09 July 2014 The Big Picture • Risk-off mood continues The risk-off mood continued yesterday with little apparent catalyst. True, the European data wasn’t all that great: Germany’s trade figures for May were disappointing, with both imports and exports falling month-on-month, and UK industrial output unexpectedly fell in May. But these figures were hardly enough to account for the large falls in all the major European bourses yesterday. The US data on the other hand was relatively good, but that didn’t stop stocks from falling, bond yields moving lower and Fed Funds rate expectations retreating. The NFIB small business optimism survey was slightly disappointing, falling to 95.0 from 96.6 instead of rising to 97.0 as expected. But the “plan to hire” index rose to 12% from 10%, well above the average of 9%, so this was a good sign for the labor market. Adding to the good news on jobs, the Job Opening and Labor Turnover Survey (JOLTS) report was expected to show a drop in job openings but instead showed another rise to 4.635mn, just a bit below the pre-crash 2007 high of 4.657mn (record high was 5.273mn in January 2001). More companies looking to hire, more job openings, it could mean higher wages and therefore earlier tightening. Plus US consumer credit once again surged as auto lending picked up, showing that consumers have more confidence to borrow and spend. But Fed Funds expectations for June 2017 were down 5 bps and US 10-year yields fell about 6 bps nonetheless, so clearly something else was at work yesterday. Once again the peak in rates was hit on payroll day, last Thursday, and yields have declined since, while Fed Funds rate expectations are now almost back to where they were the day before the NFP. We can’t even blame it on the increasing tensions in the Middle East as Brent this morning is back to levels last seen about a month ago. • Against this background, currency movements were surprisingly muted. The dollar is opening this morning in Europe little changed against most of its G10 counterparts. It’s notably stronger only against NOK, while weaker vs NZD, JPY and AUD. NZD may be gaining on momentum after yesterday’s modest upgrade in outlook by Fitch, while USD/JPY usually moves lower when stocks fall. AUD and NZD may be benefitting from relatively muted Chinese inflation (2.3% yoy in June, down from 2.5% in May), which will enable the authorities to continue with their stimulus without fear of overheating the economy. • Today: The focus today will be on the release of the minutes from the June 17-18 FOMC meeting. The market will be most likely looking for any indications of when the Committee members think it will be appropriate to begin raising rates. We also hope to get some insight into the FOMC’s slightly more hawkish rate forecasts. Expectations have been dampened somewhat after comments overnight by Minneapolis Fed President Kocherlakota, who said he expects inflation to “slacken off by the end of the year” and that inflation in the US may run below the Fed’s 2% target until 2018. Kocherlakota is known as among the most dovish people on the FOMC so his words must be taken as one extreme and by no means the Committee’s central view. Meanwhile, Richmond Fed President Lacker said he expects growth to continue at its current pace and that growth of more than 3% is “unlikely.” If the comments do turn out to be relatively dovish, it could continue the weakness in USD. On the other hand, there’s always the possibility of a surprise, and it now seems that the market is more poised for a dovish view than a more hawkish sentiment. We will get further clarification next week, when Fed Chair Janet Yellen delivers the twice-a-year report on monetary policy to Congress (the Senate on Tuesday and the House on Wednesday). • During the European day, the only indicator released is Sweden’s unemployment rate for June from the Public Employment Service, or PES. Sweden has two different calculations for its unemployment rate. This seems to be the less important one. • We also get the MBA mortgage applications for the week ended on the 4th of July and as usual no forecast is available. • Canada’s housing starts for June are also coming out. • We have four speakers scheduled on Wednesday. ECB President Mario Draghi as well as two other Executive members, Benoit Coeure and Peter Praet, speak. We also have the hearing of Nemat Shafik on her appointment as BoE Deputy Governor responsible for Markets and Banking.
Posted on: Wed, 09 Jul 2014 08:39:04 +0000