After the DJIA and S&P briefly crossed the key resistance levels of 16000 and 1800, the upper bound on the markets has been looking increasingly more distant and this morning's lack of an overnight ramp only makes it more so. Perhaps the biggest concern, however, is that with both Yellen and Bernanke on the tape yesterday, the S&P still was unable to close green. This follows on Monday's double POMO day when the S&P once again closed... red. Not helping things was the overnight announcement by the Japanese government pension fund, the GPIF, in which the fund announced it would lower its bond allocation further however the new law to reform the GPIF could be written by spring 2015. This was hardly as exciting as the market had expected, and as a result both the USDJPY and the ES-moving EURJPY find themselves at overnight lows. Will the EURJPY engage in its usual post 8 am ramp - keep a close eye, especially since the usual morning gold and silver slam down just took place.
While there has been little overnight macro events of note, today's US docket is heavy with October retail sales, October CPI, weekly mortgage applications and existing home sales on deck. The Fed releases its FOMC minutes in the latter half of the US trading session. The baffle with BS, good Fed cop/bad Fed cop routine continues once more as Ny Fed's Dudley and St Louis Fed’s Bullard speak on the economy and monetary policy.
US Data Docket
- US: CPI % y/y, cons 1.0% (8:30)
- US: Retail sales advance m/m, cons 0.1% (8:30)
- US: POMO $1.25-$1.75 billion
- US: Existing home sales m/m, cons -2.7% (11:00)
- US: Fed speaker Bullard (13:10)
- US: Minutes of Oct 29-30 FOMC meeting (15:00)
Dovish comments by Bernanke late yesterday, together with the release of comments by an advisory panel in Japan which indicated that Japan’s GPIF (pension fund) should raise its ratio of foreign assets failed to encourage sustained flow into riskier assets and instead stocks traded lower as market participants awaited the release of the FOMC minutes. Nevertheless, reports citing an advisory panel which said that Japan’s GPIF should review domestic bond-focused portfolio and that foreign asset ratio should be raised resulted in a temporary lift in equity markets, with Bunds also trending lower ever since. However, the move higher was not sustained after it became apparent that new a law to reform GPIF can be written only by spring 2015 and as such is unlikely to result in any immediate impact on global asset classes.
In other news, as expected the release of the minutes from the most recent BoE policy meeting largely echoed the details of the Quarterly Inflation Report. The minutes also noted that the rise in inflation expectations are of little significance, few signs of them affecting wage demands, expectations seen well-anchored in medium term. Going forward, market participants will get to digest the release of the latest Existing Home Sales data, as well as the weekly DoE report from the US.
Overnight bulletin digest from Bloomberg and RanSquawk
- It was reported that Japan's GPIF should review domestic bond-focused portfolio and that the foreign asset ratio should be raised, according to the GPIF Advisory Panel.
- However, later it was revealed by the Head of the GPIF Advisory Panel Ito that a new law to reform GPIF can be written by spring 2015 and thus provided a longer-term timeline for the news than initially expected.
- BoE minutes showed a 9-0 vote to keep QE unchanged at GBP 375bln and 9-0 to keep interest rates unchanged at 0.50%. Looking ahead market participants will get to digest a host of tier 1 data from the US as well as the FOMC minutes for the October meet.
- Treasuries maturing in 7Ys and longer gain after Bernanke last night said Fed will likely hold down fed funds rate long after ending QE and possibly after unemployment rate falls below 6.5%.
- Bank of England officials voted unanimously to keep policy unchanged this month and said a record-low interest rate may be needed even after unemployment falls to the threshold set under forward guidance, minutes to Nov. 6-7 meeting showed
- Japan’s Government Pension Investment Fund, the world’s largest manager of retirement savings, should become more independent of the government and review its domestic bond holdings, an advisory panel said
- The yuan’s three-month forwards touched a record high after China’s central bank strengthened the daily fixing to a record and elaborated on plans to ease exchange-rate controls
- Iran and world powers hold their third round of talks in six weeks toward a nuclear deal that would break a decade-long deadlock in the face of opposition from Israel and Saudi Arabia
- Sovereign yields higher, EU peripheral spreads wider. Asian stocks excluding China, European stocks, U.S. equity-index futures lower. WTI crude, copper little changed; gold lower
Japan GPIF should review domestic bond-focused portfolio, foreign asset ratio should be raised, according to panel.
- Japan should consider investing in Reits, private equity, commodities.
- Funds should consider investing in inflation-linked JGBS and indexes other than Topix.
- Pension funds should consider using JPX-Nikkei Index 400.
Head of the GPIF Advisory Panel Ito says new law to reform GPIF can be written by spring 2015.
- To consider lowering Japan bond allocation from level now.
- Japan reform panel head: GPIF, public pension funds won’t switch overnight to new ROE index from TOPIX for passive investment.
