The ‘Big’ dollar is ending the week on a flier against the Yen, managing to print a nine month high, while against the EUR the market has completed a three-cent U-turn. Worries about an oil supply shock are pressuring both of the favored funding currencies. CPI data in Japan indicates that the country remains gripped by its nemesis, “deflation”. This has forced BoJ Governor Shirakawa again to stand firm and state that the Central Bank would keep monetary policy “ultra-loose” in its efforts to meet its inflation target. Bernanke’s no show hand on QE mid-week had some investors closing out their short dollar positions. Implementing a third round of QE would have weighed on the dollar.
Below are some other highlights of the week:
EUROPE
USD: Pending home sales rises +2%, m/m, in January to 97, and up +8%, y/y. It is the highest level recorded in 21-months and suggests that the housing market might be turning a corner. The rise came on the back of easier mortgage lending, lower interest rates and improving labor markets.
USD: US Durable goods orders posted the biggest drop in three-years mid-week (-4%) suggesting a sign of a still fragile economic recovery. However, it is important to note that new-orders had increased the three previous months, including solid gains of a +3.2% in December and +4.2% in November; this suggests that factories have a healthy backlog of orders that need to be filled, keeping product lines moving.
USD: US Consumer confidence jumped in February, aided by a better assessment of the job situation. Confidence increased to 70.8 this month from a revised 61.5 in January. It’s the highest index print in a year. The present situation index rebounded to 45 from a revised 38.8 in January.
USD: GDP report was stronger than we expected on three fronts: First, Q4 GDP was revised up by 0.2% to 3.0% rather than down to 2.6%. The second surprise was in the PCE price index. Q4 growth rate was pushed all the way up to +1.2% from +0.7%. This is still below the Fed’s target range, but makes the disinflation story a little less compelling. The third major surprise was in the Q3 personal income revisions, which were massively positive. The annual growth rate of nominal labor compensation was revised up by more than four-percent points. Analysts note that a swing of more than two and a half percentage points in real-disposable income growth in the third quarter, from -1.9% to +0.7%.
Fed: Bernanke’s semi-annual report to Congress avoided any discussion of Fed asset-purchase plans in his prepared testimony. Bernanke’s text cited weak household income growth as being one of the fundamental factors restraining consumer spending, noting that real household income growth was flat in 2011. He indicated that inflation was moderate as the Fed anticipated in the second half of 2011 to a rate of 1.5% (close to its average pace in the preceding two-years).
USD: Jobless claims dropped-2k to +351k last week. Even better was the four-week moving average falling to +354k (lowest level in four years). This is a healthier sign that US labor markets are improving.
USD: Income (+0.5%) and spending (flat) came in less than expected, suggesting that consumers are still hesitant to buy in fully to a better economy.
CAD: Canada’s current account deficit narrowed less than expected in Q4. The deficit shrank to -CAD$10.33B from a revised -CAD$12.32b.
USD: The market was expecting a strong US ISM print (58), but were disappointed with it slipping to 52.4 from 54.1. Stronger global risk appetite has investors shrugging.
CAD: GDP growth was a tad higher than expected (+0.4%, m/m). Q4 annualized increase matched consensus (+1.8%).
THe USD reached record lows against the EUR as the Greek bailout was finalized and crisis was if not adverted at least postponed. US Housing fell in January, but revisions to previous months’ data was better than originally reported.
This weekend the G20 meets in Mexico City to discuss the group’s role in a new round of IMF contributions that are very likely to end up being used to contain the Eurozone debt crisis. U.S., Chinese and Japanese official have questioned the role of the IMF and want more assurances that European individual governments and the economic zone as a whole are doing their part to prevent sovereign debt from reaching default status.
The IMF is looking for a 500 billion dollar commitment from the group in order to face the current European crisis. China, Japan and Mexico are willing to help if Europe leadership acts in line with their rhetoric. The U.S. is not seeking to add additional funds until they see “additional steps” are taken to prevent contagion.
