Quotes from Danske Bank:
-Focus will be on Janet Yellen’s speech in Jackson Hole at 16:00 CET. Yellen speaks on the subject of the labour market – the key component to the timing of the first rate hike. However, Yellen has spoken extensively on this subject before and it is hard to imagine she can come up with much new given how much time the Fed has spent on analysing this area.
-Yellen’s view is clear – that there is still significant slack in the labour market, which is backed up by very moderate wage increases. According to the minutes of the latest Fed meeting, many members expressed that the Fed might soon change the description of the underutilisation of labour.
-If Yellen comments on policy at all, she is likely to repeat the phrase from the semi-annual testimony that if the labour market continues to improve faster than expected, the risk is that the first rate hike could come sooner than currently projected.
-ECB-president Mario Draghi will speak at 20:30 CET in Jackson Hole after market close in Europe. It is unclear to what degree he will stick to the labour market theme that at the moment is less decisive for monetary policy in the euro area. Fitch is expected to confirm its current triple-A rating of Denmark.
Source: FxWire Pro
The event the market had been waiting for finally arrived: the ECB’s rate decision, and it was one for the history books. The central bank lowered its deposit rate by 10bps to -0.1%, main refinancing rate to 0.15%, and marginal lending rate by 30bps to 0.4%. In addition, the ECB announced that it would cease sterilizing its existing Securities Market Programme (SMP) bond holdings, make targeted very long-term loans to banks, and lay the groundwork for future purchases of asset-backed securities. The last point was viewed by market participants as the preliminary step before the central bank would begin broader asset purchases. The move by the ECB to negative deposit rates is unprecedented for a developed market central bank.
Effectively, Mario Draghi pushed a big portion of his chips into the middle of the table to combat deflationary forces in the eurozone by increasing the supply of available credit.
Risk assets responded accordingly, although the euro / US dollar cross recovered all of its losses and finished positive by the time US equity markets closed. Italian equities, as represented by the FTSEMIB, was the best performing group in Europe today, followed by France and Spain. European sovereign bonds also performed very strongly. The Italian 5-year bond yield fell by 12.4 basis points to 1.59%, below similar maturity US Treasuries.
US equities weren’t left out from the global risk rally. The S&P 500 (SPX) got off to a slow start, but ended up higher by 0.65%. All 10 basic sectors of the S&P 500 gained on the day, led by industrials and financials. In the KBW Bank Index (BKX), all 24 of its components increased. On a beta-adjusted basis, the small-cap Russell 2000 (RUT) outperformed by 0.8%, and tech stocks saw similar gains.
Outside of the US, Germany will report its April trade balance and industrial production. Also, Canada will report its May employment report at the same time as the US.
There are no major earnings reports scheduled.
One of the morning’s big stories focused on comments from ECB Chief Economist Peter Praet, considered the de facto spokesman for President Mario Draghi. Praet stated that the central bank was prepared to lower its main lending rate, offer funding loans to banks, or set a negative deposit rate. Large-scale asset purchases would only be utilized if growth and inflation did not live up to the ECB’s projections. In addition, an unnamed source told Reuters that a rate cut was a near certainty for the June 5 meeting.
US Treasuries rallied strongly today after comments from Bank of England Governor Mark Carney indicated that the central bank would likely hold rates low until mid-2015, about a quarter longer than had been expected. This caused the gilt market to reprice toward that later date, and the 5-year gilt yield fell 11.1 basis points. Treasuries were dragged along on this rally, pushing the 10-year yield down as much as eight basis points and out of a trading range it has been stuck in all year. The yield of 2.53% was its lowest level this year.
The major US stock indices opened the day marginally lower and trended down for the remainder of the session. Selling intensified during the last hour, and the S&P 500 (SPX) closed down 0.47%, which left it back near the level it opened on Monday. Small-cap stocks noticeably underperformed while most emerging market equities gained. Consumer discretionary, industrials, financials, and consumer staples were all notable laggards in today’s session.
The producer price index of final demand for April rose 2.1% from a year ago, well above the 1.7% expected by economists and faster than the 1.4% rate last month. The increase was linked to a sizable jump in food prices and trade services. However, the market’s takeaway was that companies wouldn’t be able to pass on these recent input price increases and it was actually a negative. Tomorrow’s consumer price index will decide whether or not that concern is correct.
