If yesterday morning, the key macro data was the current , and
projected, weakness in China (whose record jump in FX deposits
indicates fears about capital outflows are alive and well, and that
the highest currency depreciation risk in 2015 is for none other
than the Chinese currency), then overnight we got more economic
data out of Europe that, at least for now, suggest that the
collapse in the Euro is boosting European factory order, with
German Industrial Production not only beating expectations, but the
prior month being revised from 0.1% to 1.0% - the fifth consecutive
increase in production. Spain promptly met that "beat and raise",
when it also reported a better than expected 0.4% (est -0.3%) with
December revised higher to 0.0%. All of which was to be expected -
as we noted yesterday, the main reason for transitory European
strength in a zero-sum world, is the soaring USD and the
collapsing, recession-level
US factory orders.
The question stands: how much longer will the Fed allow the ECB
to export its recession to the US on the back of the soaring
dollar, and how much longer will the market be deluded that
"decoupling" is still possible despite a dramatic bout of weakness
in recent US data. Look for the answer in today's BLS report, which
- if the Fed is getting secound thoughts about its rate hike
strategy in just 3 months - has to print well below 200,000 to send
a very important message to the market about just how much weaker
the US economy is than generally perceived.
For now, however, the ECB is getting its way, and the question
of just how much European QE is priced in, remains open, with
peripheral bond yields dropping to new all time lows for yet
another day, while the EURUSD has plunged to fresh 11 year lows,
sliding below 1.094, and making every US corporation with European
operations scream in terror.
Looking at markets, US equities are just barely in the red,
coiled to move either way when the seasonally-adjusted jobs data
hits. it has been very quiet ahead of non-farm payrolls in core
fixed income and equity markets, however peripheral curves have
been bull flattening throughout the European session, with record
low yields for Spanish, Portuguese, Italian and Irish 10y, while
the German 10/30s curve resides at its flattest level since June
2012. Meanwhile, the EUR 5Y/5Y forward breakeven rate rose to a
year high this morning, at 1.798%.
Elsewhere equity markets have traded sideways (EUROSTOXX 50:
-0.03%), with many market participants looking ahead to the key
event of the day, US non-farm payrolls scheduled at 1330GMT/0730CST
(Exp. 235k). According to the latest Fed stress tests, all 31 US
banks passed after exceeding minimum requirements, for the first
time since the tests began in 2009. However, Goldman Sachs (GS),
Morgan Stanley (MS) and JP Morgan (JPM) were among the five banks
with the lowest readings for a capital ratio of at least 5%.
FX markets are still seeing repercussions from yesterday’s ECB
press conference with EUR/USD breaking back below the 1.1000 handle
and yesterday’s low of 1.0988 to reside around its lowest level
since 2003, with a large option at 1.1000 (USD 2bln) set to roll
off at the 10am NY cut. Elsewhere, there are large options in
USD/JPY at 120.00 (USD 2.2bln) and 120.50 (USD 1.1bln) also set to
expire at the 10am NY cut. GBP/USD fell to a four week low this
morning in sympathy with the EUR as well as on the back of the BoE
surveyed inflation forecast for the next 12 months (1.9%, Prev.
2.5%), the lowest since 2001.
The EUR weakness sees the USD-index continue to print fresh 11
and a half year highs and is set for its best weekly performance in
over a month. While during Asian hours, AUD/USD broke above the
0.7800 handle after erasing almost all of yesterday’s losses, as
AUD/NZD extended yesterday’s 1% gain.
As well as the non-farm payroll report, which may be slightly
delayed today due to poor weather conditions in Washington DC,
today also sees comments out of Fed’s Fisher (Non-Voter, Hawk) at
1830GMT/1230CST, with Fed's Williams (Voter, Dove) stating
overnight that by mid-year, the Fed should seriously discuss hiking
rates and that it is safer to increase rates early and gradually
than waiting and having to hike rates sharply.
The greenback’s 11 and a half year highs have weighed on the
precious metals market, with gold and silver both in negative
territory during the European session,
while in base metals iron ore fell below USD 60/tonne
during Asia hours to a 6yr low.In the energy complex, WTI
crude futures trade relatively flat heading into the NYMEX open
amid no major fundamental news and are on course for their first
weekly gain in 3-weeks.
