FX

March 9th, 2017 7:22 am

Via Marc Chandler at Brown Brothers Harriman:

Pre-ECB Squaring Lifts Euro in a Strong USD Context

  • Sandwiched in between the ADP estimate and the US jobs data, the ECB meets today
  • Falling commodity prices and rising US rates have helped take the shine off the Australian dollar
  • Chinese producer prices jumped but consumer price inflation slowed markedly
  • We note that the BOJ tweaked its negative deposit rate regime today
  • Czech February CPI rose 2.5% y/y; Mexico February CPI is expected to rise 4.82% y/y; Peru central bank is expected to keep rates steady at 4.25%

The dollar is mostly firmer against the majors.  The euro and Swiss franc are outperforming, while Nokkie and the dollar bloc are underperforming.  EM currencies are mostly weaker.  The CEE currencies are outperforming, while RUB and KRW are underperforming.  MSCI Asia Pacific was down 0.5%, even with the Nikkei rising 0.3%.  MSCI EM is down 1.2%, with China shares falling 0.6%.  Euro Stoxx 600 is down 0.3% near midday, while S&P futures are pointing to a flat open.  The 10-year UST yield is flat at 2.56%, the highest since late December.  Commodity prices are mostly lower, with oil down nearly 3%, copper down 1.4%, and gold down 0.3%.

The euro tested the lower of its range near $1.05 in Asia before short covering in Europe lifted it back toward yesterday’s highs near $1.0575.  However, buoyed by the upside surprise in the ADP estimate of private sector jobs growth, the dollar is firmer against most other currencies today.  The US 10-year yield is up 20 bp this week.  Including today’s move, the US 10-year yield is up for the ninth consecutive session.  At 2.57%, it has convincingly broken the downtrend in place since the middle of last December when the yield peaked near 2.64%.

Sandwiched in between the ADP estimate and the US jobs data, the ECB meets today.  With the euro near the lower end of its range, falling for four of the past five weeks, the pain trade is that the ECB will be somewhat less dovish.  The signal could be a change in the forward guidance about rates remaining at current levels or lower.  The phrase “or lower” could be dropped, some believe, in recognition of the solid growth (above trend) and rising price pressures.

However, this does not appear to us to be the more likely scenario.  Core inflation is stable in the trough (now 0.9%, after bottoming at 0.6%).  However, the ECB cannot be confident that energy prices, and to a lesser extent some weather-related increase in some fresh vegetable prices, will fade in the coming months, leaving a return to disinflation in its wake.  This idea may deter the ECB’s staff from lifting their inflation forecasts very much.

Also, the ECB will be loath to take measures in the presently charged environment that could be destabilizing.  Comments from officials show no strong urgency.  The market is doing some of that work already in the sense that outside of a few exceptions, like Germany and the Netherlands, have seen short-term interest rates over the past month.

Moreover, it seems that the pressures spurred by higher commodity prices may be peaking.  It is true that China’s PPI jumped to 7.8% year-over-year, which is the fastest pace since 2008 and is seen reflecting commodity prices.  However, this is partly a base effect as in the month of February producer prices actually fell (by 0.6%).  Oil prices have fallen, and today, the US WTI is below $50 a barrel for the first time this year.  Copper prices are lower for the sixth session and iron ore prices, off over 1% today, also appear to have rolled over.  Gold is falling as its down draft enters its fourth session (it has fallen in seven of the past nine sessions).

Falling commodity prices and rising US rates have helped take the shine off the Australian dollar, which is the strongest of the major currencies so far this year (up 4% even after this week’s 1% drop).  The Australian dollar broke out of the $0.7600-$0.7700 range last week.  It whipsawed back to into the range on Tuesday, but the slide resumed yesterday, and further losses are seen today.  The objective of the range breakout was $0.7500, and that has been taken out today.

Speculators in the futures market had shifted and taken a net long Aussie position, and the loss of $0.7500-$0.7520 warns that not only will longs have to be cut but momentum players may look to establish shorts.  The next target is near $0.7450, and then $0.7380.  The note of caution is that the Aussie is through the lower Bollinger Band (~$0.7525 today)

Falling oil prices and rising US yields have taken a toll on the Canadian dollar.  Recall the US dollar was testing support near CAD1.30 last month and is above CAD1.35 now, and looks poised to test the nemesis from the end of last year near CAD1.3600.

While Chinese producer prices jumped, consumer price inflation slowed markedly.  Economists had expected a slowing from the 2.5% year-over-year pace seen in January, but the 0.8% m/m pace was what they anticipated.  It is the slowest pace since January 2015.  It appears to be skewed by an early spring and good vegetable crop.  The Lunar New Year may have also distorted.  

Separately, China reported stronger bank lending in February than expected, but still a marked slowing from January.  The broader measures of aggregate financing, which also picks up the shadow banking activity, rose less than expected.  The CNY1.15 trillion increased compares with a median expectation of CNY1.45 trillion and the CNY3.737 trillion rise in January.

The yuan was weaker, falling to its lowest level since mid-January but recovering late.  The offshore yuan (CNH) fell below the onshore yuan (CNY), and the PBOC may have helped spur the recovery of both.  The offshore yuan has been stronger than the onshore yuan most of the year so far.  It was seen as a sign that the PBOC was trying to break the bearish speculation that helped create a troubling cycle of a weaker currency and capital outflows.