ASIA WEEK IN FX
EUROPE WEEK IN FX
WEEK AHEAD
G20 Meetings
US Pending Home Sales
US Durable Goods Orders and CB Consumer Confidence
This weeks highly anticipated teleconference meeting only produced ‘sound bites’, allowing another day to be wasted and another day closer to default. The next Euro finance meeting is this coming Monday in Brussels. It’s here that the market again will hope for more clarity on a potential Greek third tranche timetable. The aggressive squeeze put on the weaker EUR shorts in the final sessions of the week has been caused by the Greek government believing that a “deal” is done. Failure to get a second +EUR130b bailout after next Monday’s Euro finance ministers meeting will again provide a market license to sell the single currency as Greece enters election season without funding.
Below are some other highlights of the week:
EUROPE
EU: Greek parliament approves austerity measures in a late Sunday vote, temporarily allowing the EUR to retrace all the previous Friday’s losses. A majority of the two main parities voted in favor, although more than 40 MP’s from these parties either voted no or abstained.
EU: Greece had to identify +EUR300m in additional austerity measures to offset pension reforms it rejected last week.
EU: In after hours trading on Monday, Moody’s downgraded Italy and Spain and revised the outlook to negative for France and the UK’s AAA rating. Spain’s rating was cut to A3 from A1, Italy was lowered to A3 from A2 and Portugal was reduced to Ba3 from Ba2 with negative outlook. The ratings of Slovakia, Slovenia and Malta have also been cut.
GBP: UK inflation moderated last month with headline inflation falling to +3.6%, y/y, from +4.2%. Core goods inflation fell to +2.6%, y/y, from +3.0% with a flat seasonally adjusted reading on the month. The drop in core was due to lower services inflation and suggests somewhat smaller inflationary pressure.
GER: German ZEW surprised much stronger than expected with the expectations component jumping to 5.4 from -21.6 (highest level in 10-months). Current situation assessment increased to 40.3 from 28.4. This has been a less reliable indicator, but this strong pick up bodes well for this month’s PMIs and IFO due next week.
EU: Euro-zone, IP contracted -1.1%, m/m, in December and in line with consensus. Meanwhile GDP data showed a sharper slowdown continued in the periphery. Portuguese GDP contracted -1.3%, q/q, in Q4 following a -0.6% decrease in Q3. Greek on the other hand GDP fell-7% in Q4.
HUF: Hungarian headline inflation spiked to +5.5%, y/y, in January from +4.1%.The sharp rise is attributed to a VAT hike last month and the pass through effect from a weak currency. The market should expect the Central bank to see this as a ‘once-off’ price adjustment. Policy makers remain preoccupied with today’s deadline to respond to the EC objections to recent legislation on Cbank independence.
EU: The Euro-zone economy contracted in Q4 (-0.3%, q/q) for the first time in two-and-a-half years, as nine member states posted a fall, while five entered a recession. This would suggest that the impact of the debt crisis continues to bite and it’s probably prudent to suggest the remaining regions, apart from Germany will follow in Q1. Germany remains the most likely outlier, but not an economy large enough to shoulder the rest of Europe. EUR bears continue to find better levels to short the region again.
CNY: PBoC governor Zhou asserted that China specifically and the BRIC countries more generally are willing to support the euro area, but are waiting for the appropriate time to do this. China could support the euro area through the EFSF or IMF with funding from the central bank, China’s sovereign wealth fund, or China’s development banks.
GRE: The three main party leaders have agreed to personally sign off on the latest austerity measures imposed by Troika. Final approval of the program is now not expected until next Monday’s Euro group meeting. The markets will then be watching and wondering what the uptake of the swap among investors will look like.
GBP: The BoE inflation report showed inflation at around +1.8% in two-years under the assumptions that the Bank Rate moves in line with market interest rates and the size of the asset buying program remains at +£325b. The prediction is much higher that +1.27% forecasted last November. Less risk of further debt monetization means that the GBP can potentially attract more official flows. Sterling remains attractive as an alternative currency to the EUR.
UK: The unemployment rate remained at +8.4%, while the claimant count rose slightly to +6.9k from +1.9k, a touch above the consensus forecast for +3k.
HUF: The MNB introduced new credit facilities supposedly to facilitate an expansion in bank lending to the corporate and household sectors.
CZK: The Czech Republic entered a recession in Q4, with a second consecutive contraction of GDP. GDP fell -0.3%, q/q, following a -0.1%, q/q drop in Q3.
