Jan
27
Portugal weakens the Euro
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This morning the Euro has fallen against the Pound as the news from the Portuguese bond market was released. The 10-year bond yield has hit a new high at 15.25%, with investors growing their concerns on a possible contagion. Many analysts believe Portugal will need a second bailout. Meanwhile, the markets expects to hear from Greece’s deal with private-sector creditors soon. GBP/EUR is on a knifes edge as we wait with baited breath to see if Greece is given some respite.
Meanwhile GBP/USD has tested the 1.5700 mark as relatively positive news from the US economy and the bizarre confirmation that US rates will remain at 0.25% until 2014, releases the safe haven funds.
Looking elsewhere there has been some commentary that there is a near-term risk of EUR/CHF breaking 1.2050 and touching the Swiss National Bank’s 1.20 floor. Markets seem overly relaxed about risks stemming from Greece’s debt negotiations.
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Jan
26
Market Update
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Equity markets are broadly higher this morning with investors seeming taking some comfort from the Fed‟s decision to hold interest rates at „exceptionally low levels‟ until the end of 2014 rather than mid-2013. Although interest rates are now on hold for longer, the decision looks to have slightly pushed back expectations of further Quantitative Easing.
The dollar lost some ground after the announcement with euro-dollar trading back above $1.31, whilst cable rallied from $1.5620 to $1.57. Bearing in mind that the cross had been down to $1.5520 after the publication of Q4 GDP data, the rally in sterling is fairly solid and we suspect reflects a view that the 0.2% fall in fourth quarter output will be revised higher.
Following on from yesterday‟s Fed meeting we have a busy set of US data releases this afternoon. The December Durables Goods orders report kicks-off at 1:30pm and a rise in aircraft orders is expected to push the headline index up by some 2% or so at least. However, core orders are expected to be a little softer and the ISM Manufacturing survey points to a 1% rise on the month, which is also in line with consensus. Even if December data remain solid, there are some concerns that the expiration of a 100% capital deduction on 31st December will lead to a fall in orders in the first quarter. The tax allowance was only for assets actually used, rather than just ordered, so the full impact of any adverse effect should have been seen earlier in the quarter rather than just in December, however the risk remains of a weaker outturn, which would lower expectations for Q4 GDP growth.
Initial jobless claims fell from 402,000 to 352,000 last week, although that seems to reflect some seasonal adjustment factors rather than any underlying improvement. It is therefore hardly surprising that consensus is looking for initial claims to rise this week back at around 370,000 which is a little above the current 4- week moving average rate.
New home sales are expected to rise by 1.9% in December to 321,000, but this could prove pessimistic as the NAHB survey pointed to a sharp increase in sales. So there looks to be some upside risk to consensus and we could see a much stronger number if the new homes series starts playing catch-up with the NAHB survey.
The decision by the Conference Board to restructure their Leading Economic Indicator means that we have less faith over forecasts for the time being. The ISM delivery times component has been replaced by new orders and the M2 money supply component has been removed. The entire back series will be rebuilt so that it can be compared to GDP, but today the series will largely be ignored.
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Jan
25
Poor start to the day for GBP
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Big events of the day are the release of the Bank of England (BoE) minutes from their last rate decision meeting, which have already been released. UK GDP figures for Q4 2011 and the US interest rate decision this evening (UK time).
Whilst there are likely to be no surprises with the US certain to keep interest rates on hold, effectively at 0.25%, the press conference always provides scope for the Chairman words to move the markets.
The minutes of the BoE MPC meetings are published two weeks after the interest rate decision. The minutes give a full account of the policy discussion, including differences of view. They also record the votes of the individual members of the Committee. Generally speaking, if the BoE is hawkish about the inflationary outlook for the economy, then the markets see a higher possibility of a rate increase, and that is positive for the GBP. The member of the committee voted 9-0 in favour of keeping interest rates on hold at 0.5% but there were some hints that some members feel that further Quantitative Easing (QE) will be needed in the coming months – this has had a negative effect on GBP (particularly GBP/USD and GBP/EUR).
Q4 2011 GDP came in slightly worse than expected but only fractionally – this has had a slightly negative effect on GBP but coupled with the further pressure on GBP with the prospect of further QE – Sterling has had better starts!
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Jan
24
GBP/EUR has regained some ground after the increment to £10.8bn in the UK’s Public Sector net Borrowing in December, coming in lower than expectations (£12.2bn). The UK budget deficit in December rose to £13.7bn against a forecasted £14.9bn. In the April-December period the deficit was also lower than expected, rising to £103.3bn vs. £114.6bn.