Rising yields appear to have forced the Bank of Japan’s hands as well.  The 10-year yield almost reached the BOJ 10 bp threshold after a poor reception to the MOF’s five-year bond auction.  The US 10-year yield premium over Japan reached 2.48 percentage points yesterday, the most in nearly three months.  This helped the greenback to test the JPY115 level that has largely capped the dollar since mid-January.

We note that the BOJ tweaked its negative deposit rate regime today.  It made a small change in the portion of the current account balances at the BOJ to which are exempt from negative rates (“macro add-on balances”) to 17% from 13%.

The softer yen helped Japanese equities edge higher and buck the regional trend that saw the MSCI Asia Pacific Index fall 0.5%, which is now at its lowest level in a month.  European stocks are also heavy.  The Dow Jones Stoxx 600 rose yesterday and snapped a four-day losing streak, but it is back on the downside today.  A close today below 371.80 would be the first below the 20-day moving average since February 7.  As one might expect, energy and materials are leading the push lower.  On the other hand, rising interest rates is seen as favorable for financials, which coupled with the real estate sector are leading the winners.

Sterling’s downside momentum appears to be stalling in front of $1.21.  Sterling is marginally lower today, for the fourth consecutive session.  It fell in the first four sessions of last week as well.  It has had only one advancing session in the past 10.  The Brexit drama over amendments to the bill allowing May to trigger Article 50 has weighed on sentiment, but it is likely a short-lived factor.  Interest rate differentials are also taking a toll.

The main focus is on the ECB and Draghi’s press conference.  Tomorrow’s US jobs data may deter aggressive profit-taking on the dollar today.  The US reports import/export prices, and weekly jobless claims.  Claims may bounce after falling to new cyclical lows.

Czech February CPI rose 2.5% y/y vs. 2.4% expected.  Inflation is the highest since November 2012, though still within the 1-3% target range.   Next policy meeting is March 30, and no change in policy or forward guidance is likely.  With inflation rising and the economic recovery intact, we think the CNB is on track to exit the koruna floor around mid-year.  When it does, we expect appreciation of the koruna on the order of 10-15%, which would in turn help limit inflation.

Mexico February CPI is expected to rise 4.82% y/y vs. 4.72% in January.  Banxico warned of above-target inflation for 2017 in its quarterly inflation report.  It also cut its 2017 growth forecast to 1.3-2.3% from 1.5-2.5% previously and its 2018 growth forecast to 1.7-2.7% from 2.2-3.2% previously.  As such, we do not think it will tighten further over the near-term.  Next policy meeting is March 30, and no move is likely if the peso remains somewhat stable.

Peru central bank is expected to keep rates steady at 4.25%.  Price pressures remain elevated, with CPI accelerating to 3.3% y/y in February from 3.1% in January.  This remains above the 1-3% target range.  Indeed, with the exception of a month or two here and there, inflation has remains above this range since mid-2013.  We believe further disinflation is needed to support the case for the first 25 bp rate cut.    

Morning Musings

March 8th, 2017 9:07 am

Via Stephen Stanley at Amherst Pierpont Securities:

FX

March 6th, 2017 7:28 am

Via Marc Chandler at Brown Brothers Harriman:

Drivers for the Week Ahead

  • The week ahead features the ECB meeting and the US February jobs report
  • Yellen confirmed the likelihood of a rate hike on March 15
  • Anxiety over European politics remains elevated, but it has eased by nearly any metric one chooses
  • The Reserve Bank of Australia will likely hew a neutral line when it meets this week
  • Markets were rattled by news of North Korea missile launches over the weekend

The dollar is broadly firmer against the majors as follow-through selling from Friday was limited.  The yen is outperforming, while the euro and Nokkie are underperforming.  EM currencies are mixed.  ZAR and IDR are outperforming, while the CEE currencies are underperforming.  MSCI Asia Pacific was up 0.4%, with the Nikkei falling 0.5%.  MSCI EM is up 0.5%, with China shares rising 0.5%.  Euro Stoxx 600 is down 0.5% near midday, while S&P futures are pointing to a lower open.  The 10-year UST yield is down 1 bp at 2.47%.  Commodity prices are mostly lower, with oil down 0.5%, copper down 1.2%, and gold down 0.2%.

The week ahead features the ECB meeting and the US February jobs report.  The Reserve Bank of Australia meets, Europe reports industrial production, Japan reports January current account figures, and China reports its latest inflation and lending figures.  We frame this week’s discussion of the drivers in terms of four sets of questions and offer some tentative answers.  

1.  What is the significance of the price action following Yellen’s comments last Friday afternoon?  The US dollar reversed lower, snapping streaks against euro, yen, and sterling.  US interest rates eased.  Did Yellen contradict the other Fed officials, including Governors, about the likelihood of a near-term hike?  

Yellen, in fact, confirmed the likelihood of a rate hike on March 15.  She conditioned her statement on the US economic data to be broadly in line with the Fed’s expectations.  There seems to be a not very thinly veiled reference to the February jobs data on March 10.  With weekly jobless claims (and their four-week average) making new cyclical lows, the chances of a meaningful downside shock has been minimized.  In addition, average hourly earnings likely recovered from January’s disappointment.  

