Futures Fade After Report ECB Still Unsure On QE Format

While the trading world, or at least the kneejerk-reaction algos, is focused on today's US nonfarm payrolls due out in just 2 hours (consensus expects 240K, with unemployment declining from 5.8% to 5.7%) the key event overnight came out of China, (where inflation printed at just 1.5% while PPI has imploded from -1.8% in September to -2.2% in October to -2.7% in November to a whopping -3.3% in December) because as per BofA "soft domestic demand over-capacity issue have kept inflation pressures low". This extended a record stretch of negative PPI prints and was the steepest drop in factory-gate prices in two years. "The oil price drop is one factor, but the more important factor of the PPI decline is the weakness of the global economy -- look at Europe and Japan,” said Larry Hu, head of China economics at Macquarie Securities Ltd. in Hong Kong. “With trade and other inflation transmission methods, the whole world is facing disinflation pressure.” 

Europe promptly followed with big news of its own, thanks to a Bloomberg report that as recently as Wednesday ECB staff "presented policy makers with models for buying as much as 500 billion euros ($591 billion) of investment-grade assets... options included buying only AAA-rated debt or bonds rated at least BBB-, the euro-area central bank official said. Governors took no decision on the design or implementation of any package after the presentation." In other words less than two weeks before the fateful ECB meeting and Mario Draghi not only still hasn't decided on which of three public QE version he will adopt, but the ECB has reverted back to a private QE plan. Not surprisingly the EURUSD jumped back over 1.18 on the news (and USDJPY and stock markets dropped) on the news that Europe still is completely unsure how to proceed with QE despite the endless jawboning.

In other news, and as reported last night, Fed's non-voting, and outgoing, dove Kocherlakota said the Fed should not raise US interest rates this year and raising interest rates would slow progress towards inflation goal. Kocherlakota added that Fed stimulus is insufficient to hit inflation target and sees few years for inflation to return to 2%. Unlike Evan's "catastrophe" comment, stocks not only had no response but actually retreated on the comment.

Speaking of China, something peculiar happened in its stock market when the Shanghai Composite Index fell, erasing a gain of as much as 3.4 percent in the last half hour of trading, as traders weighed the prospect of stimulus amid data signaling a deeper economic slowdown. Energy companies led declines after Chinese factory-gate prices posted their sharpest drop in two years.

European equities (EuroStoxx50 -1%) also traded lower after the abovementioned report that ECB staff are said to have outlined EUR 500bln investment grade QE plan although have said not to have taken any decision on QE. Furthermore, IBEX (-2.45%) is the underperforming index and financial names are leading the way lower for Europe as Santander (-9.6%) have resumed trade this morning following yesterday’s news that they are to boost capital. However, Chairwoman Botin refuted claims that the bank are interested in Banca Dei Monte Paschi (-4.9%) after the Italian lender were seen higher by 12.4% yesterday on the back of rumours of Santander interest. Fixed income remains tentative with light volumes observed in the Bund as it trade flat with while the ECB reports propelled periphery paper higher.

The USD-index (-0.24%) remains offered in the session following yesterday’s remarks from Fed’s Kocherlakota saying that the Fed should not raise US interest rates this year, raising interest rates would slow progress towards inflation goal, however these comment did not impact the fixed income or equity markets. The subsequent ECB comments lifted EUR/USD back above the 1.1800 handle after initially moving lower before reports that the ECB confirmed that no decision on QE had been made. Separately, GBP/USD saw some strength ahead of the UK Manufacturing and Industrial Production with rumours circulating that the releases were positive, however the data points came in mixed causing GBP/USD to come off session highs.

The softer USD earlier supported spot Gold although has since come off best levels in the session with copper prices remain near 4½ year lows as commodities traded relatively flat following mixed inflation data from China. Elsewhere, WTI crude futures have seen its overnight gains trimmed as oil prices are headed for its 7th weekly loss today.

And now all eyes focus on today's main report, the December non-farm payrolls.