EU: General risk attitudes ebbed and flowed on Thursday, as fears that the second Greek bailout talks were showing signs of an impasse, pushed the EUR to a three-month low.
Moody’s: The agency is reviewing credit ratings for 17 major financial firms, and that a new wave of downgrades is imminent.
Fixed Income: Despite stronger than expected French and Spanish bond auctions demand midweek, periphery yields continue to tick higher.
SEK: As expected, the Riksbank cut interest rates by -25bps to +1.50% followed by a dovish statement. With the Repo rate path revised lower, no further rate hikes are being priced in until 2014 at the earliest. Policy makers remain uncertain about future rate growth and have revised growth forecasts higher for 2014 while lowering near-term forecasts. Domestic inflation was weak last month with the headline rate falling to +1.9%, y/y, from +2.3%. Core-inflation also remains subdued at +0.9%.
NOK: Norway’s mainland GDP grew +0.6%, q/q, in Q4, beating the +0.5% expectation.
This weeks highly anticipated teleconference meeting only produced ‘sound bites’, allowing another day to be wasted and another day closer to default. The next Euro finance meeting is this coming Monday in Brussels. It’s here that the market again will hope for more clarity on a potential Greek third tranche timetable. The aggressive squeeze put on the weaker EUR shorts in the final sessions of the week has been caused by the Greek government believing that a “deal” is done. Failure to get a second +EUR130b bailout after next Monday’s Euro finance ministers meeting will again provide a market license to sell the single currency as Greece enters election season without funding.
Below are some other highlights of the week:
EUROPE
EU: Greek parliament approves austerity measures in a late Sunday vote, temporarily allowing the EUR to retrace all the previous Friday’s losses. A majority of the two main parities voted in favor, although more than 40 MP’s from these parties either voted no or abstained.
EU: Greece had to identify +EUR300m in additional austerity measures to offset pension reforms it rejected last week.
EU: In after hours trading on Monday, Moody’s downgraded Italy and Spain and revised the outlook to negative for France and the UK’s AAA rating. Spain’s rating was cut to A3 from A1, Italy was lowered to A3 from A2 and Portugal was reduced to Ba3 from Ba2 with negative outlook. The ratings of Slovakia, Slovenia and Malta have also been cut.
GBP: UK inflation moderated last month with headline inflation falling to +3.6%, y/y, from +4.2%. Core goods inflation fell to +2.6%, y/y, from +3.0% with a flat seasonally adjusted reading on the month. The drop in core was due to lower services inflation and suggests somewhat smaller inflationary pressure.
GER: German ZEW surprised much stronger than expected with the expectations component jumping to 5.4 from -21.6 (highest level in 10-months). Current situation assessment increased to 40.3 from 28.4. This has been a less reliable indicator, but this strong pick up bodes well for this month’s PMIs and IFO due next week.
EU: Euro-zone, IP contracted -1.1%, m/m, in December and in line with consensus. Meanwhile GDP data showed a sharper slowdown continued in the periphery. Portuguese GDP contracted -1.3%, q/q, in Q4 following a -0.6% decrease in Q3. Greek on the other hand GDP fell-7% in Q4.
HUF: Hungarian headline inflation spiked to +5.5%, y/y, in January from +4.1%.The sharp rise is attributed to a VAT hike last month and the pass through effect from a weak currency. The market should expect the Central bank to see this as a ‘once-off’ price adjustment. Policy makers remain preoccupied with today’s deadline to respond to the EC objections to recent legislation on Cbank independence.
EU: The Euro-zone economy contracted in Q4 (-0.3%, q/q) for the first time in two-and-a-half years, as nine member states posted a fall, while five entered a recession. This would suggest that the impact of the debt crisis continues to bite and it’s probably prudent to suggest the remaining regions, apart from Germany will follow in Q1. Germany remains the most likely outlier, but not an economy large enough to shoulder the rest of Europe. EUR bears continue to find better levels to short the region again.
CNY: PBoC governor Zhou asserted that China specifically and the BRIC countries more generally are willing to support the euro area, but are waiting for the appropriate time to do this. China could support the euro area through the EFSF or IMF with funding from the central bank, China’s sovereign wealth fund, or China’s development banks.