If anything, Yellen may have been a little more hawkish than was generally recognized.  In describing the current monetary stance, she said it was “moderately accommodative.” Previously she said it was “modestly accommodative.”  This may sound innocuous, but the Fed speaks in such nuances.  Although several Fed officials, including Yellen, deny the Fed has slipped behind the curve, there seems to be a sense that there is more accommodation that needs to be removed.  

The market has taken the data and official comments to indicate with a high degree of confidence that Fed will hike this month.  However, it has not priced the likelihood of three hikes this year.  While the odds of a March move, according to Bloomberg calculations, rose from 40% to 94% chance in the past week, the odds of a third hike by year end increased from about a one-in-four chance to a one-in-three.  

There was a typical “buy the rumor (that Yellen would confirm what nearly all of the other Fed officials have been saying) sell the fact (when she did)” activity in a relatively thinly participated Friday afternoon in North America.  The dollar had moved higher for several sessions in a row, and the market had priced in a March hike by nearly as much as it could.  The dollar moved more than two standard deviations (Bollinger Bands) against several currencies, showing the stretched nature of the price action.  

US interest rates have also approached important levels, and based on recent data, many economists were revising down estimates of Q1 growth.  The Atlanta Fed’s GDP tracker has it at 1.8% now, down from 2.5% on February 27 (though the NY Fed still sees it tracking 3.1%).  The US 10-year yield rose every session last week, the first time in nearly a year.  The two-year yield had risen every session last week as well, and even reached a six-year high before slipping lower ahead of the weekend.  The uncertainty of the significance of the last few hours of trading last week may make for cautious and choppy trading until short-term participants get their sea-legs back, but it is largely noise for medium and long-term investors.  

2.  What is happening in Europe?  Is it all about European politics?  Given solid PMI readings and evidence that price pressures are rising, will the ECB adjust its policy initiatives accordingly?

Anxiety over European politics remains elevated, but it has eased by nearly any metric one chooses.  The interest rate premium investors demand for holding French paper over German narrowed last week at both the two- and 10-year sectors.  The French 10-year premium has narrowed nearly 20 bp from its peak, while the two-year premium has been by around 13 bp.  There is scope for one major twist in the drama.  The beleaguered Fillon could pull out of the race and be replaced by Juppe, who could catapult toward the top of the polls.  Meanwhile, Le Pen has her own legal difficulties.  In the Netherlands, the latest polls suggest the populist-nationalists have also slipped recently.

More generally throughout the EMU, premiums narrowed, and importantly, the narrowing occurred in a rising interest rate environment.  Often the spreads have been more sensitive to the overall direction of interest rates.  The rising rates should also be kept in perspective.  Not just Germany, but France, the Netherlands, Italy, Spain, Portugal, and Ireland can all borrow for two years at negative interest rates.  Indeed, it appears that nearly all EMU members, save Greece, are paid to borrow for two years.  

ECB policy is on hold, probably through the Q3.  Draghi will likely be encouraged by the recent PMIs, which suggest that the region’s economy may even be accelerating a bit.  The staff will update its forecasts, and there is scope to lift growth and inflation projections a little.  That said, the January industrial production reports may be softer than the PMIs implied.  Draghi is likely to be disappointed that his calls for structural reforms continue to find few takers.  

Questions about the ECB’s inflation credibility will be rebuffed.  The increase in headline inflation is largely a function of higher energy costs, and secondarily seasonal foods (weather-related).  Many on the ECB want to look through this temporary impact.  Instead, they are focusing on the core rate, which remains in the trough near 0.9% (having bottomed at 0.6%).  We also think that relatively higher German inflation within the EMU is not an urgent problem. It is not the most desirable way for other countries to gain competitiveness over Germany, but it is one way.  

A month ago, it looked as if UK Prime Minister would formally trigger Article 50 on March 8-9.  However, that time frame is unlikely now that the House of Lords passed an amendment to the bill (seeking to protect the rights of EU citizens in the UK).  It seems procedurally more significant than substance, as some government officials were sympathetic with the sentiment.  It may delay the actually triggering by a week or so.  

3.  With the focus on the Fed and European politics, Japan and China may have slipped off radar screens.  What is happening there and what should we expect from this week’s data?  

Japan’s Prime Minister Abe may be disappointed by the US withdrawal from TPP negotiations.  However, he is probably happier with the Trump’s Administration plans for increased military spending on top of the increase that had already been planned, as well as its tough line toward China.  The Japanese economy is being lifted by capex, industrial output, exports, and fiscal support.  After the recent capex report, many expect Japan’s Q4 GDP will be revised from 0.2% to 0.4% (from 1.0% on an annualized basis to 1.6%).  

Japan will also report its January current account.  Seasonal factors are dominant.  The current account and the trade balance always (without fail for 20 years) deteriorate in January compared with December (and always improve in February).  Remember, unlike Germany, Japan’s trade balance does not drive the current account.  Investment income is typically larger than the trade surplus.  

Japanese shares have underperformed at the start of 2017.  The Nikkei is up 1.8% and the Topix is up 2.6%.  The Nikkei trails other G7 markets this year, while the Topix edges ahead of Italy and Canada.  The 10-year bond yield has been above zero since the middle of last November.  It has been confined mostly to a three to 10 basis point range, with the BOJ deterring moves above the range.  After being challenged late last year, the BOJ has regained the upper hand.  