Tomorrow morning, the April consumer price index will be released, which will complete the other half of the inflation picture. Prices are expected to rise 2.0% from a year ago after increasing 1.5% in March. Because the producer price index showed such a dramatic increase in April, market participants will be watching closely to see if companies were able to pass along those price increases to consumers. Also scheduled to be released is the May New York regional manufacturing survey, the first of its kind for the month of May. The last two reports scheduled for tomorrow are March long-term capital (TIC) flows and weekly jobless claims.
The main catalyst for risk assets overnight is the preliminary release of Japan’s first-quarter GDP. Its result should have a significant effect on the USDJPY currency pair and, by extension, US equities. Also scheduled to be released are preliminary first-quarter GDPs from the eurozone, France, and Germany. The last piece of data is the final April eurozone consumer price index.
Tomorrow is the busiest day of the week for earnings, with 12 companies reporting. Notable reports include Wal-Mart (WMT), Kohl’s (KSS), J.C. Penney (JCP), Autodesk (ADSK), Nordstrom (JWN), and Applied Materials (AMAT).
The main event early today was the ECB rate decision. The central bank left its benchmark interest rates unchanged, as was expected by the majority of economists. In his usual press conference, President Mario Draghi made the same comments as he did last month about the ECB’s monetary policy stance. However, in response to a question about when he might act, Draghi stated that the ECB was prepared to begin an asset purchase program as early as next month, when its staff would update its economic projections. (See: “Todd Harrison: The ECB Loads the Bazooka.”)
Energy was a very notable underperformer today. The EIA released its weekly natural gas inventories, which recorded a 74-billion-cubic-feet build versus expectations of 70 bcf. Natural gas was lower, which dragged down the stocks of a number of exploration and production companies. Gulfport Energy (GPOR) was also a major culprit for the sell-off today after reporting earnings in the pre-market and missing by a wide margin. The stock fell 19% amid a number of analyst downgrades.
The broader indices experienced another roller-coaster day. The S&P 500 opened up 0.55%, only to fall a full percent intraday, only to recover some of those losses by the close of the session. Small caps notably underperformed again after yesterday’s strong intraday turnaround.
High-beta tech stocks were generally weak today, with Tesla Motors (TSLA) leading the charge lower. Tesla fell 11.3% after reporting first-quarter earnings that were roughly in line with expectations, and thus not strong enough to satisfy bulls in the shaky market environment.
Internet security play FireEye (FEYE) traded higher in the early going, but it couldn’t hold its gains and finished down 4.19%. At $27.45, it’s now more than 70% off its $97.35 March high.
One tech name that bucked the larger trend was Twitter (TWTR), which rose 4.17% to $31.94 after Morgan Stanley (MS) upgraded the stock to equal-weight.
Two economic reports are scheduled for tomorrow, the March JOLTS Job Openings and Wholesale Inventories. The March report of inventories will be the last officially reported figure for the next round of first-quarter GDP revisions. Inventories are expected to grow 0.5% month-on-month after rising a similar amount in the month prior. The Job Openings report is judged by economists to be the “truest” gauge of labor market activity because it measures job leavers in addition to new hires.
Another set of important Chinese data is due out overnight: April consumer and producer price indexes. Consumer prices are expected to rise 2.1% year-on-year after rising 2.4% in the month prior. Also scheduled to be reported is Canada’s employment change, Germany and UK’s trade balances, UK manufacturing and industrial production, and the April GDP estimate for the UK.
Being Friday, it will be a light day for earnings. The only notable reports scheduled are Ralph Lauren (RL) and Hilton Worldwide (HLT).
The S&P 500 rose as much as 18.50 points by noon today, which was a gain of 24.75 points from the overnight futures low. However, all of the rally was erased late in the afternoon as selling intensified in small-cap stocks, only to see a sharp bounce in the last 30 minutes of the session erase the earlier selling. The S&P 500 finished the day up 0.82%, led by energy and materials stocks. Biotech, which has been under particular pressure recently, failed to close the session in the green, though it did hold important technical support near 213.
European indices started the day lower as investors remained cautious over new developments between Russia and the West over Ukraine. The Italian FTSEMIB was the strongest performer, which has typically been the most closely correlated to investors’ thoughts on potential easing from the ECB. Over the weekend, ECB President Mario Draghi said at a press conference in Washington that the increase in the EURUSD exchange rate posed a risk to price stability in the eurozone, which may require unconventional measures in response.
