Payrolls Still Rolling, ECB Starts QE, China Slows Growth

- The week hinged on big announcements out of top Chinese officials and the ECB, as well as the latest US jobs report. The PBoC started the week off with another unscheduled rate cut, which helped soften the blow of Premier Li confirming a lower GDP growth target for 2015. The ECB offered up operational details for its quantitative easing program and said it would begin next week. The dollar index, already at a decade high, gained more strength in the wake of another solid US employment report bringing Fed rate lift off closer to reality. US Treasury yields moved up across the curve, the 2-10 year spread widened 150 basis points, and the US benchmark 10-year Treasury yield is now up on the year at 2.24%. On Monday, the Nasdaq Composite crested the 5,000 mark for the first time since the year 2000 tech bubble popped, but that marked the top for the week as the Nasdaq dropped 0.7%, the DJIA lost 1.5%, and the S&P500 fell 1.6%.


- Heading into the trading week risk appetite was getting a tailwind from another surprise PBoC rate and the anticipation of the launch of ECB QE. Early on, the USD maintained a firm tone against most currencies with the Dollar Index hitting fresh 11-year highs. By Thursday the ECB confirmed that it would begin its QE purchases on March 9th and that the program would indeed purchase government bonds with negative yields, sending the Euro below 1.10 and European bond yields to fresh record lows. 


- Another stellar US employment report Friday only fueled the USD rally. The USD/JPY approached 3-week highs and tested near the 121 handle. The Yen weakness encouraged some verbal intervention when a Japanese government advisor stated that the pair's present levels were in the "upper limit of comfort zone." Emerging market currencies also remained highly sensitive to US Fed expectations. The USD/BRL tested above 3.03 level (weakest Real level since 2004), and the South Africa Rand hit 13 year lows as USD/ZAR approached the 12 neighborhood.


- In announcing the details of the QE program, ECB President Draghi reiterated the €60B of monthly bond purchases will continue at least through September 2016, and until inflation approaches the target level of just under 2%. The ECB will buy government bonds with negative yields up to the Deposit Rate (which is presently -0.20%). ECB staff projections revised 2015 inflation forecasts to 0.0% from +0.7% prior (citing much lower oil), with 2016 revised up to 1.5% from 1.3% and initial 2017 projections set at 1.8%, right in line with Draghi's central objective for QE. 


- Despite the bailout extension agreed upon last week, things are looking dire in Greece. Tax collection is lagging badly and some reports suggest the nation could run out of money in mid-to-late March, though officials in Athens vowed they will have no problems making their March debt payments. Despite repeated denials by European officials and Syriza's election promises, there has been talk about initial plans for a third Greek bailout package. 


- The Fed released the results of its annual stress tests on major financial institutions and to the surprise of some analysts all 31 passed the initial hurdle, having adequate capital even in the greatest stress scenario. Zions Bancorp, the only bank that failed the stress test last year, scraped by with a capital ratio just above its required level. Surprisingly, Goldman Sachs also had a close call as its total risk based capital ratio in the stress scenario came in at just one-tenth of a percent higher than the minimum requirement, compared to other Wall Street Banks which had an average cushion of more than one percentage point. The greater test may come next week when the Fed announces whether it will accept the capital return plans of the banks (CCAR requests). Five banks had their CCAR plans rejected last year, most notably Citigroup, whose CEO has proclaimed his job is on the line this year.


- The February US jobs report on Friday backed up the spectacular January data with more solid results. Nonfarm payrolls added nearly 300 thousand net new jobs, keeping the four month average above that level. Unemployment fell to a seven year low of 5.5%, with a nice three-tenths drop in underemployment, though it was partly attributable to a fresh drop in the labor force participation rate. Wage inflation remains elusive; After a strong gain in last month's hourly earnings, February saw a meager 0.1% m/m rise in wages, half of the expected gain.


- WTI crude prices traded somewhat higher mid- week, rising as high as $52.40 from around $49 on Monday, but remained within the range seen over the course of February. Dollar strengthening brought WTI back to the low end of that range on Friday. Crude inventories are reaching critical levels: the weekly EIA report saw the eighth consecutive build in stockpiles and biggest weekly rise in 14 years. A Citibank commodities analyst warned the US is running out of oil storage capacity and said WTI could fall to $20 if storage limits were reached. Brent pivoted around $60, held back by the growing possibility that a US/Iran nuclear deal could result in sanctions being lifted against Iran, creating a fresh surge of crude exports.


- February US auto sales were very uneven, with some big misses being chalked up to severe winter weather. Ford's sales declined nearly 2% y/y, compared to expectations for a 3-5% gain. Executive said there was a pronounced slowdown in the second half of February, which lines up with the major East Coast blizzards. Volkswagen saw its sales contract more than 5%, while Nissan's sales were up 2.7% compared to the more than 7% gain expected. GM was curiously not impacted, with Feb sales up right in line with estimates, while Fiat Chrysler was a bit slower than expected.


- Friday morning, it was announced that Apple will be added to the Dow Jones Industrial Average, replacing AT&T, a move that was facilitated by Apple's decision to conduct a 7-1 stock split last year, making it a viable choice for the price weighted Dow. Apple will join the DJIA after the close of trading on March 18, becoming its fifth highest weighted component.


- The last of the big US retailers reported quarterly earnings this week. American Eagle gained more than 9% after modestly topping expectations and beating its own expectations for declining comps with a flat SSS reading. Abercrombie & Fitch tanked 14% after missing on revenue, declining to offer much in the way of guidance and generally offering pessimistic commentary. Costco offered solid quarterly results and good comps. On the confernce call, executives said the impact of West Coast port strike is mostly over and suggested it will take 4-8 weeks to clear backlogs at those ports.


- In M&A news, AbbVie reached a deal to acquire biotech name Pharmacyclics for about $21 billion, buying access to what is expected to be one of the world's top-selling cancer drugs, Imbruvica. The firm was reportedly engaged in a fierce bidding war against Johnson & Johnson and analysts condemned AbbVie for overpaying. Moreover, J&J already owns half of the future cash flow from Imbruvica, via a partnership deal signed long ago. Chip maker NXP Semi agreed to buy Freescale Semiconductor in a cash and stock deal valuing it at $11.8 billion. Hewlett-Packard reached a deal to acquire network access firm Aruba Networks for $3 billion in cash. 


- China Premier Li Keqiang unveiled official projections for 2015 at the start of the National People's Congress that largely reflected recent market assessments of slowing growth and inflation. GDP target was set as a softer estimate of "around" 7% from 7.5% in 2014, trade growth was lowered to 6.0% from 7.5%, CPI forecast was lowered to 3.0% from 3.5%, and the M2 money supply growth target was set at 12% vs 13% prior. Along with the economic framework, Beijing offered a vision of improvement in some of the well-known social shortcomings: China regulators intend to formalize a banking deposit insurance system, broaden regulation of shadow banking and real estate, invest some CNY1.6T in further rail and water infrastructure development, build an additional 7.4M units of public housing, and shutter some of outdated coal facilities to help reduce carbon dioxide intensity by over 3%. The China Standing Committee also pledged to push forward yuan convertibility on capital account, broaden the use of FX reserves, and allow the Yuan to float more freely, even though analysts are skeptical over the extent to which regulators will widen the Yuan trading band. The announcement followed a weekend decision by the PBoC to cut 1-year lending and deposit interest rates by another 25 basis points, the 2nd rate cut in 3 months, while also raising the maximum rate on bank deposits. For the week, USD/CNY pushed out above CNY6.28, the weakest level for the currency since late 2012, and Shanghai Composite pared its recent rebound with a 2% slide.