In a slightly more long term view UK Inflation expectations for next 5-10 years have fallen to 3.2% in Jan from 3.4% in Dec – this is likely to have next to no impact but in theory does make GBP less attractive in the long term.
Meanwhile in Japan the BoJ says it will continue to carefully monitor the impact of overseas uncertainty on the Japanese economy. The central bank also stated that a zero interest rate policy will remain in place until price stability is in sight. The BoJ said it lowered its forecast for real gross domestic product to a 0.4% contraction for this fiscal year and a 2.0% gain for the next year.
The EUR/USD rallied briefly to 1.3062 high ahead of the Spanish bond auction results, but returned to 1.3000 psychological level where it is still standing. Spain sold €2.51B worth of bonds out of a targeted €1.5-2.5B. The 3-month paper is paying 1.285%, while the 6-month pays 1.847%, both lower than previous auction’s 1.735% and 2.435% which is good news for EUR.
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Jan
23
Market Update
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The Chinese lunar New Year holiday has effectively shut down most of the Asian stock markets today, which could be seen as a positive given the ongoing failure of Greek debt restructuring talks. Discussions are believed to have failed over the weekend, but there is due to be a teleconference with investors today. Those close to the discussions suggest that a haircut of around 70% is currently under discussion, which is significantly higher than the 50% demanded. This probably explains why we are seeing some hold outs at the moment. EU Finance Ministers are due to meet in Brussels after markets close and are expected to be dominated by the Greek debt-swap agreement. There had been hopes for an agreement over the weekend and time is certainly beginning to run out to avoid a default on 20th March when debt repayment is due.
Finance Ministers were originally due to meet to discuss implementing the fiscal pact and allow for the setting-up of the permanent ESM one year ahead of schedule. However, as has been usual in most recent summits the failure of EU leaders to come up with the comprehensive solution on sovereign debt issues means that new progress is unlikely to be made.
The shadow hanging over Greece combined with a dearth of data will leave stock markets with little direction today. French business confidence fell in January, confounding expectations of an increase and it is now back at lows last seen in February 2010. The Advance estimate of Eurozone consumer confidence is expected to also show a further deterioration with the expected 0.3pp dip to -21.4, putting confidence back at levels last seen in August 2009, confirming the shallow recession that we expect the Eurozone to experience in the six months to March 2012.
If finance ministers are constrained, EU foreign ministers have reportedly agreed on an Iranian oil embargo. Given that the Iranian government have previously claimed that they would react to any embargo by shutting the Straits of Hormuz, oil prices look set for a period of volatility. One sticking point for Europe has been to replace Iranian crude that flows to Greece and makes up around one-third of Greek crude purchases. There are hopes that Saudi Arabia or Libya will be able to provide oil to Greece on the same basis as Iran.
Having fallen to $109.50 in overnight trading, the front Brent Crude contract rose back above $110 in early trading and we could easily see it ramp back above $112 should Iranian threats continue and the global economy continue to show solid growth. Falls in oil prices on Greek concerns look overdone as the main contribution to global GDP this year will come from emerging and developing markets, who remain on track to grow by 6% yoy on average.
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Jan
17
No great surprise
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Having European markets open on a firmer footing after a positive Asian session following slightly stronger than expected Chinese GDP, retail sales and industrial production data. GDP expanded by 2% quarter-on-quarter and 8.9% year-on-year against consensus annual forecasts of 8.7%. This was the slowest pace of growth in over two years. Both exports and imports slowed while consumption contributed more than half of overall growth. The positive reaction probably owes more to a relief that growth is not falling precipitously, but markets are aware Chinese authorities are standing ready with stimulus measures such as possible cuts in the reserve requirement ratio should they be necessary. These could be taken positively or negatively on any day. Equities have opened strongly in Europe following 4% and 5% gains in Shanghai. The EUR has bounced by almost 1% against the USD and less so against GBP, but remains lower against a host of high beta currencies such as the AUD and NZD. The first test of this positive sentiment will come with the EFSF’s 182-day EUR 1.5bn bill auction at 11.00 GMT. Overnight S&P lowered the long-term sovereign credit rating of the EFSF from AAA to AA+. The Japanese government who has been a buyer of EFSF debt has since said it’s trust in EFSF has not been shaken and the downgrade will not immediately change its stance of purchasing them. The Japanese finance minister also he wanted to examine current FX moves before deciding on whether to intervene in EUR/JPY.