GRE: The three main party leaders have agreed to personally sign off on the latest austerity measures imposed by Troika. Final approval of the program is now not expected until next Monday’s Euro group meeting. The markets will then be watching and wondering what the uptake of the swap among investors will look like.
GBP: The BoE inflation report showed inflation at around +1.8% in two-years under the assumptions that the Bank Rate moves in line with market interest rates and the size of the asset buying program remains at +£325b. The prediction is much higher that +1.27% forecasted last November. Less risk of further debt monetization means that the GBP can potentially attract more official flows. Sterling remains attractive as an alternative currency to the EUR.
UK: The unemployment rate remained at +8.4%, while the claimant count rose slightly to +6.9k from +1.9k, a touch above the consensus forecast for +3k.
HUF: The MNB introduced new credit facilities supposedly to facilitate an expansion in bank lending to the corporate and household sectors.
CZK: The Czech Republic entered a recession in Q4, with a second consecutive contraction of GDP. GDP fell -0.3%, q/q, following a -0.1%, q/q drop in Q3.
EU: General risk attitudes ebbed and flowed on Thursday, as fears that the second Greek bailout talks were showing signs of an impasse, pushed the EUR to a three-month low.
Moody’s: The agency is reviewing credit ratings for 17 major financial firms, and that a new wave of downgrades is imminent.
Fixed Income: Despite stronger than expected French and Spanish bond auctions demand midweek, periphery yields continue to tick higher.
SEK: As expected, the Riksbank cut interest rates by -25bps to +1.50% followed by a dovish statement. With the Repo rate path revised lower, no further rate hikes are being priced in until 2014 at the earliest. Policy makers remain uncertain about future rate growth and have revised growth forecasts higher for 2014 while lowering near-term forecasts. Domestic inflation was weak last month with the headline rate falling to +1.9%, y/y, from +2.3%. Core-inflation also remains subdued at +0.9%.
NOK: Norway’s mainland GDP grew +0.6%, q/q, in Q4, beating the +0.5% expectation.
US data has done a stellar job this week. Above expectation prints have helped to sustain the EUR and other risk related currencies as the market heads towards the showdown in Brussels on Monday. Initial jobless claims last week beat expectations, falling to the lowest level in four years, meanwhile Philly Fed for this month came in stronger than expected, as did January housing starts. The data seems to be putting the final squeeze on the weaker EUR shorts, determined for the single currency to end the week on a high. Will the elevated pricing remain there on Monday during US presidents Day? Obviously liquidity is going to be a major concern on this US national holiday, no matter what the outcome is in Brussels. It’s setting up to be an interesting opening session in Australasia!
Below are some other highlights of the week:
Americas
NA: It was another light week on the North American data front as we head into next weeks shortened trading week.
CAD: Auto sales fell-3% following a-1% drop in the previous month.
USD: Retail sales disappointed at +0.4% vs. +0.7% expected. However, non-autos beat expectations with a +0.7% rise allowing risk off trades to be considered.
USD: NY Fed index rallied to 19.53 this month from 13.48. The sub-indexes were mixed, but almost all of them remained in expansion territory, which suggests that the factory sector is doing well in the middle month of Q1.
USD: China sold US treasuries in December (-$32b), cutting its net holdings for the third consecutive month, but remains the largest foreign holder of US debt (+$1.1t). The net long-term TICS data showed buying of +$17.9b in December, after purchases of +$61.3b the previous month.
USD: According to the EIA, US commercial crude oil inventories fell by -0.2m barrels to +339.1m last week.
FOMC: Januarys minutes indicated that a few members said the Fed may soon have to consider more asset purchases, while others believed that the economic outlook would have to deteriorate first.
CAD: Manufacturing sales growth in December was lower than expected, up +0.6% to +$49.94b, the fifth gain in five months. The market was looking for a +2% increase. The headline data suggests that GDP expanded in December after two disappointing consecutive months.
USD: Housing starts rallied last month, +1.95% vs. -1.9%, but not enough to convince the market that this sector is ready to recover from the worst downturn in history. Building permits, future construction, rose +0.7% to an annual rate of +676k vs. +1.3% expectation.
USD: US PPI rose a seasonally adjusted +0.1% for finished goods in January. The core was up +0.4%, the largest increase in seven-months.