The dollar-yen exchange rate remains strongly correlated to 10-year interest rate differentials.  The correlation is among the highest for the past 20 years.  With Japan’s side of the spread fairly stable, the movement of the US 10-year yields drives the differential.  The correlation between dollar-yen and the two-year interest rate differential is not as strong as the 10-year.  At 0.65, it has hardly been surpassed over the past two decades.  

China’s economy appears to have stabilized with the help of an explosion of credit.  After weakening in January, the dollar traded sideways against the yuan between CNY6.85-CNY6.90 since late January.  The dollar threatened to break higher but is likely to move back into the range after the weekend.  The yuan is up about 0.7% against the dollar so far this year.  The offshore yuan is up 1.15%, helped by a rate squeeze and possible intervention by Chinese officials.  The Shanghai Composite in underperforming the region.  The MSCI Emerging Markets equity index is up 8%, and MSCI Asia Pacific index is up 6.5%, while the Shanghai Composite is up 3.7%.

The economic data will be skewed by the Lunar New Year holiday.  The direction of the data may be more important than the exact magnitudes.  Reserves likely fell as capital outflows appear to be more than offsetting the current account surplus and capital account inflows.  The trade balance will likely to fall sharply, though imports and exports likely continue accelerating (due to the base effect).  Aggregate lending also likely fell sharply from elevated levels.  Producer prices are surging, but consumer price is set to moderate.  The Bloomberg consensus is for a 1.8% year-over-year pace in February after a 2.5% clip in January.  

4.  What is the Reserve Bank of Australia going to do when it meets?  The Australian dollar is the strongest major currency this year, with a 5.4% rise.  What is the outlook?  

The Reserve Bank of Australia will likely hew a neutral line.  It recently updated its macroeconomic forecasts.  There is little new that may be added.  The stabilization of the Chinese economy and the stable to stronger US and European economies have lifted the global outlook.  With a surge in iron ore, coal and copper prices, Australia enjoyed a sharp improvement in its terms of trade.  This is unlikely to be repeated, and instead, some deterioration is now likely.  The Australian dollar has repeatedly tried to break above $0.7700, but ultimately failed and was sold through $0.7600.  It recovered in late Friday turnover, but speculators who have built their largest net long position in the futures market may be looking for an opportunity to cut back on exposure.  Rate differentials are also moving against Australia (smaller carry).

The Canadian dollar lost nearly 2.2% against the US dollar last week.  Bank of Canada Governor Poloz insisted on seeing the glass has half empty, while US central bank officials were talking about the need to consider lifting rates against, the second hike in four months.  The two-year yield spread jump 14 bp to finish the week at 54 bp, the highest since early last year.  The US premium has steadily increased and has fallen only twice in the past 11 sessions.  

Canada’s merchandise trade surplus surged in Q14 2016, but it will be difficult to be sustained at the start of 2017.  Investors may also pay close attention to the performance of non-energy exports, which have been disappointing.    

Canada’s job creation in Q4 16  (~30.2k) was the strongest quarterly growth in four years. January continued the streak with a 48.3k increase.  Look for payback in February where the Bloomberg median expectation is for a loss of 2.5k jobs.  Canada created 15.8k full-time jobs in January and an average of 12.1k in Q4 16 and 6.1k on average in 2016.  

Speculators have their largest net long Canadian dollar position on in the futures market in four years.  The Canadian dollar may not benefit as much as other currencies if the US dollar begins weakening, but does seem to be vulnerable in a stronger US dollar environment.  

EM CPI and real sector data this week should support our view that Asian and EMEA central banks will have to tilt more hawkish this week.  Latam data should show further disinflation that supports a more dovish tilt in that region.  Polish and Peruvian central banks meet this week, but no changes are expected.

Markets were rattled by news of North Korea missile launches over the weekend.   Four ballistic missiles were reportedly fired into the waters surrounding Japan.  China condemned the launches, but it remains to be seen if it will take stronger action to rein in its client state.  We will send out a longer piece on South Korea today that discusses rising tensions on the peninsula.  

Upcoming Week

March 4th, 2017 11:45 am

Via Stephen Stanley at Amgerst Pierpont Securities:

What a difference a week makes.  Last Monday, the market was pricing in less than 50-50 odds of a March rate hike and only 1 primary dealer economist (along with myself) was projecting a Fed move this month.  By the end of the week, a carpet bombing campaign of jawboning by most of the FOMC, including all of the leadership, had finally convinced everyone that an increase is coming March 15.  There is only one economic report that could conceivably derail the Fed now: the February employment release, due out Friday.  As it happens, I look for an unusually strong set of results, including a 200K rise in payrolls, a downtick in the unemployment rate, and a rebound in average hourly earnings (likely +0.3% for the month).  Obviously, that combination, or anything close to it, would only reinforce the FOMC’s resolve.  Otherwise, it should be a relatively quiet week as we count down to March 15.

Shifting gears to the bond markets, it will be interesting to see where investors are willing to underwrite Treasury auctions of 3s, 10s, and 30s this week after the big backup in yields in the wake of the shift in thinking with respect to the Fed.  On the MBS side, it is worth noting that the rise in mortgage rates since the election has sharply slowed the pace of refinancing activity.  As a result, the rate of turnover in the Fed’s MBS portfolio has slowed noticeably.  In the current two-week period, the Fed is only planning to buy about $12 billion in securities, down from an average of closer to $20 billion through much of 2016 and the slowest two-week purchase pace in almost a year.