Markets were also keen to see the outcome of the latest French bond auction yesterday when €1.9 billion of 1 year bills were sold at a rate of 0.406%. This is an improvement on last week’s auction when the average yield was 0.454% and more evidence that while unwelcome, the EFSF news had already been largely factored in.
Draghi’s testimony to the European Parliament on Monday evening sternly reemphasized the need for coordination over the European debt crisis. The German Centre for European Economic Research (ZEW) survey is our first look at January data. There was a small improvement in the December survey, which suggested that the economy was slowing less than feared. A further improvement in the economic sentiment index is expected, but it would still see it at levels last seen in September. With the current situation index expected to fall from 26.8 to 24.0, which would mark its lowest level since July 2010.
Consumer Price Index (CPI) remains the key focus in the UK, with expectations for a sharp fall in prices from 4.8% to 4.2%. Retail Price Index (RPI) Index and House prices round of the events. Looking forward, with the Advance Estimate of Q4 GDP being released next week, we start to get the final piece of hard data to firm up forecasts. Last week National Institute of Economic and Social Research (NIESR) estimated that the economy grew by 0.1% in the three months to December despite what looks to have been a fairly sharp contraction in industrial production. December labor market data and retail sales could well outperform expectations as we would expect to see a seasonal hiring in December a little stronger than last year due to the mild winter. We look for only a 2,000 increase in the claimant count, but average weekly earnings seem destined to remain below 2%, leaving them well below the rate of inflation.
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Jan
16
Friday 13th – S&P made it unlucky for some Eurozone countries
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Cynics might argue that S&P’s ratings changes are generally announced on a Friday night to secure maximum publicity over a whole weekend. The agencies themselves argue that the timetable is designed to minimize market disruption and to allow analysts and investors to reflect on fresh information and prevent disorderly market conditions. There’s probably some truth in both these arguments, but the process is then totally undermined by rumours and leaks ahead of the official announcement. So, whilst this morning’s 3bp increase in both Italian and French 10 year bond spreads relative to Germany looks orderly, it follows a very volatile Friday afternoon session which saw bond prices and the euro itself come under heavy selling pressure.
EUR/USD has hit a 16 month low of 1.2626, whilst EUR/JPY at 97.04 is the lowest in more than 11 years. And, though GBP/EUR has edged back to 1.2101, this more than half a penny above last week’s lows as the pound itself has fallen below USD1.53.
A fairly quiet week would have been in store for the Eurozone after the ECB voted unanimously to keep rates on hold last week. Draghi is due to testify to the European Parliament on Monday evening, but this will be in his capacity as head of the European Systemic Risk Board, so the discussion is likely to touch on the robustness of the Eurozone banking system rather than on the outlook for monetary policy. Instead, expect a lot of market focus on the success – or otherwise – of the EFSF’s 182 day Bill auction on Tuesday and the broader implications of S&P’s sovereign downgrades for the EFSF’s own credit rating.
As far as hard actual economic facts are concerned, the Martin Luther King Holiday in the United States today means that the week starts slowly and that US economic data is pushed towards the end of the week. As with the UK, the interest will largely focus on what the outlook seems for Q4 GDP growth, with Wednesday’s industrial production the key release for those looking to forecast output growth.
With the Advance Estimate of Q4 GDP being released next week, we start to get the final pieces of the jigsaw later this week to firm up forecasts. Last week NIESR estimated that the economy grew by 0.1% in the three months to December despite what looks to have been a fairly sharp contraction in industrial production. December labour market data and retail sales could well outperform expectations as we would expect to see a seasonal hiring in December a little stronger than last year due to the mild winter. We look for only a 2,000 increase in the claimant count, but average weekly earnings seem destined to remain below 2%, leaving them well below the rate of inflation.
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Jan
13
ECB unchanged interest rate proves the EURO`s slightly strengthen
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Stock markets rallied this morning as central banks stood pat yesterday and ECB President Draghi tried to boost confidence in the Eurozone. Euro-dollar rallied to $1.2870 in early trading before falling back and the dearth of data this morning should be supportive for the single currency.
Oil prices fell sharply yesterday after reports that any European ban on Iranian oil exports would be phased in over six months. The delay in the embargo helped assuage fears that refiners would be scrabbling for cured and helped the front Brent contract gall from a peak of $115 to a low of $110.31 overnight before it regained the $112 level this morning. The entire commodities sphere was weaker, with the FAO showing global food prices falling in December, largely due to a fall in cereals prices. Given the links between food and energy prices, it is hardly surprising that a fall in grain prices fed through to the energy complex.