Today’s focus will of course be on the payroll report for
February. The market is looking for a +235k print which is down
from +257k in January. Indicatively everyone's favorite weatherman,
DB's Joe LaVorgna, expected +250k forecast. According to Joe
although inclement weather over the past month, which has coincided
with unseasonably cold temperatures, may have been a factor
weighing on economic activity the last few weeks, February nonfarm
payrolls may have dodged most of the worst of the recent weather
disruptions given that jobless claims plunged during the February
employment survey week. Jobless claims for the period at 282k were
27k lower than the January payrolls survey period. As a
reminder Goldman also warned that due to snow, the NFP number is
likely to be weaker although "snowstorms" may push wage data
higher.
In summary:
European shares remain mixed, though off intraday lows, with
the insurance and travel & leisure sectors outperforming and
telcos, real estate underperforming. German Jan. industry output
above estimates. Euro drops to lowest since 2003 against dollar.
The Swiss and Italian markets are the best-performing larger
bourses, U.K. the worst. The euro is weaker against the dollar.
Portuguese 10yr bond yields fall; Irish yields decline. Commodities
gain, with silver, copper underperforming and Brent crude
outperforming.
U.S. trade balance, consumer credit, nonfarm payrolls,
unemployment, average earnings, labor force participation, due
later.
Market Wrap
S&P 500 futures little changed at 2099
Stoxx 600 up 0.2% to 394.6
US 10Yr yield up 0bps to 2.12%
German 10Yr yield little changed at 0.35%
MSCI Asia Pacific up 0.7% to 146.2
Gold spot down 0.1% to $1196.9/oz
Eurostoxx 50 -0%, FTSE 100 -0.2%, CAC 40 +0%, DAX +0%, IBEX,
-0.1%, FTSEMIB +0.4%, SMI +0.7%
Asian stocks rise with the Nikkei outperforming and the
Shanghai Composite underperforming.
MSCI Asia Pacific up 0.7% to 146.2
Nikkei 225 up 1.2%, Hang Seng down 0.1%, Kospi up 0.7%,
Shanghai Composite down 0.2%, ASX down 0.1%, Sensex up 0.2%
Euro down 0.53% to $1.0971
Dollar Index up 0.32% to 96.69
Italian 10Yr yield down 3bps to 1.27%
Spanish 10Yr yield down 4bps to 1.24%
French 10Yr yield down 1bps to 0.64%
S&P GSCI Index up 0.3% to 415.9
Brent Futures up 0.6% to $60.8/bbl, WTI Futures up 0.1% to
$50.8/bbl
LME 3m Copper down 0.7% to $5796/MT
LME 3m Nickel little changed at $14205/MT
Wheat futures down 0.1% to 480.3 USd/bu
Bulletin Headline Summary from Bloomberg and RanSquawk
Spanish, Portuguese, Italian and Irish 10y print record low
yields, while the German 10/30s curve resides at its flattest level
since June 2012.
EUR/USD has broken back below the 1.1000 handle and yesterday’s
low of 1.0988 to its lowest level since 2003 with GBP/USD falling
to a four week low alongside a strong USD.
Looking ahead, US non-farm payrolls is scheduled at
1330GMT/0730CST (Exp. 235k) with Fed’s Fisher due to speak at
1830GMT/1230CST
DB's Jim Reid as is customary completes the balance of
overnight events
A confident, yield curve flattening, high beta enhancing Draghi.
More European risk out-performance but offset by a weaker FX. A
payrolls preview with lots at stake. A big optical change in Euro
credit spreads given index changes at the end of last month, a
preview of our latest HY monthly and thoughts on the UK where
yesterday the BoE saw its 6th year anniversary of cutting rates to
a now 321-year low. All this and a landmark day yesterday in my
year. After 5 weeks and 5 days my knee brace was allowed off. My
MCL is well on the road to being healed. Now starts 3 and a half
weeks of physio before I can have surgery reconstructing my ACL and
then back to another 6 month rehab-ing. My wife said to me that my
best feature used to be my thighs, especially given all the
cycling. After 5 and a half weeks of wastage she now thinks they're
my worst. They now wobble, look feeble, are weak and go alongside a
right knee can only bend very slightly after all that time in a
brace. So the hard work starts today.
From listening to Mr Draghi yesterday it seems he feels the hard
work is over before they've even started QE. We learnt that they
will start the program on Monday and that the ECB president was in
confident mood at the meeting yesterday both on growth prospects
and the likely success and functionality of the QE program.