Bulletin Headline Summary from Bloomberg and RanSquawk

  • European equities reside in negative territory heading into the US crossover after reports that the ECB are still undecided on QE.
  • Looking ahead, the US NFP data scheduled for 1330GMT/0730CST is expected to show another month of strong employment growth in the US with analysts forecasting a reading of 240K.
  • ECB staff presented policy makers with models for buying as much as EU500b ($591b) of investment-grade assets, according to a person who attended a meeting of the Governing Council
  • Dec.’s 0.2% decline in euro-area consumer prices is especially difficult for policy makers because companies are more likely to set wages and prices in Jan., meaning a falling inflation rate will set the tone for such decisions, according to Jefferies economist Marchel Alexandrovich
  • China’s producer-price index fell 3.3% in Dec. (est. 3.1%), extending a record stretch of declines; slide has yet to be fully reflected in consumer prices, which rose 1.5%, matching the median estimate
  • Raising rates in 2015 “would only further retard the pace of the slow recovery in inflation,” Minneapolis Fed’s Kocherlakota said in a speech yesterday
  • German industrial production unexpectedly fell for the first time in three months in November as energy output slumped; France’s industrial production fell 0.3%
  • U.K. manufacturing output rose 0.7% in Nov., most in seven months; industrial production fell 0.1% as oil and gas extraction declined 5.5%
  • Norway is considering tapping reserve funds to shield western Europe’s biggest oil producer from the worst slump in crude prices in more than half a decade
  • Kaisa Group’s woes show investors will demand yields of at least 10% to buy Chinese real-estate junk bonds amid growing wariness of state interference in the property market
  • French police closed in on the suspects in the massacre of journalists at magazine Charlie Hebdo, cornering them in a small town near Paris’s Charles de Gaulle airport
  • U.K. Independence Party leader Nigel Farage called PM Cameron “a chicken running scared” after the premier told ITV News he wouldn’t take part in debates unless they also include Green leader Natalie Bennett, whose party is vying for fourth place in terms of voter support with the Liberal Democrats
  • Sovereign yields mostly lower. Asian stocks mostly higher; European stocks, U.S. equity-index futures lower. Brent crude, WTI lower; copper falls, gold lower

US Event Calendar

  • 8:30am: Change in Nonfarm Payrolls, Dec., est. 240k (prior 321k)
    • Change in Private Payrolls, Dec., est. 225k (prior 314k)
    • Change in Manufact. Payrolls, Dec, est. 15k (prior 28k)
    • Unemployment Rate, Dec., est. 5.7% (prior 5.8%)
    • Average Hourly Earnings, m/m, Dec., est. 0.2% (prior 0.4%)
    • Average Hourly Earnings, y/y, Dec., est. 2.2% (prior 2.1%)
    • Average Weekly Hours All Employees, Dec., est. 34.6 (prior 34.6)
    • Underemployment Rate, Dec. (prior 11.4%)
    • Change in Household Employment, Dec. (prior 4k)
    • Labor Force Participation Rate, Dec. (prior 62.8%)
  • 10:00am: Wholesale Inventories, m/m, Nov., est. 0.3% (prior 0.4%)
  • Wholesale Sales m/m, Nov., est. 0% (prior 0.2%)

DB's Jim Reid concludes the overnight recap

After last month's +321k headline print we've had 2 bouts of risk off and another large rally in bonds so anyone who traded payrolls based on the number alone has been overtaken by other events (Oil, Greece and the ECB in particular). For today expectations are for +240k on the street and +200k at DB with our US colleagues highlighting a potential December seasonal factor having an influence on the data.

We go into the number on the back of an impressive rebound for risk over the last couple of days. Indeed the US, UK and German markets yesterday wiped out their YTD losses after an impressive rally off the intra-day lows from Tuesday. Digging into the details, the S&P 500 (+1.79%) and Dow (+1.84%) both finished the day strongly – the S&P 500 in particular now 3.5% up from Tuesday’s lows. In fact it was a strong day for risk assets across the board, CDX IG closing 1.5bps tighter and US HY energy names tightening a further 17bps. This index is now -93bps off the December 16th wides from last year.