Yellen Speech

March 3rd, 2017 2:11 pm

Via Stephen Stanley at Amherst Pierpont Securities:

Today at 1:54 PM

Credit Pipeline

March 3rd, 2017 6:50 am

Via Bloomberg:

IG CREDIT PIPELINE: A Dollop of MS to Top off ~$56b Week
2017-03-03 10:57:15.569 GMT

By Robert Elson
(Bloomberg) — Friday sessions YTD have not followed the
2016 mode of being live for issuance. Not clear that the MS re-
opening will be the start of a return to the new normal. Last
year even saw deals come and go on Fridays that had jobs data
released. Stay tuned.

Set to price today:

* Morgan Stanley (MS) A3/BBB+, to price a re-opened 5/NC4 FRN;
IPT 3ML +Low-90s
* This issue originally priced Jan. 17 at 3ML +118

Added/updated today:

* Kuwait (KUWIB) to hold investor meetings March 6-10, via
C/DB/HSBC/JPM/NBK/SCB; debut 144a/Reg-S 5Y-10Y deal to
follow
* The State of Kuwait is rated Aa2/AA

Recent updates:

* Mitsubishi UFJ Lease & Finance (MUFJLF) A3/A, to hold
investor meetings March 13-14, via MS
* Nordstrom (JWN) Baa1/BBB+, to hold investor calls March 1-2,
via BAML/MS/USB; $benchmark offering may follow
* JWN last priced a new deal in May 2014
* Great Plains Energy (GXP) Baa2/BBB, to hold investor calls
March 2-3, via Barc/BAML/GS/JPM/MUFG/WFS
* Great Plains Energy agreed to buy Westar Energy (WR) in
May 2016
* GXP last issued in March 2012
* Republic of Indonesia (INDON) Baa3/BB+, mandates
BAML/C/HSBC/SCB for investor meetings to begin March 6
* Woori Bank (WOORIB) A2/A, mandates BNP/C/HSBC/JPM/Nom to
hold inestor meetings March 6-9
* 3M (MMM) A1/AA-; filed mixed shelf
* Plans up to $2.8b debt in 2017, suggesting another yr of
incrementally higher leverage, BI says (Dec. 14)
* Korea National Oil (KOROIL) Aa2/AA, mandates
BAML/C/CA/DB/HSBC/JPM for investor meetings March 2-10; a
USD and/or EUR denominated 144a/Reg-S short to intermediate
maturity deal expected to follow
* Texas Instruments (TXN) A1/A+, has history of March, April
issuance
* Mosaic (MOS) Baa2/BBB-, filed automatic mixed shelf; has not
issued since 2013
* $2.5b deal for Vale fertilizer ops; to fund purchase via
$1.25b cash and debt issuance
* Allergan (AGN) Baa3/BBB, exits blackout; last issued in 2015
* Has $1b maturing March 1
* General Motors Company Files Shelf; Parent Last Issued Feb.
2016
* Medtronic (MDT) A3/A, Files Debt Shelf, Has February
Maturities
* CNA Financial (CNAFNL) Baa2/BBB, Exits Blackout, Has History
of Feb. 10Y Issuance
* Exxon Mobil (XOM) Aaa/AA+, has a history of Q1 issuance
* Feb. 29, 2016: $12b in 8-tranches
* March 3, 2015: $8b in 7-tranches
* March 17, 2014: $5.5b in 5 parts
* Has $2.25b maturing March 15

* M&A deals expected in 2017, updated
* List grows with the addition of RBLN, BATSLN, FOXA
* MARS, the privately help candy behemoth of M&M fame has
a $5b loan outstanding for its VCA purchase; a private
place or debut bond sale to support the acquisition is
possible

SHELF FILINGS

* Panama; debt shelf amended to offer up to $3b debt, warrants
(Jan. 9)
* PG&E Corp (PCG) Baa1/BBB; $350m mixed shelf; Feb. 2014 was
last issuance at this level (Jan. 4)

OTHER

* United Technologies (UTX) A3/A-; plans to tap debt markets
in early 2017 to complete share buyback (Dec. 14)
* European Stability Mechanism (ESM) Aa1/–; mandates for
advisement on inaugural USD issuance (Oct. 21)
* Conagra Brands (CAG) Baa2/BBB; could add up to $2.5b debt
for M&A, BI said
* CAG was raised to BBB by S&P in Nov. on the expectation
co. will maintain debt leverage ~3x and below

French Polling

March 3rd, 2017 6:40 am

Via Bloomberg:

Macron Overtakes Le Pen in France as Juppe Looms Over Fillon Bid
2017-03-03 11:31:49.221 GMT