Surprisingly there was a bit of market nervousness going into the
meeting concerning how committed they are to QE but the council
appeared fully behind the plans they announced in late January.
In terms of the technicalities, the headline that caught
the eye was that ‘purchases of nominal marketable debt instruments
at a negative yield to maturity are permissible as long as the
yield is above the deposit facility rate’, which is currently
-0.20%.This should promote flatteners as the ECB bias
purchases further out the curve. It also appears that there may be
some flexibility for NCB’s should purchases of govvies and agencies
in their respective jurisdiction prove insufficient by making
‘substitute purchases’ instead. Our European Economics team noted
that substitutes could include international/supranational
institutions in the euro area or, in exceptional circumstances, the
market debt instruments of ‘public non-financial corporations’
within the jurisdiction in question. The 25% issue limit meanwhile
will apply for the first six months, after which it will be
subsequently reviewed by the Council.
With respect to Greece, the waiver on Greek collateral was
not-reintroduced with the ECB continuing to play
hardball.Our colleagues noted that with respect to the
current funding situation,
after yesterday it appears that financing T-Bills under ELA
is not an option for Greece. Instead the focus will now be
on the Eurogroup meeting where by an early disbursement of funds
from the EU/IMF programme may be the main hope for Greece, however
this will clearly depend on Greece’s incentive to agree to the
correct conditions for any disbursement.
ECB President Draghi also presented the staff forecast for HICP
inflation of 1.8% in 2017 which is slightly higher than DB's
forecasts. To be fair this was never going to be sub 1.5% or much
more than 2% as it would indicate that their policies now aren't
appropriate. So it’s a bit of a meaningless forecast at this stage
but an interesting one to track. On growth, the staff forecast are
for real GDP to expand by 1.5%, 1.9% and 2.1% in 2015, 2016 and
2017 respectively. The upgraded forecasts are cumulatively 1.2pp
more than the Bloomberg consensus number.
Sentiment was clearly better following the headlines. Equities
in Europe closed firmer with the Stoxx 600 +0.81% higher and now
just a shade off the all-time highs of 15 years ago. The DAX
(+1.00%) and CAC (+0.94%) also closed higher, the former in
particular extending all time highs. The better sentiment didn’t
appear to help markets in the US however where bourses closed
relatively subdued. The S&P 500 (+0.12%) closed a touch higher
with the market appearing to be in hold mode ahead of payrolls
today. However, with a 0.43% depreciation for the Euro versus the
Dollar to $1.103 yesterday, this explains some of the differential.
In fact, over the last two days, in USD terms the Stoxx 600 has
returned -0.10% and the S&P 500 is -0.32%.
The better tone in Europe wasn’t just constrained to equity
markets yesterday. Credit too had a firmer day as Crossover
tightened 11bps. Meanwhile, supported by the news of the ECB buying
bonds down to -0.2% yields, there was a strong bid for government
bonds. The Bund curve flattened in particular as 2y and 5y notes
tightened 0.1bps and 2.7bps respectively whilst 10y and 30y yields
dropped 3.5bps and 8.8bps. 2y Bunds were in fact one of the
underperformers on the day across Europe which was unsurprising
given they already trade below the -0.2% cut off for the ECB (at
-0.209%). Peripherals also benefited with 10y yields in Spain
(-7.9bps), Portugal (-9.2bps) and Italy (-8.6bps) all tightening –
the latter two in particular closing at fresh all-time lows in
yield.
Also late yesterday we had the results of the Fed stress tests
which showed the 31 largest banks meeting the necessary capital
requirements under various hypothetical scenarios. It was in fact
the first time since tests started in 2009 that all participating
banks passed. The banks will now face a second round on Wednesday
which will test the strength of a bank in returning money to
shareholders. The WSJ reported that two banks in particular,
Goldman Sachs and Zions Bancorp, had ratios close to the Fed’s
minimum level which could well limit shareholder payouts.