The other economic report of significance is March’s consumer price index.
The Atlanta Fed will be holding a conference tomorrow in Stone Mountain, Georgia. Chairwoman Janet Yellen is scheduled to give the opening remarks via video at 8:45 a.m. EDT.
The UK will release its consumer and producer price index early tomorrow morning. Also, the German ZEW survey of market professionals’ thoughts on the current economic situation and expectations will be reported.
The S&P 500 touched a new all-time high of 1893.8 this morning before profit-taking set in ahead of Friday’s big NFP report.
We saw very bearish action in high-beta stocks, with weakness in key leadership sectors like biotech, and by day’s end, the S&P was down 0.1%.
Biotech, which is largely viewed as a key indicator of investors’ willingness to embrace risk, sell 2.7%, as measured by the Nasdaq Biotechnology Index. With this decline, the group is now down 14.5% from the February 25 high.
Small caps also took it on the chin, with the Russell 2000 trading down 1.0%, and there was a nasty pullback in emerging markets. The stock markets of countries like Russia, Brazil, and China have been very hot as of late despite mixed global economic data trends, but all three sold off today.
Nonetheless, the action wasn’t all bad. US housing and financial stocks did slightly better than the major averages, and energy stocks finished nicely in the green as crude oil crossed the $100 mark.
On the economics front, as expected, the European Central Bank kept its benchmark interest rate at 0.25%. However, ECB President Mario Draghi emphasized that the Bank will maintain an accommodative monetary policy to battle the prospect of inflation.
Here in the US, the ISM Non-Manufacturing PMI rose to 53.1, which was slightly below the consensus reading of 53.5. obless claims were also a modest disappointment at 326,000, which was above expectations of 319,000.
US markets still feel like they’re working off some excess following 2013’s 30% pop, though that hasn’t yet translated to the major averages as the selling is happening in riskier stocks. One good illustration of the action is the big move up in utility stocks.
That group is up 8.6% year-to-date, and has continued going higher just as the aforementioned biotech and social media names have cratered. We’ve also seen nice, slow and steady upward moves in Big Pharma names like Pfizer (PFE) and Merck (MRK).
Current expectations call for a headline number of 200,000 with an unemployment rate of 6.6%.
Investors are looking for a rebound following the extended spell of bad weather that contributed to three straight weak reports. And given that the S&P is sitting near an all-time high, it’s fair to say expectations are a bit elevated.
Good morning, Quartz readers!
This week reminded us that central banks can still surprise. Markets soared when the Federal Reserve decided not to slow its stimulus to the US economy, and the Reserve Bank of India’s new head, Raghuram Rajan, took the limelight after raising rates sooner than expected to fight inflation.
To understand the power of central bankers, read Neil Irwin’s excellent The Alchemists. Remarkably gripping for a book about monetary policy, it relates how Fed chair Ben Bernanke, European Central Bank (ECB) head Jean-Claude Trichet and Bank of England (BoE) governor Mervyn King joined battle against the global financial crisis.
But Trichet and King are now gone, Bernanke has one foot out the door, and their successors face more diverse challenges. Rajan must stem the fall of the rupee. Haruhiko Kuroda in Japan is fighting entrenched deflation with a flood of cash. The BoE’s Mark Carney and the ECB’s Mario Draghi are looking for growth amidst rising debt. And Bernanke’s successor, probably Janet Yellen, will have to make the decision he postponed this week: When to let the US economy stand on its own two feet.
While no one would call saving the global financial system easy, it at least comes with a clear playbook, written by Walter Bagehot and Milton Friedman: Emergency loans to AIG and faltering European countries alike; low, if not zero, interest rates for years to come.
But sustainable growth is a more slippery problem. Should central bankers target nominal GDP, or issue specific guidance about unemployment and prices? How should they balance the conflicts between inflation and growth? How much should they track financial instability or seek to pop bubbles? How can they balance domestic needs with the impact of their choices on other countries? And can anything a central bank does succeed without complementary fiscal policy?
Bernanke, King and Trichet found a way to put out a fire. The new generation may find it harder to rebuild amidst the ashes.—Tim Fernholz Share this
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