By Mark Deen and Gregory Viscusi
(Bloomberg) — Emmanuel Macron overtook the anti-euro
candidate Marine Le Pen for the first time in polling for the
French presidential election as the clamor grew for Republican
Francois Fillon to step aside.
Macron’s support jumped 2 points to 27 percent from a week
earlier in an Odoxa survey of first-round voting intentions
while Le Pen slipped to 25.5 percent from 27 percent. Yet the
March 1 and 2 survey of 951 people also showed that Alain Juppe,
defeated by Fillon in the Republican primary, would lead if he
was back in the race.
Juppe was favorite to become France’s next president last
year before he was overwhelmed by a late surge in support for
Fillon during the nomination battle. With prosecutors preparing
to charge Fillon with embezzling public money, some Republicans
are looking to Juppe to jump back in to salvage their party’s
hopes in the first ballot on April 23.
More than 60 politicians have said they could no longer
support Fillon, who is set to be charged for the embezzlement of
public funds despite his protests of innocence. Juppe, the 71-
year-old mayor of Bordeaux, featured on the front page of Le
Parisian newspaper with a report that he is telling allies he is
ready to run if the party wants him. One official who was in
Juppe’s primary campaign suggested he is unlikely to return,
while the mayor himself couldn’t be reached for comment.

Fillon Clings On

Such a dramatic reversal would be in keeping with a race
that has seen three different front-runners and the
unprecedented sidelining of both a sitting and former president.
For now though, Fillon is registered as a candidate and clinging
on to his bid.
“It’s not at all given that Juppe would just waltz back
into his previous position,” Elabe pollster Yves-Marie Cann said
in an interview. “A lot has happened since the primary, there’s
just seven weeks to go.”
The return of Juppe would threaten to drain away centrist
voters who gravitated toward Macron rather than Fillon, an
admirer of former British Prime Minister Margaret Thatcher. Even
so, Cann said it may prove tough to stop Macron now.
“There’s real momentum for Macron,” Cann said. “Look where
he is now. With each poll the percentage of Macron voters who
say they are certain of their choice is rising.”

‘Political Assassination’

The 39-year-old former economy minister brushed off the
possibility of a Juppe challenge.
“A presidential campaign isn’t a series of catch-ups,” he
said on RTL radio Friday. “I’ll continue to advance and march no
matter what happens.”
Fillon, who was the front-runner as little as two months
ago, has seen his campaign marred since mid-January by the
investigation into his employment of his wife. Currently third
in the polls, Fillon says he’s done nothing illegal and
characterized his judicial woes as a “political assassination”
as his center-right party of Charles de Gaulle faces elimination
in the first round of a presidential election for the first
time.
Fillon Family Pay Revelations Muddy French Race: QuickTake
Q&A
The Fillon campaign is planning a crucial rally of
supporters in Paris on Sunday. The gathering on an esplanade
overlooking the Eiffel Tower is meant to be a show of force,
though many officials from the Republican party have said they
won’t be attending. Speaking late Thursday, Fillon dismissed the
significance of the Republican deserters.
“We’ll do it without them,” he said while campaigning
around the southern city of Nimes on Thursday. “The base is
holding on. The right-wing voters are holding on.”

–With assistance from David Whitehouse, Helene Fouquet and
Geraldine Amiel.

FX

March 3rd, 2017 6:32 am

Via Marc Chandler at Brown Brothers Harriman:

Yellen and Jobs Report Last Two Hurdles to US Hike

  • The US dollar is narrowly mixed as Yellen’s speech in Chicago is awaited
  • The failure of the Fed to raise rates in March would be potentially more destabilizing than raising rates
  • Japan reported a slew of data
  • Turkey February CPI rose 10.13% y/y vs. 9.74% expected; Colombia reports February CPI Saturday

The dollar is mixed against the majors ahead of the weekend.  The euro and the Swedish krona are outperforming, while sterling and dollar bloc are underperforming.  EM currencies are also mixed.  ZAR and RUB are outperforming, while TWD and KRW are underperforming.  MSCI Asia Pacific was down 0.7%, with the Nikkei falling 0.5%.  MSCI EM is down 0.9%, with China shares falling 0.2%.  Euro Stoxx 600 is down 0.3% near midday, while S&P futures are pointing to a lower open.  The 10-year UST yield is up 2 bp at 2.49%.  Commodity prices are mixed, with oil up 0.4%, copper flat, and gold down 0.5%.

The US dollar is narrowly mixed as Yellen’s speech in Chicago is awaited.  The greenback’s three-day advance against the euro and four-day advance against the yen is at risk.  Sterling, however, is lower for the sixth session following the weaker than expected service PMI (53.3 vs. 54.5 in January and 54.1 expected).  

The dollar-bloc currencies, where speculators in the futures market had gone net long, continue to underperform.  The dollar-bloc along with sterling are the weakest of the major currencies today.  On the week, the Canadian and New Zealand dollars have lost about 2.5%, while the Australian dollar is off 1.6% and has broken out of the month-long $0.7600-$0.7700 range that had largely confined the price action.  

If Yellen (or Fischer) want to push against expectations for a hike on March 15, today may be their last opportunity.  This seems unlikely given the recent comments by Dudley, but also Governors Brainard and Powell.  There appears to have been a relatively sudden change in the official rhetoric, and it has been seemingly without exception.  

We had thought the word cues in the minutes (“fairly soon”) did not imply March, given the previous signals before the December 2015 and December 2016 hikes.  We thought June was too far but thought May was more promising and had the added advantage of giving the Fed greater degrees of freedom.  The Fed will eventually need to have the flexibility to raise rates at half of its meetings where forecasts are not updated and there is no press conference scheduled.  