Staying in the US, today’s focus will of course be on the
payroll report for February. The market is looking for a +235k
print which is down from +257k in January. Our US colleagues have a
slightly more bullish +250k forecast. They argue that although
inclement weather over the past month, which has coincided with
unseasonably cold temperatures, may have been a factor weighing on
economic activity the last few weeks, February nonfarm payrolls may
have dodged most of the worst of the recent weather disruptions
given that jobless claims plunged during the February employment
survey week. Jobless claims for the period at 282k were 27k lower
than the January payrolls survey period. They note that the
four-week moving average for the February survey week was lower as
well (283k vs. 307k in January) and in fact the third lowest for a
payroll survey week since going back to April 2000.
Yesterday’s more subdued performance in the US appeared to be as
a result of slightly softer macro data and also a decline in oil
stocks. On the latter, the energy component (-0.62%) was the
notable underperformer following a decline for WTI (-1.49%) and
Brent (-0.12%). In terms of data, it was the jobless claims print
which caught the eye with the 320k print well ahead of the 295k
expected. The reading was in the fact the highest in nine months
although it’s likely that the recent bad weather played its part.
Elsewhere, factory orders (-0.2% mom vs. +0.2% expected) for
January were softer than expected although both unit labour costs
(+4.1% vs. +3.3% expected) and nonfarm productivity (-2.2% vs.
-2.3% expected) surprised modestly to the upside.
Away from yesterday’s price action and looking more closely at
credit markets we quickly wanted to highlight the impact on the EUR
cash indices of the recent rating downgrades for both Gazprom and
Petrobras, which have seen their bonds exit the iBoxx IG indices
and join the HY indices. In total €6.75bn (notional outstanding) of
Gazprom bonds and €6.9bn (notional outstanding) of Petrobras bonds
have transitioned. Having been in the top 30 of issuers in the IG
index they are now the 3rd and 4th biggest issuer in the HY index.
But perhaps of more interest is what this has meant for index
spread levels. First of all the impact on IG. The overall corporate
index is now 6bps tighter as a result while the non-financial index
has tightened by 9bps. However the most notable move comes in BBB
non-financials where spreads are now nearly 20bps tighter. The
addition of these names to the HY index has obviously seen indices
widen, particularly the BB non-financial index, which is more than
30bps wider post the addition, while overall non-financial are
around 20bps wider. Clearly all this is only optical but it’s a
nightmare for us strategists as when we use spread charts we're now
clearly not looking at a consistent series. Woe is us.
Staying with credit, yesterday we published our latest HY
monthly where we revisit our EUR vs. USD HY cross currency
analysis. At a broad index level USD BBs appear to offer more yield
and spread than EUR BBs while for single-Bs yields are at broadly
similar levels while EUR single-B spreads still offer reasonable
upside. These trends are also broadly present when we look at the
analysis at a more micro bond level. So higher rated bonds spreads
look more attractive in USD than EUR but as we move down the credit
spectrum the EUR bonds offer the wider spreads. Therefore it’s
difficult to come up with a definitive conclusion and any
investment decision may actually be driven by factors other than
simply relative valuations with implications of divergent monetary
policy and the energy sector likely to play an important role.
Back to monetary policy, outside of the ECB, the BoE kept rates
unchanged yesterday as was of course expected on what was the 6th
anniversary of them cutting rates to 0.5%. In today's EMR we repeat
a well used graph of ours showing the UK base rate back to 1694 -
the longest series for any global base rate. Prior to this current
period, the lowest rates were hit was 2%. So it’s easy to forget in
these days of negative yields just how unusual the whole interest
rate situation is. There is no historical context for what has been
seen in recent years. Interestingly in a conversation with George
Buckley yesterday, he reminded me that at the start of this 6 year
period the BoE suggested that rates couldn't go lower than 0.5%.
With the release of the last minutes they seemed to have changed
their mind and left the door open for lower rates if the need
arises. Just by doing nothing the BoE has gone from a low yielding
early mover 6 years ago to now being a higher yielder in Europe.
Interesting times.
Quickly refreshing our screens this morning, Asian bourses are
generally firmer ahead of today’s data. The Nikkei (+1.03%),
Shanghai Comp (+0.09%), Hang Sang (+0.06%) and Kospi (+0.68%) are
all higher.
In terms of the day ahead, focus will of course be on payrolls
this afternoon however before that we get more details on the Q4
GDP print for the Euro-area (market expecting +0.9% yoy) as well as
industrial production out of Germany and trade data for France.
Along with payrolls in the US, we get the usual associated
employment indicators including unemployment, hourly earnings and
the labour force participation rate. Consumer credit rounds off the
calendar.