January 14th, 2015 6:43 am
Via Marc Chandler at Bloomberg:
ECJ Decision Gives ECB Broad Discretion, Euro Slips
– The preliminary indications by the European Court of Justice are that the ECB’s Outright Monetary Transaction initiative was “in principle” consistent with the ECB mandate
– The yen, not the dollar, is the strongest of the major currencies today
– Briefly yesterday, the price of US WTI crude oil benchmark was above the Brent oil benchmark for the first time since July 2013
– November Philippine overseas remittances were the lowest since January 2009
– Brazilian assets have received a boost on positive headlines from the new economic team
Price action: The dollar is mostly firmer against the majors. The yen and Nokkie are outperforming and are up on the day, while the antipodeans are underperforming. The euro made another marginal new low for this move near $1.1725, while cable is holding up better at around $1.5175. As a result, EUR/GBP is making new lows for the year. Dollar/yen is trading just above 117, at the lowest level since December 17. EM currencies are mostly softer, led by RUB, TRY, and the CEE currencies. PHP, KRW, and TWD are holding up better. MSCI Asia Pacific was down 0.4%, led by a 1.7% drop in the Nikkei. Euro Stoxx 600 is down 0.6% near midday, while S&P futures are pointing to a lower open. Commodity prices are broadly lower with copper down sharply and making new lows for this move.
- The preliminary indications by the European Court of Justice are that the ECB’s Outright Monetary Transaction initiative was “in principle” consistent with the ECB mandate. Even though the opinion by the Advocate General Villalon is non-binding, the signal is important. The court defended broad discretion from the ECB in “framing and implementing” monetary policy. Moreover, the Advocate General pushed back against judicial review of ECB’s activity, arguing that the central bank needs broad discretion, and has expertise and experience that needs to be respected. The final decision is expected near mid-year, but the advice of the Advocate General is often followed.
- The euro fell on the news, making a marginal new low below $1.1730, and European bonds rallied. Although the decision was on the OMT, the implication is that it does not pose an obstacle to a sovereign bond buying program that could be announced as early as next week. There are other factors that are helping underpin European bonds, such as the continued decline in oil prices, and commodity prices more generally, and the decline in US 10-year yields to the mid-October flash crash low.
- The yen, not the dollar, is the strongest of the major currencies today. The weakness in equity prices, and the reversal of the early sharp gains in S&P 500 yesterday, with follow through in Asia (Nikkei -1.7% to its lowest level since mid-December and settled on its lows), coupled with decline in US yield triggered a short squeeze that lifted the yen. The dollar fell to about JPY116.50 in early Europe before bottom pickers emerged. The euro has been trending lower against the yen since peaking in early December just shy of JPY150. Today it fell to almost JPY137, its lowest level since the end of October.
- Briefly yesterday, the price of US WTI crude oil benchmark was above the Brent oil benchmark for the first time since July 2013. Three forces seem to be at work. First, the move followed Mexico’s Pemex offer of an oil swap. This would entail the liberalization of the US crude export ban. There is a push that is being codified into an amendment in the Keystone Pipeline legislation. Second, US refineries are operating above 90% capacity, turning the crude into product (heating oil and gasoline). Third, OPEC producers continue to cut prices (deepen discounts to the official selling prices).
- Lower energy costs in turn add to the downside pressure on other commodities, including steel and copper. The sharp decline in copper prices, off 5.5% earlier today and rise in inventories (at the major exchanges) is stealing attention from oil prices. It is weighing on metal producers while supporting manufacturers and utilities.
- The economic data is overshadowed by the price developments and European Court decision. Europe did report stronger-than-expected November industrial production. It rose 0.2%. The consensus was for a flat report. The October series was revised up to 0.3% from 0.1%. In the US, attention will turn to the December retail sales report, business inventories, and the Fed’s Beige Book. Headline retail sales will be weighed down by the drop in gasoline prices and the sequential decline in auto sales. However, the market will look past the headline and focus on the core measure, used for GDP calculations. Autos, gasoline, and building materials are picked up in different reports. The core measure is expected to rise by 0.4%. Although this is lower than the 0.6% gain reported in October, it is still a healthy gain. Moreover, US revolving credit (credit cards) are not being relied on to fuel consumption. Wage pressure (or indeed the lack thereof) will be the primary focus for investors coming from the Beige Book.
- November Philippine overseas remittances were the lowest since January 2009. Remittances are estimated to account for around 10% of domestic consumption, so it’s not a trivial matter. Some of the decline could be coming from the Gulf oil producing states, where many Philippine migrants work. This represents a considerable downside risk for country. The remittances rose 2.0% y/y in November (at $2.1bln), well below expectations of 6.4% y/y and 7.0% y/y in October. Philippine central bank Deputy Governor Guinigundo opined that this slowdown would be temporary, but if continues it would be a “source of uncertainty.”
- Bonds in India continue their downtrend. The move today was helped by wholesale inflation figures for December, which came out on the low side at 0.11% y/y despite a 5.2% y/y gain for food articles, as fuel and power prices came down 7.8% y/y. A lot is going right for India at the moment. Aside from the commodity price decline, Modi’s progress on the fiscal and structural reforms has been gradual, but encouraging. Prospects of lower rates this year has helped underpin a 75 bp decline in India’s 10-year yields, now at 7.78% and the lowest level since mid-2013. We see room for gains to continue.
- Brazilian assets have received a boost on positive headlines from the new economic team. Local newspapers suggest that a new set of measures are coming out soon, which should include tax increases. In addition, electricity prices will be increased, possibly by as much as 40% to make up scrapping of subsidies (saving some 0.2% of GDP). Of course, this will have a material impact on CPI, but increases the chances for the government to hit its 1.2% primary surplus this year.
- National Bank of Poland meets and is expected to keep rates steady at 2.0%. Poland then reports December CPI Thursday, expected at -0.9% y/y vs. -0.6% in November. Given deepening deflation risks, we think there is a risk of a dovish surprise. If not, we do think the central bank will eventually resume cutting rates in H1 2015. Hungary reported deeper than expected deflation of -0.9% y/y earlier, and also supports our view that the easing cycle there will be restarted too.
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