USD: US weekly claims fell last week, -13k to +348k, to the lowest level in four years. This is the third consecutive weekly drop. The more accurate four-week moving average declined -1.75k to +362.2k.
USD: The Philly Fed Manufacturing Index rallied to 10.2 this month from 7.3 in January. Both prices and new orders both rose, while the labor picture was mixed. Manufactures remain optimistic about the future.
CAD: Canada’s composite leading index increased +0.7% in January, completing the seventh consecutive increase. The advances were concentrated in manufacturing, housing and services employment, and was offset by declines in durable goods sales and equity prices
CAD: Canadian Consumer prices rose more than expected in January (+0.4% vs. -0.6%), led by higher gas and food costs. Core-prices (+0.2%, m/m) are again back over +2% (+2.1%, y/y), after a short spell below the inflation target (+1.9%).
“Key” surprises have ended up being the theme of this week. The Fed has extended the term of free money by 18-months and the door is now ajar for further QE. It’s the “when” that many appear to disagree with. It seems unlikely to be applied until after operation twist ends in June. QE2 and the ‘twist’ arrived after extensive debates and many months of weak data. In the medium term, both equities and commodities should continue to benefit from the idea that the Fed has better than even odds of performing additional QE.
US GDP, despite growing at a solid +2.8% in Q4, provided its surprise in the details. The mix of growth suggests weakness this quarter and beyond. The bulk of last quarter’s growth came from the inventory sector (+2% of the top-line). Real GDP ex-inventories were a poor +0.8%, the weakest pace in a year.
Below are some other highlights of the week:
AMERICAS
CAD: Retail Sales rose a tad more than expected in November (+0.3% vs. +0.2%). However, it was the smallest of four consecutive monthly gains, on increased sales of gas and clothing. Sales rose to +$38.7b slowing from a revised +0.9% increase in October. Sales volume at +0.5% was also the fourth straight increase.
USD: Obama’s campaign begins. In the State of the Union address he called for the creation of a trade enforcement division to investigate unfair trade practices, an end to tax deductions related to US company closures of facilities in the US for relocation abroad. He also announced plans to provide financing for US firms competing with overseas firms receiving state financing.
USD: December Pending Home Sales (-3.5% to 96.6) fell from its 19-month high print the prior month. The results were +5.6% above the December 2010 point.
USD: Weekly crude inventory report increased by +3.6m barrels last week to +334.8m barrels.
FOMC: The Fed surprised markets mid-week by extending its contingent commitment to low policy rates through 2014 (an extension of 18-months). In their transparency approach, the FOMC central projections showed only 6 of 17 committee members anticipate no easing before 2015.
USD: December durable goods orders firm with a +3% increase and a +2.1% ex-transport print. This supports recent manufacturing survey’s that the sector is regaining some momentum.
USD: As expected, seasonally adjusted initial unemployment benefit claims contracted upwards last week to +377k, up +21k w/w. The less volatile four-week average stands at +377.5k. Continuing claims now at +3.55m is more consistent with a +8.6% unemployment rate.
USD: December new home sales unexpectedly fell -2.2% to +307k, well below consensus estimates of +320k. It’s disappointing data on the back of other recent housing indicators having been positive. The data suggests that the market cannot be confident of a strong and sustained boost to GDP despite lower mortgage rates.
USD: First reading of the US Q4 GDP did not live up to hype. Economists expected +3% and they got +2.8%, however, still a notable improvement from the +1.8% in Q3 print.
USD: The belief that more jobs are to be had pushed the UoM consumer sentiment higher to 75 from 74. Sentiment has been expanding for five-months; stronger payrolls lead to stronger sentiment.
USD: UoM inflation expectations edged higher to +3.3% at the end of January from +2.7% earlier in the month.
Recap of the Latest Global News
By Cory Vi & Andrew Su on Jan 24, 2012
The EUR staged a rally yesterday as European finance ministers met in Brussels to discuss new budget rules and the Greek debt swap plan. In a familiar pattern, Europhoria seems to grip the markets every time officials meet to discuss the debt crisis and the EUR rallies. Our expectation that history would repeat itself and the EUR would once again fall after the optimism surrounding the meetings dissipates is eventuating. The region’s finance ministers have failed to agree on the Greek debt swap deal and are calling on a greater contribution from debt holders. The EUR has fallen from a high of 1.3065 during the Asian session to as low as 1.2988 during the European morning.