An important part of the shift in the rhetoric of Fed officials is that the rate hike is not tied to any specific trigger, such as stronger data or more improvement in the labor market.  The general economic conditions and proximity to the full employment and price stability goals are sufficient, and officials are simply looking for appropriate opportunities.  The broader context, including stronger world growth and a stable dollar (which eased on a broad trade-weighted basis in both January and February), is also conducive.  

The failure to raise rates would be potentially more destabilizing than raising rates.  Investors, seeing the rising prices and improving labor market (with weekly jobless claims at new cyclical lows) would wonder about at least two things:  What does the Fed know that we don’t and is the Fed slipping behind the curve?  It does not seem Fed officials will let expectations build to such a degree (nearly 90% by Bloomberg’s calculation and almost 80% in the CME’s estimate) without delivering.  

The market’s focus is squarely on Yellen (and Fischer), with today’s economic data having little impact.  Japan and EMU data were constructive, while the UK service PMI and China’s Caixin PMIs were not so strong.  Caixin’s composite rose to 52.6 from 52.2, which reflects the gains in the previously reported manufacturing survey as the services PMI slipped to 52.6 from 53.1.  

Japan reported a slew of data.  The most important were the CPI.  The Japanese core rate, which excludes fresh food, rose 0.1% year-over-year in January.  It was the first positive year-over-year reading since December 2015.  Excluding food and energy (like the US core), consumer prices rose 0.2% after a 0.1% increase in December.  The unemployment rate also ticked lower to 3.0% from 3.1%.  

That is where the good news ended for Japan.  The services and composite PMI slipped (51.3 vs. 51.9 and 52.2 vs. 52.3 respectively).  However, the more worrisome sign was the unexpectedly large 1.2% year-over-year decline in overall household spending.  It was expected to have fallen 0.4% after a 0.3% contraction in the year through December.  Purchases of homes and autos were particularly soft.  

Japan’s Topix gapped higher yesterday but retreated today to fill the gap and finished near the middle of the day’s range.  The dollar moved above JPY114 in the middle of the week.  It closed above there yesterday and is holding above there today as it consolidates.  Optionality is thought to be discouraging a run to JPY115.00.  

The composite eurozone PMI was unchanged from the 56.0 flash reading.  Recall that this reading was a marked improvement from January’s 54.4, although the service PMI was a tad softer than the flash.  The composite averaged 53.9 in Q4, which suggests some upside risk to growth.  In the country reports, Germany was as the flash indicated, and both Italy and Spain surprised on the upside.  That leaves France as the source of disappointment.  The service PMI was revised to 56.4 from the flash’s 56.7.  The French composite is at 55.9 rather than 56.2 that the flash estimate had it.  

Disappointment comes from the January retail sales.  German retail sales were the likely culprit.  They fell 0.8%.  The Bloomberg survey produced a median forecast of a 0.3% gain.  Recall December was flat and retail sales in November fell 0.7%.  German retail sales have not grown since October (though fell in August and September too).

Retail sales for the eurozone fell 0.1% in January compared with expectations for a 0.3% gain.   This follows a revised 0.5% contraction in December, which were originally reported as a 0.3% decline.  Eurozone retail sales have now fallen for three consecutive months and five of the last six.  The disappointing consumption and the stable core CPI (0.9%) will give Draghi fodder to push back against some hawks at next week’s ECB meeting.  

The French premium over Germany narrowed this week at both the two- and 10-year tenors.  And it took place at higher absolute yields.  In some sense, the French political picture is clearing.  Fillon’s campaign is in trouble as reports suggest that the center-right Republicans are abandoning it.  Macron’s support is increasing.  Neither Macron nor Le Pen has a parliamentary coalition (Macron’s new party has no members in parliament while the National Front has two seats).  The first round of the presidential contest is April 23 and the second round is May 7.  In June, France goes back to the polls to vote for parliament (June 11 and 18).  

Oil prices are stabilizing after a three-day slide that brought the April light sweet futures contract to the lower end of its three-month trading range.  Even though OPEC appears to have cut output for the second month in February, US output is rising.  At 9.03 mln barrels a day, it is the highest since last March.  Moreover, US oil inventory continues to rise.  The EIA estimates a 1.5 mln barrel build in the past week that raises the year-to-date accumulation to 41 mln barrels.  

Lastly, we note that the S&P 500 gapped higher on Wednesday and did not enter the gap yesterday.  US shares are trading lower in Europe, and the S&P 500 is expected to open lower.  The gap is an important technical consideration now.  The gap is found roughly between 2367.8 and 2380.1.  The gap will likely be entered but is not necessarily bearish.  A close below the bottom would likely be sufficient to be concerning for next week’s activity.

Turkey February CPI rose 10.13% y/y vs. 9.74% expected and 9.22% in January.  Despite the firmer lira, CPI moved further above the 3-7% target range.  Recent lira weakness and the 15.36% y/y surge in PPI suggest price pressures are intensifying.  Yet the central bank has hesitated to hike rates outright.  Instead, it has used the rates corridor in recent months to push interbank rates higher.  Next policy meeting is March 16.  If the lira continues to weaken, further tightening is likely by tweaking the rates corridors again.

