Overnight Sentiment Bubbly Ahead Of Retail Sales, FOMC

While US equity futures continue to do their thing as the DJIA 13K ceiling comes into play again (two weeks ago Dow 13K was crossed nearly 80 times), ahead of today's 2:15pm Bernanke statement which will make the case for the NEW QE even more remote, none of the traditional correlation drivers are in active mode, with the EURUSD now at LOD levels, following headlines such as the following: "Euro Pares Losses vs Dollar as Germany’s ZEW Beats Ests" and 20 minutes later "EUR Weakens After German Zew Rises for 4th Month." As can be surmised, a consumer confidence circular and reflexive indicator is the basis for this Schrodinger (alive and dead) euro, and sure enough sentiment, aka the stock market, aka the ECB's balance sheet expansion of $1.3 trillion, is "improved" despite renewed concern over Spain’s fiscal outlook after better than expected German ZEW per Bloomberg. Next, investors await U.S. retail sales, which have come in consistently weaker in the past 3 month, and unless a pick up here is noted, one can scratch Q1 GDP. None of which will have any impact on the S&P 500 policy indicator whatsoever: in an election year, not even Brian Sack can push the stock market into the red.

More on overnight sentiment from BofA:

Market Action

Asian equity markets rose sharply as Euro area finance ministers meet to complete the second Greek bailout. The best performer in the region was the Indian Sensex, up 1.3%. The Korean Kospi, which is highly sensitive to the global economy, in particular, export demand, gained 1.1%. The Hang Seng managed to finish 1.0% higher. The Shanghai Composite gained 0.9%. The Japanese Nikkei only finished up 0.1%, as investors there were disappointed that the Bank of Japan did not provide additional monetary stimulus.

In Europe, equities are up 1.0% in the aggregate, as investors are hopeful of the prospects of the second Greek bailout package. In addition, markets rallied after the German ZEW, a measure of investor confidence, showed that German investors are very upbeat. The index surged to 22.3 in February from January's 5.4 level.

At home, futures are pointing to a solid rally as well. The S&P 500 is set to open 0.6% higher. The Dow is set to post its fourth straight gain, with futures pointing to a 0.6% higher open.

In the bond markets, the safest sovereign debts are selling off. Both the 10-year and 30-year US Treasury yields are 1bp higher, at 2.04% and 3.18%, respectively. In Europe, the UK gilt is 2bp higher, at 2.11%, and the German bund is yielding 1.77%, after rising 1bp. Meanwhile, debts of the peripheral countries are trading mixed. Spain's 10-year yield is up 2bp, while Italy's is down 5bp.

The dollar is modestly higher against a basket of other major currencies. The DXY index is 0.1% higher. Commodities are mixed. WTI crude oil is 48 cents higher, to $106.82 a barrel, and gold is down $7.20 an ounce, to $1,694.25.

Overseas data wrap up:

Inflation in France slowed to a 2.5% yoy rate in February. That was down from the previous month's rate of 2.6% and below consensus expectations of no change in the pace of consumer prices. Looking at the details of the report, we find that consumer energy prices are up 7.8% yoy. In our view, a large reason why inflation has remained sticky is due to the recent rise in oil prices. In the near term, that will continue to bias inflation higher. Longer term, the main drivers of inflation - the output gap and employment - should begin to dominate the inflation outlook.

The Bank of International Settlements (BIS) recently released a report estimating the impact of deleveraging on credit growth in Europe. The BIS report found that credit contracted 0.6% qoq during the third and fourth quarters of 2011 in Europe. Meanwhile, credit growth globally was marginally positive, expanding 0.4% qoq in Q4 2011. While it is too early to see the impact of the ECB's LTRO programs, the measures were designed as a way to slow bank deleveraging, improve financial conditions and restart credit growth in Europe. Without the LTROs, credit contraction in Europe would have been a heavy anchor on growth in the Euro area, pushing the economic region into an even deeper recession than our European economists have already pencilled in (-0.5% yoy).

Overnight, the Bank of Japan left monetary policy unchanged. Its monetary policy rate continues to remain at 0.10%. With the country locked in deflation, the risk is the BoJ enacts more easing measures such as additional QE in the future.

Today's events

At 8:30 am, retail sales are expected to rise 0.9% in February after a 0.4% increase in January. While we expect a gain in retail auto sales, it shouldn't be as strong as the increase in unit sales. This will leave retail sales ex-autos up 0.7%, matching the gain in January. Looking beyond autos, gasoline, and building materials (which get booked into GDP through the construction spending report), the resulting "core control" measure is expected to rise 0.3%, a slowing from January's 0.7% increase. At 2:15 pm, the FOMC concludes its monetary policy meeting and will release its press statement. We expect the Fed to adopt a "wait-and-see" approach at their confab next week. For a full preview, see below.


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