.

The blended Eurozone Services PMI therefore printed at a combined 47.9, up from the previous print 47.3, which was expected to not change in February, sending the EURUSD briefly to its overnight highs.

The UK Services PMI was also an upside surprise, coming at 51.8 on expectations of drop from 51.5 to 51.0, and offsetting some of the recently horrible economic data out of the UK. More good news came when the January retail sales data was reported, which printed at 1.2% on expectations of a 0.3% rise from a -0.8% drop.

Not very surprisingly, however, it was not the EURUSD which benefited the most from this data, which has lost nearly 50 pips from its overnight highs following the better economic news, but the various equity futures which have one centrally-planned goal: to take out all time DJIA highs or else, and unless something changes in the next three hours, precisely this will happen.

Quick recap of European markets currently:


  • Spanish 10Y yield down 3bps to 5.07%
  • Italian 10Y yield down 11bps to 4.77%
  • U.K. 10Y yield up 5bps to 1.95%
  • German 10Y yield up 3bps to 1.44%
  • Bund future down 0.21% to 145.2
  • BTP future up 0.67% to 109.22
  • Euro +0.04% to $1.3032
  • Dollar Index down 0.08% to 82.13
  • Sterling spot up 0.28% to $1.5158
  • 1Y euro cross currency basis swap up 2bps to -22bps
  • Stoxx 600 up 1.2% to 292.36

SocGen summarizes the important data for macro traders, such as central bankers:

Core markets pretty much took the turbulence in Asia in their stride yesterday and in truth there is no reason why legislation in China to cool the property market should have severe knock-on effects on the attitude of Western markets vis-a-vis risk. If the law helps to bring back and establish longer-term stability in hot Chinese real estate, then this should minimise the sudden flight to quality. Having said that, the decline in the services ISM suggests a cooling in the pace of activity since the leadership transition coincided with a burst in confidence last November. Although it does not explain the 5.2% correction in commodity price indices like the CRBY, it does help to justify it. The decline has been Fed and USD led and until yesterday showed no immediate sign of abating. This has dragged AUD/USD to eight-month lows, and even the RBA's decision not to cut the cash rate overnight may not guarantee that fresh lows could be plumbed in the days and weeks to come. It boils down to the quality of incoming US macro data and rate spreads. On the same topic, how Italy and BTP yields and hence spreads over Bunds are keeping euro markets in their tight grip is evident from correlations between various securities and the 2y or 10y BTP yields/ EUR/USD and 10y EU swaps currently stands at -0.90. The interesting part is that the correlation with equities, ie the Stoxx 600 index, has totally broken down. Running at -0.8 a week prior to election day, it has collapsed from -0.6 on the 26 February to -0.04 yesterday. In other words, equities are making their moves independently of what's happening in Italy.

DB's Jim Reid completes the overnight recap:

Markets seem to be at different temperatures at the moment depending on where you place the thermometer around the world. Italy is in danger of being stuck in an arctic winter with the FTSEMIB down another 0.85% yesterday and now 13% below its recent peak. At the other end of the spectrum, summer is being experienced in the US market. The S&P 500 closed up +0.46% last night and is now only 3% off its all time peak (The Dow is within 37 points). Elsewhere there's a hint of autumn in the air in China following Monday's 3.65% declines on headlines about property tightening measures. Indeed just to highlight the magnitude of the decline yesterday, the Shanghai Composite Property index finished the day around 9.2% lower which is the worst single day performance since June 2008. Finally one would have to say that Japanese markets are resembling spring with the Nikkei 40% now above its 2012 lows.

Looking at yesterday’s price action in more detail, equity markets in Europe and the US once again opened weaker before spending the rest of the session making up lost ground. Monday’s sell-off in Chinese equities probably explained the early weakness – and from there the S&P 500 managed to rally +0.86% from the lows. Data and newsflow was on the thin side and S&P 500 volumes were the lowest in three weeks. Interestingly, Apple suffered another fall with the stock down 2.42% yesterday to hit a 52-week low. The share price is now about 40% below the peak in September last year. In stark contrast to Apple, Google hit an all-time high yesterday, with the FT saying that it perhaps reflects a shift in perception of the two tech companies’ respective prospects in the smartphone market.

Returning to China, there were more Chinese headlines overnight as the nation’s top leaders meet at the annual National People’s Congress although most of the news has been a reiteration of previous themes. Premier Wen’s final work report showed that China has kept its 2013 GDP growth target unchanged at 7.5%. Inflation is targeted at 3.5% for this year. For the record, DB's Jun Ma is looking for GDP and inflation of 8.2% and 3% respectively for 2013. Wen also said that the country will strengthen the management of local government debt. The ministry of finance said that China’s 2013 budget deficit is planned at about 2% of GDP and will feature a 10.7% spending increase in the military’s budget. In terms of property controls, the vice-minister of Housing and Urban-Rural Development commented that the government will release more detail on new property curbs within a week. Data wise, the HSBC Chinese Services PMI has come in at 52.1 versus 54.0 previously. Nevertheless, major bourses in Asia are trading firmer overnight led by the Nikkei (+0.3%) and Hang Seng (+0.1%).

The former has been helped by comments from deputy BoJ governor candidate Iwata who said at a confirmation hearing in Japanese parliament that the BoJ has a responsibility to quickly achieve a 2% inflation target and should buy longer term government bonds. Elsewhere the Aussie dollar is 0.5% higher against the USD following the RBA’s decision to leave the cash rate unchanged.

In the world of fixed income, Fed Vice-chair Janet Yellen yesterday said that the Fed should continue on with its $85bn/month bond purchases and whilst recognising that some risks need monitoring over time she doesn’t see any that would cause her to advocate a curtailment of the purchase program at this stage. 10yr UST yields rose 3bps higher to close at 1.87% yesterday. Yellen’s comments provided little support to commodities however with gold down 3.1% and Brent (-0.28%) down for its fifth consecutive day to $110/bbl yesterday.

On that note, the FT had an interesting story noting that China has overtaken the US as the world’s largest net importer of oil. According to provisional numbers from the EIA, US net oil imports dropped to 5.98m bbls a day in December (lowest since February 1992) while China’s net imports rose to 6.12m bbls a day according to Chinese customs.

In terms of the latest in Italian politics, Beppe Grillo’s Five Star Movement may consider staging a confidence-vote walk-out to allow a political group to form a government according to two unidentified senators cited by Bloomberg. A Senate walk-out would lower the threshold for achieving a majority, making it easier to secure enough backing for a new government. It would also allow Five Star to let a government form while sparing its senators from a "Yes" vote in a confidence ballot.

On a separate but related topic, it was also interesting to hear comments from the EU’s Ollie Rehn that poor economic growth in Europe may “justify in a certain number of cases reviewing deadlines for the correction of excessive deficits”. Angela Merkel chimed in yesterday adding that with all the consolidation in budgets, we “don’t quite have the answers for where the growth should come from” (Bloomberg).

Turning to the day ahead, EU finance ministers meet today and we have the latest round of services PMIs in Europe. Across the Atlantic, the services ISM and IBD/TIPP economic optimism index are the major data releases of note. All these are perhaps the warm up acts to Draghi's post ECB press event on Thursday and Payrolls on Friday.


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