Germany has proposed the idea of combining the temporary and permanent rescue funds in an effort to reinforce the funds and boost resources to them. Meanwhile, a move by European finance ministers to provide greater debt relief to Greece by calling on investors to accept a lower interest rate on exchanged bonds is setting up a possible fiery situation at the next EU Summit on January 30. All the event risk in the markets has finally caught up with the riskier currencies with the Australian dollar falling more than a cent from yesterday.
Equity markets in the US closed flat yesterday as investors took time to evaluate the reasons for three consecutive weekly rises in stocks and caution still surrounds the debt crisis in Europe. The S&P 500′s 14 day relative strength index has stayed above 65 since mid January and recording its strongest run in almost a year. Asian markets were largely subdued with many closed for Chinese New Year celebrations. The Nikkei closed 0.22% higher while the ASX 200 closed flat. European bourses have lost 1% mid session as negotiations over the Greek debt swap deal stall.
It’s been a difficult week for the Euro ‘bears’; you get downgraded, receive some suspect economic data and fail to agree on a ‘haircut’ in stone just yet (details over the w/d), yet the currency appreciates +150pts from this years lows and in danger of edging even higher. What’s with that?
Many analysts seemed to have factored in a record single currency low print somewhere in their trading strategy calculations. Is this attainable? Much depends on key issues such as the Greek PSI and the forthcoming Euro-area summit. The currency remains susceptible to possible near term policy risks in Europe and fiscal tightening.
For now, the market remain focused on the ongoing Greek private sector involvement negotiations. There are rumored reports that indicate an initial agreement has been reached on a voluntary restructuring, but uncertainty is likely to persist until it becomes clear how widely private sector participants will adopt the plan.
Below are some other highlights of the week:
EUROPE
Merkel and Sarkozy started the week sounding the trumpets “We must solve Europe’s competitiveness problems”
EU: Greece dispatches officials to the US for meetings with the IMF. The fear of a default and a subsequent euro-zone exit has overshadowed a mass credit downgrade of euro-zone countries. Athens requires a deal with the PSI within days to avoid going bankrupt when +EUR14.5b of bond redemptions fall due in late March. Talks with its creditor remain ongoing.
EUR: The single currency is beginning to lose support from foreign Cbanks. Reserve data for the 4Q in 2011 reveals a weakening in reserve accumulation as compared to previous years. The ‘build (buy EUR’s) to hold down local currencies was nearly “zero”-resulting in a change of global asset prices.
FRF: French Treasury came to the market a day after being downgraded from AAA to AA+ by S&P’s. They auctioned +EUR8.7b of 84-day-357-day T-bills. The issues drew strong investor demand in Frances first bill auction of 2012 with short-term yields rising only slightly from record lows reached in its last auction of 2011.
EU: It was not a market surprise that the EFSF program was downgraded from AAA to AA+ late Monday.
EUR: Stronger set of Chinese growth data managed to push the EUR off this years lows, a couple of days after sovereign credit downgrades. The single currency short term remains elevated!
EU: The EFSF auctioned +€1.5b of 6-month bills, with a bid-to-cover ratio of 3.1 despite S&P’s downgrade to AA+. The Eurogroup has agreed to discuss the implications of trying to restore the AAA status. Spain also issued +€4.9b of 12- and 18-month bills with strong support.
ECB: Euro-zone inflation was revised a tad lower to +2.7%, y/y, from the +2.8% initial estimate. Inflation had been boosted over the past three-months by VAT hikes and electricity prices. The ECB projects inflation to slow to +2% this year. Market does not expect an imminent rate cut. FI is pricing in one for March.
GER: Despite remaining at depressed levels, the German ZEW expectations recovered sharply to -21.6 from -53.8 last month (sharpest increase in history).
UK: UK inflation slowed to +4.2%, y/y, from 4.8% in November, in line with consensus. Last month, the core-inflation happened to fall to +3.0% from +3.2%. Not necessarily obstacles for expanding the QE program, but recent growth indicators suggest the risks are now for less rather than more QE next month.
