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In terms of US monetary policy, the Fed minutes didn’t really provide much in the way of clarity and thus the USD and the US fixed income market was little changed. Most importantly, the rhetoric around forward guidance highlighted there wasn’t much support for lowering (strengthening) the threshold around the une mployment rate. Unless inflation moves back to the boards 2% target the Fed will continue to keep the funds rate unchanged. It was also interesting to see that a number argued that the Fed should to do more to emphasise the importance inflation plays in their decision making.
The market now expecting a strong payrolls report
The ADP print was the bigger driver on prices. Interestingly, over the last decade there has only really been a short period in 2010 when the payrolls report actually outperformed the ADP print. So it seems logical that if the last three years are anything to go by, and you take into consideration the expansion seen in the employment sub-components of the manufacturing and services ISM, we should (in theory) see a payrolls report between 180,000 to 230,000. One has to think that given the leading indicators that a number below 170,000 has been mitigated. The prospect of traders running long USD positions into Friday’s payrolls report also seems logical.
With the US providing Asia with no real lead, it’s interesting to see price action in various indices. The ASX 200 is down 0.2% and outperforming on a relative basis, helped to a degree by a stronger-than-forecast retail sales report (+0.7%) and a good annualised building approval report. In terms of retail spend, strong numbers were seen in apparel and the café and restaurant space, however the fact that AUD/USD only managed a rally to 0.8913 suggest the market in no way saw this as a game changer and it wasn’t long before sellers came back into the market. Retail names and banks saw little buying interest and clearly the fact the retail report was information from November highlights this is a lagging indicator and traders want to hear information about how the Christmas period has tracked. The positive way of looking at building approvals is that the three-month annualised rate is now 199,800 approvals, which is the highest since 1994.
It really seems that trading the index (ASX 200) is tough right now and those looking for volatility should look at individual equities again. Certainly this seems to be the trend from clients, who are finding good opportunities in equities, with names like Ramsey Healthcare, Sirtex Medical and Forge getting attention.
Inflation in China following world trends
In China the various indices found a modest boost from the December (annualised) inflation data, which showed a sharp slowdown in price pressure, both on a consumer and business input level. The market seems to have taken the falls in their stride, although it gives the PBOC room to maneuverer. The major issue and the conundrum authorities face here is how they support inflation without boosting credit supply. Clearly the supply of credit and the risks that are posed over the medium to longer-term are real, so it seems logical that despite the falls in inflation very little will be done to support inflation. From a market perspective a bigger impact will be felt on a sizeable miss/beat to consensus to the yet-to-be released trade balance and financing figures out this week.
The Nikkei is 1.2% lower, diverging from USD/JPY which is holding onto 105.00 for dear life. Perhaps some of these losses can be attributed to the Abe government potentially looking to close certain corporate loopholes. The consumer service space is taking the brunt of the selling today, down 2.7%. In terms of USD/JPY I am starting to warm to short positions, however I want to wait until the payrolls report is out of the way. There are a number of factors at play, one of which incudes positioning and the fact the USD is pricing in a lot of good news. Of course technicals need to be respected and selling into a strong uptrend is never advised, but the fact that USD/JPY has printed a higher high on January 2, while the RSI printed a lower high, highlights divergence and could signal a turning point is on the cards for the JPY.
Turning to Europe, a modestly weaker open is expected, although the IBEX continues to be a pillar of strength and we see a positive open here. German industrial production is due for release; however the eyes of the market will be on the BOE and more so the ECB meeting and subsequent Mario Draghi press conference. Mario Draghi will be pleased with the moves in the various debt markets, with ever falling divergence seen between various nation bonds. The ECB will also be happy with the levels of excess liquidity, while EONIA rates (Europe’s money markets) have settled down after spiking into year-end.
What Mr Draghi won’t be pleased with is inflation and it’s this angle that the market will be keen to explore the ECB’s views and how ready they are and at what level inflation will have to fall to realistically explore more radical measures. These measures include cutting the refinancing rate again, reducing reserve requirements, a new LTRO (long-term refinancing operation), QE, or cancelling the weekly drain (i.e. a processes where it fails to sterilize the bonds it purchased through to late 2012 through its Securities Market Program or SMP), which ultimately leads to EUR weakness. All of these factors could be touched on, although Mario Draghi will merely suggest they have them at their disposal and will almost certainly be non-committal. Rallies in EUR/GBP and EUR/USD should be sold in my opinion as the inflation issue in Europe (not to mention the political angle) is real and will get more focus given the trend in headline and core inflation.