Yesterday’s positive sentiment was centered on supportive comments from both the ECB’s Draghi, which we’ll touch upon later, and also comments out of the Fed’s Evans in Chicago after the US close on Wednesday. On the latter, Evans, one of the more dovish Fed members, commented that he does not think that ‘we should be in a hurry to raise rates’, noting that although job growth is clearly moving in the right direction, the outlook for inflation is ‘more worrisome’. Evans however, didn’t rule out a rate hike in 2015, suggesting that in regards to hitting the 2% inflation target over a reasonable period of time, that ‘it is a tradeoff as to whether or not we delay for quite a long time before the first liftoff, or liftoff begins a little earlier than maybe I would think, but with a shallow enough path of increases so that the overall path still remains adequately accommodative to have confidence’. Another Fed member, Rosengren, in a report on Reuters lent some support to Evans’ comments noting that ‘we want to make sure that the recovery is sustainable before we raise interest rates’. Finally after the market close Fed member Kocherlakota commented in his speech that the Fed ‘can best achieve its macroeconomic objectives by not raising the fed funds rate target this year’ and that the Central Bank ‘has not provided sufficient stimulus to hit its inflation target’.

With a better tone in the market, US Treasuries weakened for a second successive day with the 10y benchmark yield closing back above 2% at 2.018% (+5bps). Yesterday’s data was supportive also. Initial jobless claims continued to stay below 300k with the latest 294k reading meaning the four-week average print ticked down slightly to 290.5k. The Dollar also appears to show little sign of retreating with the DXY +0.52% helped by further gains against the Euro (+0.39%) to $1.179. Elsewhere oil markets appeared to take something off a backseat yesterday with WTI and Brent +0.29% and -0.37% respectively.

Closer to home yesterday, it was a strong day for European equities with the Stoxx 600 (+2.75%) and Dax (+3.36%) both closing significantly firmer. After soft inflation prints out of Germany and the Euro-area this week, comments from the ECB’s Draghi appeared to add further hope that ECB QE is imminent with the January 22nd monetary policy meeting now just around the corner. Responding to the European Parliament, Draghi noted in his letter that following a review of monetary stimulus the ECB may look to adjust size, pace and composition and that ‘such measures may entail the purchase of a variety of assets – one of which could be sovereign bonds’. With the rally in risk assets Bunds closed weaker with 10y yields +2.6bps wider at 0.510% although yields in Spain (-1.9bps), Italy (-6.0bps) and Portugal (-13.6bps) all closed tighter. In credit Crossover (-16bps) closed firmer although on the micro side Tesco has been downgraded into high yield territory by Fitch.

Elsewhere Greek equities continued their downward trajectory with the ASE closing 2.06% lower. The ECB’s Coeure was reported on France 24 playing down a ‘Grexit’, specifically saying that ‘there is a very strong commitment from European political authorities to ensure the integrity of the euro area’ and that ‘no-one is now working on an exit of Greece from the euro area’. Coeure also went on to mention that the ECB monetary policy decision due at the end of the month will not be influenced by the Greek election due 3 days after.

Moving to the overnight session Asian equity markets are following the US lead with major bourses trading higher across the region. The Nikkei, Hang Seng and KOSPI are up +0.06%, +1.21% and +1.20% respectively as we type. Chinese equities (+2.00) have recovered having previously traded with a softer tone this morning probably not helped by further weakness in factory gate prices. Indeed China's PPI continues to decline with a -3.3% yoy print for December. This compares with a -2.7% yoy print in November and also below market consensus of -3.1%. China PPI has been in negative territory for the last 34 months signaling chronic over capacity problems in Chinese industrials. CPI numbers are a little firmer though at +1.5% which is in line with consensus. Away from macro, credit markets are still focused on the developments around Kaisa. As we go to print the market is yet to receive confirmation whether the property developer has paid its bond coupon ($25.625mn) due yesterday. We are starring at potentially the first ever default by a Chinese property developer in the offshore Dollar bond market.

Speaking of defaults S&P noted that the first week of 2015 has seen 3 corporate defaults globally. The 3 defaults so far are all based in emerging markets and one of them was Kaisa which has been lowered by the agency to Selective Default on Monday after the company defaulted on a HK$400m offshore term loan. The second default relates to a Brazilian engineering and construction and infrastructure investment group OAS S.A after a failure to pay event. The third default was confidential and not disclosed but it is not a good start to the year on this front.

Looking at the day ahead we kick this morning off in Europe with industrial production numbers for Germany, UK and France. We’ll also get trade data for Germany along with manufacturing production prints for both France and the UK. Construction output in the UK could also be of some interest this morning. This afternoon in the US, as well as the aforementioned payrolls print we’ll get unemployment and average hourly earnings readings. We round off the calendar with wholesale inventories later today whilst comments from the Fed’s Lacker (on the economic outlook) could be worth keeping an eye on.