IMF: Market reports indicated that the IMF will seek to increase resources by $1Trillion, drawing largely on the BRIC economies, Japan and oil exporters. This news provided some risk appreciation and perhaps even more if augmented by a fully functioning ESM. Do not expect automatic or willing contributions!
EU: Negotiations on Greek private sector involvement resumed midweek. It’s been reported that Greece is close to agreeing to pay +32c per EUR of government debt. Aiding the negotiations, Greek officials have signaled increased willingness to use collective action clauses if participation in PSI falls short of 100%.
GBP: UK jobless claims surprised low at +1.2k in December vs. an expected +7k and continuing the positive trends for the unemployment rate. However, the ILO unemployment rate increased to +8.4% from +8.3%.
EUR: The market risk rally remains intact, despite the poor data out of Australia. The CE3 block and Scandinavia currencies continued to outperform on the week.
EUR: There was a successful longer dated issuance in both Spain and France. Spain issued +€6.6b in 5-10yr bonds while France placed +€7.9b worth of 2-4year paper and +€1.5b in inflation linked bonds. Despite the auctions yielding “strong” bid-to-cover ratios, the auctions failed to generate market momentum in FI.
GBP: UK retail sales ex-fuel rose +0.6%, m/m in December. With sales remaining subdued, analysts expect falling inflation to help real consumer income and support future data releases. Cable is expected to remain under pressure.
US data is beginning to highlight the disconnect between the US and the Euro-zone. As FX traders hone their Fixed Income (FI) skills with the Euro sovereign debt issues, even they must sympathize with the frustration of the US bond bears. The benchmark 10-year Treasury yield has defied improving US data, and straddles the +2% yield for most of this year. It’s another crowded market trade that mirrors the frustrations of the ‘short’ single currency strategy. Euro-zone concern remains in the driver seat while US data for now, acts like “Robin” of the relationship. Yields for Treasuries or other ‘safe haven sovereign debt’ are not in danger of rallying any time soon until the Euro-zone stabilizes.
Below are some other highlights of the week:
AMERICAS
US: Martin Luther King Day on Monday was respected by the markets; it was also to be the lead for a quiet beginning of the week, or so we thought. Lack of liquidity led to thin markets, producing volatility that allowed dealers print a new yearly EUR/USD low.
CAD: New Motor vehicle sales fell-1% in November to +137.6k units, offsetting the October and September gains. Truck sales fell -1.3% to +80.4k units.
USD: January Empire State Index on manufacturing conditions in New York of 13.48 was stronger than the consensus of 11. It was a rise from 8.19 in December and a third straight improvement from a series of negatives.
CAD: The BoC, as expected, kept O/N rates on hold at +1%, reporting there is considerable monetary policy stimulus in Canada. Carney sees less slack in an economy that is now expected to return to full capacity by the 3Q in 2013. Inflation was seen as marginally firmer.
USD: US wholesale prices fell in December as food and energy costs declined significantly. PPI (manufactures and wholesales) declined a seasonally adjusted -0.1%. A slowdown of costs may give the Fed more wriggle room. Core-PPI increased by +0.3% (the largest increase in seven-months).
USD: November TIC report recorded a net rise of $59.8B. Foreign holdings saw a large rise from Japan $59.9b and a small decline from china -$1.5B.
USD: December Capacity Utilization increased +0.3pt at 78.1%.
CAD: BoC Monetary Report. There was a major shift in tone in the US outlook that sees US growth forecast improve to +2% in 2012 from +1.7% in the previous MPR. The other main take away is a downgraded Europe forecast with growth now to be in recession territory at -1% in 2012 from +0.2% in the previous report.
BRL: The Brazilian Central Bank (BCB) cut the Selic rate by -50bp to +10.50%. “A moderate adjustment in the basic rate level is consistent with the scenario of inflation convergence to the target in 2012″. BCB seems to be signposting further cut rates. Analysts are expecting another -100bsp by March.
CAD: Canadian Manufacturing shipments advanced at a faster pace in November than forecasted, up +2% to $49.1b. Robust gains were seen in the petroleum and coal industry.
USD: US December CPI ex-food and energy at +0.1% was unchanged.