Of note, 5Y Chinese Interest Rate Swaps have reached a record high and overnight repo rates edged higher after Communist Party economic official Fang said very big chance one or two small China banks will fail next year and China must plan for bank fail scenarios to manage risks. Separately, China PBOC Deputy Governor Hu said China LGV financing may hide problems and make size too big
EU & UK Headlines
BoE MPC voted 9-0 to keep QE unchanged at GBP 375bln and 9-0 to keep interest rates unchanged at 0.50%.
- MPC growth and inflation projections underline there could be a case for not raising bank rate immediately when 7% threshold hit.
- Rise in inflation expectations of little significance, few signs of them affecting wage demands, expectations seen wellanchored in medium term.
Italian Head of Debt Management says expects domestic banks to cut bond holdings due to ECB's sector check up.
ECB's Weidmann said that there is no easy way out of crisis, printing money definitely not the solution.
Also stated that it is not sensible to immediately embark on next round of monetary policy easing after November rate cut, but also added that the ECB technically not at the end of its options.
Credit Suisse ZEW Survey Expectations (Nov) M/M 31.6 vs Prev. 24.9
Of note, Bernanke stated that the Fed remains committed to maintain highly accommodative policies for as long as they are needed and rates may stay near zero for considerable time after bond buys end.
Senate Democratic negotiator Patty Murray said she sees a path toward an agreement to ease automatic spending cuts Murray, asked if there was a path forward in her talks with her counterpart, Republican Representative Paul Ryan, said: "I believe there is."
Heading into the North American open, stocks are lower across the board in Europe, with telecommunication sector underperforming where Vodafone is trading with losses close to 2%, with the stock trading exdividend today. Even though stocks traded lower, there is little sign of distress in credit markets. On a positive note, the FT reported that US fund managers are eyeing a bank revival in the Eurozone with the belief that the regions stuttering economic recovery will soon gather steam.
USD/JPY failed to benefit from the reports citing an advisory panel which said that Japan’s GPIF should review domestic bond-focused portfolio and that foreign asset ratio should be raised and instead was driven by option related flow. In particular, the 100.00 level said to mark good size option strikes. Elsewhere, GBP outperformed its major counterpart EUR this morning, supported by lower EUR/GBP cross which fell below the 10DMA and was itself driven by touted offers in
EUR/USD by US names.
Heading into the North American open, WTI Crude in minor negative territory whilst Brent crude futures trade in minor positive territory amid relatively light news flow.
Saudi Arabia say they are unconcerned by a rising tide of US shale output which threatens to eat into OPEC's market share according to the nations Deputy Oil Minister.
The Iranian Supreme leaders says Iran will not step back 'one iota' from its nuclear rights.
World copper demand is expected to grow 4.5% on year in 2014 according to the ICGS.
Moody's says growth in Euro-area GDP and in steel demand user markets turns European steel industry outlook stable.
China September gold output at 37.64 tonnes, according to Industry Association.
SocGen summarizes the main macro developments
The minutes of the October FOMC meeting will help to determine if the melt-up in risk is justified and whether 2.66% is too low for the UST 10y (2.71% in swaps). The statement of the last Fomc meeting was perceived as a tad less dovish after the Fed eliminated the notion (i.e. showing less of a concern) that financial conditions had tightened. One must assume that a soft CPI number and tepid gain in retail sales before the minutes would potentially offset that bearish influence. We look for annual CPI to have slowed to 1% in October vs 1.2% last month. A further deviation from the target rate of 2.0% (corroborating with a corresponding fall in the Fed's preferred inflation proxy, the PCE index) should give investors confidence that yields will stay in a range before the December employment report. This should help to support the flow of corporate issuance which has been very strong already over the last 48hours, resulting in 5y swap spreads tightening to below 10bp, the lowest in a year.
In the euro zone, ECB speakers are not shying away from efforts to jawbone the EUR lower but to not much avail. After chief economist Praet, vice-president Constancio joined the bandwagon yesterday but acknowledged that no detailed discussions have taken place (yet). Asmussen instead decided to highlight the option of a negative deposit rate. The OECD, forecasting 1% real GDP growth in 2014 and 1.6% in 2015, said the ECB should look at non-standard measures (i.e. QE) to bolster the economy and counter deflation risks. EUR/JPY accelerated to a new high above 135.50, supported by PBoC comments on widening the yuan band. A break of 135.82 will lift the medium-target to the October 2009 high of 138.50. Against this backdrop, the peripheral spread tightening has further to run with yield hungry investors nudging the 10y BTP yield closer to the 4% mark.
