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US Equities advanced for a second consecutive day on Wednesday led by financials. The S&P rose by 0.45%, ending close to the 2010 highs. This morning, Asian shares trade in positive territory, apart from Chinese stocks as inflation accelerated.
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In China, CPI inflation rose by 2.7% Y/Y in February, the fastest rise in more than a year, but the Lunar New Year holidays might have lifted inflation as people spent more on food and travelling, which might have lifted prices.
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Japan’s economy grew less than initially estimated in the fourth quarter and a broad gauge of price trends gave a record negative reading, adding to pressure on the Bank of Japan to ease monetary policy further.
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Reserve Bank of NZ Governor Bollard said yesterday that he was not in a hurry to start raising rates from the current low of 2.50% before the middle of the year as the country’s economic recovery was still too subdued.
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The US Senate passed a $149 billion package of jobless aid and tax breaks as Democrats continued efforts to lower the 9.7% unemployment rate before congressional elections in November.
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Greek Prime Minister Papandreou said yesterday the EU stood ready to intervene if speculation against his country’s debt continued and euro zone sources said finance ministers would discuss next week a mechanism to support Greece.
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The UK industrial sector relapsed in January as the heaviest and most widespread snow since 1981 hit economic activity, raising fears that the first quarter could see the economy slip back into recession.
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Crude oil fell below $82 a barrel after reaching an eight-week high on expectations that OPEC members will keep output targets on hold when they meet next week in Vienna.
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Today, the eco calendar contains the US trade balance and weekly claims.
Markets
On Wednesday, there was still not one dominant driver for price action on global markets. So, the wait-and-see approach that was already seen on Monday and Tuesday still was in place. Nevertheless, underlying investor sentiment still wasn’t that bad. Stocks continued to trend gradually higher, with Europe outperforming. The S&P came even within striking distance of the year highs, but no real test occurred yet. The eco data were mostly second tier and had hardly any impact on trading. The UK production data were the only exception to this rule. The figure came again out much weaker than expected. Weather conditions might have played a role, but in any case they confirmed that the UK is a laggard in the global recovery. The publication of the report sparked a new wave of sterling selling, against the dollar and even more against the euro. However, the high profile technical barriers in cable and in EUR/GBP were not hit. In other currency cross rates, EUR/USD was rather well bid supported by the decent performance of the (European) stock markets. Nevertheless, the pair is still perfectly holding the sideways consolidation pattern centred on the 1.36 mark, which is already in place for almost one month. USD/JPY is holding above the 90-mark, but at least for now there are still no follow-through gains on the back off the post-payrolls spike.
Bonds on both sides of the Atlantic ceded some ground yesterday. A decent stock market performance and quite heavy supply weighed on prices. However, in a broader perspective, one can not but come to the conclusion that bonds continue to hold up relatively well. US bond yields were up between 1.6 bp (30-year) and 4.4 bp (5-year). German yields were up around 2 bp across the curve. The 10-year US Note auction went very well (bid cover of 3.45) with the 10-year Note Future even regaining part of the earlier losses as soon as the sale was out of the way. In Europe, the German Schatz auction (€5.035 sold, €0.965 retained, bid cover 2.1) went well too. Portugal sold €990 million from a 2021 bond. The spread of Portuguese bonds over German bunds narrowed by 6 basis points. The 10-year Greek spreads over Germany held close to the 310 bp level, despite ongoing market talk that support for Greece might be announced anytime soon.
This morning, markets are focused on the Chinese data. February consumer price inflation rose from 1.5% to 2.7%, above consensus estimate of 2.5%. The statistical office indicated that calendar issues (New Year) might be partly responsible for the rise. Nevertheless, the higher inflation reading is fuelling market speculation for additional monetary tightening. Industrial production data (20.7% Y/Y, YTD) came out strong, too. Asian stock markets show a mixed reaction to these data. Japanese stocks are higher (0.96% gain for the Nikkei). Most other Asian stocks are holing close to yesterday’s closing levels, with the Chinese stock markets slightly underperforming as investors are pondering potential impact from additional monetary tightening.
Later today, the US eco calendar heats up with the January trade balance and weekly claims. In January, the US trade deficit is expected to widen further. The consensus is looking for an expansion in the deficit from -$40.2B to -$41.0B due to solid gains in both imports and exports. Much of the strength in imports will be related to petroleum imports. Last week both initial and continuing claims dropped which might indicate that they are moving back to normal levels after being distorted by the backlog problems in California and the snowstorms. For this week, a further decline is expected in initial claims (460 000 from 469 000), while continuing claims are forecasted to have stabilized (at 4 500 000). On the supply front, the US ($13.0B 30-year Note auction) and UK (£0.9B I/L Gilt 1.25% Nov2032) will tap the market today.
Recently, eco data most often had only a rather limited impact on the (Bond) markets. Nevertheless, from an intraday perspective, we keep an eye on the claims. A positive surprise (lower claims) might cause some additional market nervousness going into next week’s Fed meeting. Of course, tomorrow’s retail sales are more important in this context. We also keep a close eye on the stock markets. Will the S&P be able to break above the key 1150 area in a sustainable way? The jury is still out on this issue, but such a break might weigh on global bonds markets, too. For global bond markets will maintain our assessment. For now, Bonds are holding up well; the tech nical pictures look still constructive, but we see little value in holding long exposure at the current low yield levels. For the Bund future, the MT uptrend line (coming in today at 112.83) is still our key point for reference. A sustained drop below this trend would be a first important sign that sentiment on the (German) bond market is turning less positive.
On the currency markets, the sideways trading range for EUR/USD between 1.3433 and 1.3850 is still perfectly in place and we don’t see a trigger to unlock this stalemate anytime soon. Next week’s Fed meeting might be the next milestone. Sterling continues to fight an uphill battle. A break below the recent lows in cable (1.4784, still a bit far away) and/or above the 0.9150/54 area in EUR/GBP would reinforce the sterling negative picture. However, today there are no high profile eco data on the calendar in the UK. So, the question is whether there will be enough ammunition to test those key levels already today.