Colombia reports February CPI Saturday, which is expected to rise 5.36% y/y vs. 5.47% in January.  If so, this would still be above the 2-4% target range.  The pace of disinflation appears to be easing but the central bank still unexpectedly cut rates 25 bp to 7.25% last Friday.  Steady rates were expected.  The bank has hiked every other month since it started the tightening cycle in December.  As such, we see no move at the March 24 policy meeting, especially if the peso continues to weaken.  

Will Janet Panic the Shorts

March 2nd, 2017 4:38 pm

This is an interesting (at least to me) article from Bloomberg on the possibility that the confluence of huge shorts and an equivocating Ms Yellen might lead to a sharp turn around in bond prices.

Via Bloomberg:

You Should Be Nervous About Janet Yellen’s Speech: Macro View
2017-03-02 20:11:30.972 GMT

By Vincent Cignarella
(Bloomberg) — Foreign-exchange and Treasuries traders may
have gotten ahead of themselves.

* While it seems obvious based on recent economic data that
the Federal Reserve will eventually need to raise rates,
Chair Janet Yellen could walk back market expectations on
Friday to create padding for risk events ahead of the March
15 decision.
* If so, markets appear precariously perched. Dollar-yen has
risen around 2.5 percent and the U.S. 10-year yield has
climbed more than 16 basis points in just three days.
* Short positioning in eurodollars, which are highly sensitive
to the path of Fed rate hikes, is near record levels with
both real and fast money extending hawkish bets, according
to the latest CFTC data.
* These moves have been driven by Fed speakers saying this
week that rates will need to rise soon. First Fed dated
overnight-interest-rate contracts have priced in close to 80
percent odds of a March increase, based on Fed effective
rate of 0.66 percent. Other measures of market-implied
probability approach 90 percent.
* But not everyone is on board. Alan Blinder, former vice
chair at the Fed, said on Bloomberg Radio Thursday that
Yellen won’t sound hawkish and she will want to leave open
the possibility of standing pat in March.
* The Fed hasn’t been coy about its intention to hike
gradually, so March is far from a slam dunk even if
officials collectively see three hikes this year. Don’t
forget, the Fed expected to hike four times in 2016, only to
tighten once.
* Non-farm payrolls on March 10 seems to be the main risk
event ahead of the FOMC. While one data set probably
wouldn’t alter the tightening trend, it could affect timing.
* Another uncertainty is fiscal stimulus. President Trump has
yet to offer specifics on tax cuts, trade and infrastructure
plans that have helped spur inflation expectations.
* Remember, one of the most profitable bets traders could have
made in the last two years is that Fed forecasts would be
wrong.

* NOTE: Vincent Cignarella is an FX strategist who writes for
Bloomberg. The observations he makes are his own and are not
intended as investment advice

Data Dissection

February 28th, 2017 9:19 am

Via Stephen Stanley at Amherst Pierpont Securities:

Real GDP in Q4 was slightly weaker than expected, coming in unrevised at 1.9%.  The shortfall relative to my expectations reflects the old saying “a few billion here and a few billion there, and pretty soon it adds up to real money.”  There were not any big surprises, but a handful of categories came in a few billion dollars lower than I had anticipated.  Business spending on equipment, intellectual property, state and local government outlays, and inventories were all a little lower than expected.  Meanwhile, the main category that was revised higher was consumer spending, which was boosted from a 2.5% growth rate to a 3.0% annualized rise, in line with the robust average recorded since the beginning of 2014.

There are a few other details within the GDP report to discuss.  First, the core PCE deflator was revised downward from a 1.3% annualized increase to 1.2%, but this is even less than meets the eye.  The 1.3% reading before was actually 1.253% unrounded, and the new reading is 1.22%, so the revision is worth even less than full tenth (and will probably be worth a mere 2 BPs on the year-over-year calculation for December).  The January reading due tomorrow for the core PCE deflator will probably increase by 0.3% on a monthly basis, but the January 2016 reading was also up 0.3%, so the year-over-year advance may hold steady at 1.7%.  Meanwhile, the downward revision to the headline PCE deflator in Q4 was more substantial, from a 2.2% annualized clip to 1.9%.  As a result, the year-over-year advance through December is probably about 15 BPs lower than before.  This means that, while the surge in prices for January that will likely be reported tomorrow will still push the year-over-year increase up by around 0.4 percentage points, we are no longer going to hit the 2.0% mark in January.  More likely, the January year-over-year increase will jump to 1.8%.  I still think we get to 2% by spring, but the urgency may be slightly lower than I had anticipated heading into the March FOMC meeting.

The other key detail from today’s report is the incorporation of benchmark employment data into the wage and salary figures for Q3.  The revisions were upward but small for both Q3 and Q4, about $10 billion and $1 billion respectively.

Switching gears, the January merchandise trade deficit exploded upward by about $5 billion to $69.2 billion, about $2½ billion worse than I had expected (and over $3 billion worse than the consensus).  Imports surged, reflecting a big bounceback in auto imports and a surge in consumer goods imports.  The latter may reflect, at least in part, the timing of Chinese New Year, so it will be important to keep a close watch on these data for February as well.  In any case, based on the downside surprise, I am trimming my Q1 real GDP growth estimate to 1.8%.  While economic data have generally been quite strong of late, the key contributors to GDP that we have so far for January have been mostly soft.  I will not be surprised to see Q1 once again come in below the trend as well as recording the worst growth reading for the year.