DB's Jim Reid concludes the overnight event summary
A dovish-sounding Bernanke has failed to lift markets this morning as we enter a second day of consolidation. There was an initial pop as the text of the speech at the National Economists Club Annual Dinner in Washington was posted online. Indeed, S&P 500 futures traded up at +0.3% and EURUSD hit a high of 1.358 (+0.3%) shortly after the speech hit the newswires. But those moves were quickly pared, and there was little further from the Q&A to excite markets. And so we are now back to trading to flat on S&P500 futures while EURUSD is +0.1% on the day (the latter shrugging off further talk of unconventional policy tools from the ECB’s Constancio and the OECD). 10yr UST yields are unchanged at 2.71% as we type.
The message from Bernanke’s speech was very much as we have come to expect from the Chairman with an emphasis on lower for longer rates and the data-dependency of QE. He agreed with Yellen’s recent testimony that the surest path to a more normal approach to monetary policy is for the Fed to do all it can today to promote a more robust recovery. There was discussion over Bernanke’s overarching goals of improving the Fed’s transparency and he repeated previous statements that unemployment thresholds for rate hikes are purely thresholds and not triggers for action. The short Q&A was a little more informative where Bernanke argued that the effect of fiscal tightening is very near term. He also talked down the implications of falling employment participation by saying that falling participation had preceded the global financial crisis. He also said that he looks forward to life after the Fed where he will be concentrating on “writing and speaking”.
So as briefly touched upon above, Asian markets this morning are trading with a heavier tone, with the initial positive sentiment at the open replaced by a more subdued atmosphere. USDJPY is holding just above 100 while the TOPIX is down 0.3%. Japanese trade data for October showed that the trade balance deteriorated to -JPY1trn on the back of surging fossil fuel imports. Partly balancing this out, exports grew 18.6% YoY which beat expectations of 16.2%. The Chinese yuan non-deliverable forward is relatively stable overnight after dropping 0.2% yesterday on comments from the PBoC that it will lessen its intervention in FX markets and commit to a wider trading band. The Hang Seng China Enterprises Index remains the clear regional outperformer today (+0.8%) and is one of the only Asian bourses to trade higher today. Indeed, the H-share index is poised to close higher for its fifth consecutive day which would be its longest winning streak in three months. During the past five days the index has added about 11%, and has significantly outperformed its domestic onshore counterpart, the Shanghai Composite, which is only up 5%.
The China offshore/onshore dichotomy is something which we have highlighted in recent days, with there appearing to be more optimism offshore about Third Plenum reforms, while some onshore indicators lag. One of the issues we wrote yesterday was the tightening onshore liquidity conditions in China - despite offshore indicators such as USD Chinese corporate credit spreads and the HSCEI performing relatively well and seemingly indicating the opposite. The issue of liquidity is something which our Chinese rate strategist, Linan Liu, has highlighted as well. Linan writes that a couple of recent developments point to a potentially unsettling liquidity issue in China before the year-end. Firstly, the recent strong capital flows into China have been quite supportive but this is expected to reverse with dividend outflows expected before the year end. Secondly, liquidity supply from fiscal spending and treasury cash management auctions has been quite low. Thirdly, the PBoC has refrained from being very accommodative in the provision of liquidity. Fourthly, investment in non-standardized assets by large financial institutions is a near-term threat to interbank liquidity. All this leaves her bearish on rates into year end. Linan notes that 10yr CGB yields are trading at all-time highs (and they are up a further 5bp at 4.73% this morning), but that a further squeeze in money market rates may drive the 10Y CGB yield towards 5%. We would highlight this is not the first time we’ve seen a liquidity squeeze in China this year but we’re unsure if the latest bout is more a technical phenomenon or indicative of something more structural. Either way it’s something we’ll be watching over the coming weeks as the initial optimism over reform announcements passes.
Coming back to the Fed, we should remind readers that today will see the release of the FOMC’s minutes from the October meeting. As with the previous month, market participants will be keen to see where the Fed is on the timing of tapering and whether there is anything on strengthening forward guidance. DB’s Joe Lavorgna suggests that the Fed may want to strengthen such guidance alongside a potential tapering of asset purchases in order to counteract any undesired tightening of financial conditions. While we’re on the topic of the Fed, vice-chair Janet Yellen sent a letter to US senators ahead of the Senate Banking committee’s vote on her nomination this Thursday. There was no new material information contained in the letter that we hadn’t heard in last week’s dovish testimony. Yellen repeated that she saw few signs that pre-crisis imbalances had returned.
Looking to today, we have a number of important risk events occurring over the next 24 hours. In the US we have one of the more busy days this week in terms of dataflow with October retail sales, October CPI, weekly mortgage applications and existing home sales. Consensus is expecting a 0% MoM print on headline CPI and markets will be watching to see whether we get the second straight month-on-month contraction in headline retail sales. The Fed releases its FOMC minutes in the latter half of the US trading session. The NY Fed’s Dudley and St Louis Fed’s Bullard will be speaking on the economy and monetary policy. Bullard is considered a bellwether in the Fed. The Bank of England also releases its latest meeting minutes this morning.