Via Marc Chandler at Brown Brothers Harriman:
Danish and Russians Cut Rates
– The Danish central bank cut its deposit rate again yesterday from -0.35% to -0.50%, the third cut in ten days
– The Russian central bank surprised markets by cutting rates by 2 percentage points to 15.0%
– Data out of Europe today was largely upbeat, though deflation concerns are as strong as ever
– During the North American session, the US reports Q4 GDP, with consensus at 3.0% SAAR vs. 5.0% in Q3
– Brazil reports December PPI and fiscal data; Colombia central bank meets
Price action: The dollar is mixed against the majors. The yen is outperforming, with dollar/yen trading near 117.50. The dollar bloc continues to underperform, all down against the US dollar today. The euro is trading around $1.1350, while cable is trading just below $1.51. EM currencies are mostly softer, with RUB the worst performer after the central bank surprised with a 200 bp rate cut to 15%. BRL, IDR, ZAR, and TRY are also underperforming. MSCI Asia Pacific fell 0.2%, the third straight down day as the 0.3% gain in the Nikkei was offset by larger losses in China and India. Euro Stoxx 600 is down 0.4% near midday, while S&P futures are pointing to a lower open. The 10-year UK gilt yield is trading at a record low 1.39%.
- The Danish central bank cut its deposit rate again yesterday from -0.35% to -0.50%, the third cut in ten days. The last one was on January 19. The country is using both of its tools to maintain the narrow band against the euro. It has also intervened, with estimates ranging from €5-8 bln this week. Under ERM II, it is committed to keeping the DKK in a 2.25% band against the euro, but in practice has adopted a 1% band. Under ERM, the central bank is obligated to defend both sides of the band, the strong and the weak. Unlike the SNB’s franc cap, the Danish regime is supported by the ECB. Will the ECB act to defend the euro against the rising Danish krone? Since it has not exercised inter-margin intervention at the 1% band, will it be there if the 2.25% band it tested?
- Meanwhile, the euro has rallied strongly against the Swiss franc this week. After the Greek election, the euro tested CHF0.98. Today it briefly resurfaced above CHF1.05. The market suspects SNB intervention. This reaffirms our understanding that the lifting of the franc was a tactical decision and did not signal a free float or the end of the SNB’s balance sheet expansion.
- The Russian central bank surprised markets by cutting rates 2 percentage points to 15.0%. We did note that the new man at the central bank, Dmitry Tulin, was placed as the head of monetary policy to take some action, but we didn’t expect it to happen so soon. The central bank stated that “Inflation and inflation expectations are forecast to decrease as the economy gradually adjusts to changing external conditions and the impact of the exchange-rate dynamics on prices wanes.” The ruble is down nearly 3% against the basket and 4% against the dollar, and we expect to revisit the December lows in the coming weeks. Separately, European Union foreign ministers extended (by six months) the targeted sanctions against Russian individuals and companies, but fell short of creating new stations. Meanwhile, Germany appears to be doubling down on its line towards Greece.
- Data out of Europe today was largely upbeat, though deflation concerns are as strong as ever. Looking at the wider eurozone, CPI came in at -0.6% y/y vs. -0.5% consensus and -0.2% in December. Eurozone unemployment rate was slightly better than expected at 11.4% in December. Germany reported December retail sales at 4.0% y/y vs. 3.6% consensus. France also reported December consumer spending up 0.5% y/y vs. -0.5% expected. Spain reported Q4 GDP growth higher than expected at 2.0% y/y vs. 1.6% in Q3 and harmonized CPI at -1.5% y/y. Also, Spain’s current account balance continues to improve, rising to €1.7 bln from just €0.3 bln. The numbers show that deflation in Spain is not preventing growth and also that the recovering economy does not stand in the way of Podemos. In the UK, consumer sentiment hit a 5-year high, rising from -4 to 1 in January. Expectations were for a print of -2.
- There was a lot of data out of Japan overnight. The labor market continued to tighten with the unemployment rate falling to 3.4%, the lowest level since late 1997, and the job-to-applicant ratio edging higher to 1.15, the highest since March 1992. The participation rate rose slightly to 59.3%. Despite the encouraging trend, compensation is still not rising meaningfully. Japan reported December national and Tokyo January CPI. The former came in at 2.4% y/y vs. 2.3% consensus, while the latter came in at 2.3% vs. 2.2% consensus. Ex-fresh food and energy measures for both series were largely close to consensus. Japan also reported December IP up 1.0% m/m vs. 1.2% consensus and -0.5% in November, as well as overall household spending at -3.4% y/y vs. -2.3% consensus. Overall, the data support the notion that the economy remains hobbled by the consumption tax hike, with consumer spending weak and inflation still likely to come in under target.
- During the North American session, the US reports Q4 GDP, with consensus at 3.0% SAAR vs. 5.0% in Q3. By way of comparison, the Atlanta Fed’s GDP NOW model is tracking at 3.5% growth for Q4. The US will also report Q4 Employment Cost Index (ECI). Canada reports November GDP, with consensus at 2.1% y/y vs. 2.3% in October.
- The FOMC embargo ends today, with Rosengren slated to speak this afternoon. Next week sees Bullard, Kocherlakota, Mester, Rosengren again, and Lockhart all speaking. We expect the upbeat message from the statement to carry over into the remarks, with the Fed still on track to hike rates near mid-year.
- Brazil reports December PPI and fiscal data. Primary balance is seen at BRL8.2 bln vs. -BRL8.1 bln in November. If so, the 12-month total would still move further into deficit territory. Indeed, the fiscal numbers are likely to get worse before they get better. Note that tax revenues contracted y/y in December for the second straight month. The current account gap was wider than expected in December, and highlights the growing “twin deficits” problem in Brazil. For USD/BRL, support seen near 2.60 and 2.55, resistance seen near 2.65 and then 2.70.
- Colombian central bank meets and is expected to keep rates steady at 4.5%. However, with the economic outlook weakening, we think an easing cycle will start in 2015. The last move was a 25 bp hike to 4.5% back in August. Inflation was 3.7% y/y in November and December, and consensus for January CPI due out next week is 3.8%. . This would a new high for the cycle, and barely within the 2-4% target range. The central bank may feel more comfortable waiting for inflation to move back towards the 3% target before cutting rates. For USD/COP, resistance seen in the 2460-70 area, and break above would suggest a test of the March 2009 high near 2610. Support seen near 2350 and then 2300.
- South Korea December IP rose sharply to 3.0% m/m, well above the expected at 0.9% m/m. However, the future doesn’t look so bright. February manufacturing forecast sentiment dropped to 73 from 77 in January. New orders dropped to 88. Korea will be the first to report January trade over the weekend. Exports are seen -2.8% y/y and imports -6.2% y/y. If so, this does not bode well for global activity to start off the year. Brazil will report January trade on Monday.