With the MPC remaining on hold this month, producer price inflation data are a little meaningless as far as financial markets are concerned. However, they will show us whether the MPC‟s contention that inflation will fall sharply through 2012 will be met. We suspect that stagnating oil prices kept input prices flat on the month, but we suspect that manufacturers took the opportunity of pre-Christmas trading to raise factory gate prices, leaving retailers to take any margin hit. We therefore look for headline output prices to rise by 0.3%, which is a little above consensus. We are also fairly gloomy on the outlook for core output prices, where we also look for a small rise against market expectations of unchanged.
The US November trade balance is the last piece of hard data to be released ahead of the first estimate of Q4 GDP in two weeks time. As with the UK, December data are „guessed‟ using econometric models and survey data. But given the large swings in trade data –due partly to large and erratic items such as aircraft and also oil- then trade can have a considerable effect on the composition and growth rate of GDP. Net trade contributed 0.4pp to Q3 GDP growth but is expected to raise growth by only half that amount in the fourth quarter. The proof will be in the November trade balance, where the deficit is expected to widen from $43.5 billion to $45 billion, driven by an increase in the oil deficit and a rise in core import orders ahead of the holiday sales season.
A stronger trade reading would provide some relief after yesterday‟s disappointing retail sales data. Advance sales rose by 0.1% against market expectations for a 0.3% increase as gasoline prices fell and electronic goods sales unexpectedly stalled. Still, the pause in November could be revised higher in due course and suggest that December will show a small rally. The key to the outlook for consumption remains consumer confidence and the University of Michigan Consumer Confidence Survey is expected to rise to 71.5 in January, matching a high last seen in June.
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Jan
12
Despite positive Signals from Germany the EURO stays weak
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A spokesman from Fitch called on the ECB to make greater efforts to limit bond yields in stressed countries and to allow the EFSF to operate as a bank. Their view is that while a collapse of the Euro is unlikely, it still remains possible and would be “cataclysmic”.
Investor demand was strong yesterday for Germany’s issue of €4 billion 5 year bonds which got bids of nearly €9 billion at an average yield of 0.90% as the flight to safety continued in the Eurozone. Meanwhile, a flash estimate of German GDP for 2011 confirmed growth of 3.0% for the year. However, the economy is likely to have shrunk by 0.25% in the final quarter.
In the UK, the Office for National Statistics reported that the trade deficit for Q4 2011 was slightly wider than expected at £2.6bn as exports fell to countries outside Europe, while imports from outside Europe rose to a record high.
Sterling came under pressure yesterday falling over 1% against the US dollar following the Fitch comments which turned the markets firmly “risk off” ahead of the BoE announcement this morning and speculation of further Quantitative Easing. In early morning trading GBP/USD has dipped below the $1.53 level.
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Jan
9
How close is the Eurozone to a fiscal compact
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Futures contracts show European bourses opening higher this morning, but we suspect that confidence is fragile after Asian markets sold-off overnight. Markets are ignoring much better than expected US data to concentrate on the ongoing Eurozone sovereign debt crisis.
The Euro spent much of Friday on the back foot but managed a small rally this morning despite comments from Czech Central Bank Governor Singer that Greece should leave the Eurozone and devalue its own currency unless the Eurozone is prepared to provide much larger levels of funding then at present.
Friday‟s 4.8% fall in German factory orders suggest that the consensus call for a 0.5% dip in industrial production could prove way too optimistic. Of course, the milder winter could have boosted construction activity in November, but excluding production we would expect at least a 2% fall on the month, which would see annual growth also slow to a similar pace. It is doubtful that there will be a significant market reaction to a weaker than expected outturn, as markets instead will be focusing on the Sarkozy-Merkel summit in Berlin this morning. A press conference is due to be held at 12:30 (GMT).
The two leaders are expected to agree how the „fiscal compact‟ agreed by Eurozone member states on 9th December will actually be interpreted. Guidelines will be needed by March. They are also expected to discuss the possibility of a financial transactions tax within the Eurozone itself, although UK objections suggest that EU-wide agreement is still some way off. It is relatively easy to agree on common points at bilateral summits but getting the rest of the Eurozone to sign up could prove much more difficult. German lawmakers have already made it clear that they are resisting increasing the ceiling for the European Stability Mechanism from €500 billion, which implies a greater IMF role in providing funding for periphery countries.
Merkel is also due to meet with Italian PM Monti on Wednesday, where is expected to state that the austerity package remains on track and that further measures are not needed. The olive branch extended to Italy looks to be an attempt to calm market nerves that the Eurozone‟s third largest economy is about to default on its debt. By shoring-up Monti politically, the hope is that the current austerity program will be fully implemented.
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