USD: December Housing starts were weaker than expected with a -4.1% fall to +657k, while building permits at +679k were down a marginal -0.1%. Starts declines were due to a correction lower in multiples.
USD: Weekly initial claims plummeted -50k to +352k, while continuing sank to +3.4m. US data is beginning to highlight the discount between the US and the Euro-zone.
USD: The Philly Fed disappointed with a 7.3 print (10.3). However, there were pockets of strength, business conditions were up, and employment was moderately higher while new orders and prices paid dropped.
CAD: Consumer prices declined in December at the fastest in six-months. On a monthly basis, both the CPI and the core fell in the month, -0.6% and -0.5% respectively. For 2011, Canada’s average inflation rate hit +2.9% (the biggest increase in eight years, 2010 was +1.8%).
CAD: Wholesale trade recorded a surprise drop in November (-0.4% to +$48.4b). The market had been expecting a+0.5% gain.
USD: Existing home sales came in a little lower than expected. Sales rose +5% in December to annualized pace of + 4.61 m units. Housing inventory fell to a 6.2 months supply.
Can we shout “soft landing” loud enough? That is what Europe et al. are praying for from the “Red Rocket,” China. As their economy slows and key export partners struggle more than ever, the government must ensure a soft landing. The call must be fiscal stimulus driven with one priority, improve domestic consumption.
Policy makers seem to agree and are determined to push ahead with shifting the country’s growth drivers away from exports and towards personal spending. The PBoC continues to gradually ease policy. The market should not expect to see a repeat of 2008 when authorities pumped the equivalent of $630b to shield their “empire” from recession. This time around they are expected to be target selective.
Below are some other highlights of the week:
ASIA
EUR: The single currency is beginning to lose support from foreign Cbanks. Reserve data for the 4Q in 2011 reveals a weakening in reserve accumulation as compared to previous years. The ‘build (buy EUR’s) to hold down local currencies was nearly “zero”-resulting in a change of global asset prices.
CNY: China reported 4Q GDP growth of +8.9%, y/y, higher than the consensus forecast of +8.7%. For full year 2011, year-over-year, growth was +9.2%, down slightly from the +10.4% growth in 2010, supported by robust December macro-data. Retail sales growth rose to +18.1% in December, up from +17.3% in the prior month.
JPY: Japan’s Finance Minister Azumi indicated that the BoJ is monitoring the EURJPY rate as it continues to print record lows.
IDR: Bank of Indonesia widened the lower end of their inter-bank rate to +200bps, that is similar to a -50bps cut. With BI continuing to ease monetary conditions and the current account now balanced leaves the IDR more vulnerable to capital flow weakness.
CNY: There have been reports from China indicate the RRR for banks in Guizhou has been lowered. It seems that authorities want to continue to ease selectively following the robust 4Q data.
MYR: Malaysia’s inflation fell to +3.0%, y/y, in December from +3.3%. Analysts note that robust domestic demand points to Bank Negara Malaysia keeping policy rates on hold.
IDR: Indonesia’s credit rating was raised by Moody’s to investment grade at Baa3. Along with Fitch’s support, this can potentially increase portfolio inflows going forward, a positive for the IDR in the medium term.
AUD&NZD: Poor Aussie employment data (-29.3k in December, below consensus for a +10k gain) is supporting expectations of a further RBA cut (-25bps in February) and a weaker than expected CPI by the Kiwis (+1.8%, y/y, versus the +2.6% forecasted and down sharply from +4.6% in Q3) has put the antipodean currencies on the back foot medium term.
PHP: Bangko Sentral ng Pilipinas cut policy rates -25bp to +4.25% as expected. Easing inflation has allowed the Cbank to commence easing to support growth. Ample liquidity allows the easing to have a minimal impact on the currency.
CNY: China’s 2011 fiscal revenue rose +24.8%, while fiscal spending only rose +21.2%. The HSBC flash Chinese PMI was roughly flat in January at 48.8. The market believes the results to have been biased by the by the Lunar New Year.
THB: Thailand’s export growth was better than expected at -2%, y/y in December vs. -10% expected. Import growth surged to +19.1%, y/y, from -2.1% in November. The trade deficit widened to a record high of +$2.1b. The market expects the floods to continue put pressure on the trade balance. This will obviously affect the THB
