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Futures Fade Overnight Ramp After BOJ Disappoints, Attention Returns To Hawkish Fed

Back in September we explained why, contrary to both conventional wisdom and the BOJ's endless protests to the contrary, neither the BOJ nor the ECB have any interest in boosting QE at this - or any other point - simply because with every incremental bond they buy, the time when the two central banks run out of monetizable debt comes closer. Since then the ECB has jawboned that it may boost QE (but it has not done so), and overnight as reported previously, the BOJ likewise did not expand QE despite many, including Goldman Sachs, expecting it would do just that.

As DB summarizes, the BoJ’s decision came despite another fall in prices in Japan. Headline inflation slowed two-tenths in September to 0.0% yoy (as expected) and to the lowest level now since May 2013. The core (ex fresh-food) stayed at -0.1% yoy and the core-core (ex food and energy) rose one-tenth to +0.9% yoy. CPI excluding fresh food and energy, the focus for the BoJ, rose to +1.2% yoy which was faster than the +1.1% in August.

Sure enough, Kuroda promptly repeated the party line, when during a press briefing after the BOJ decision in to cut its inflation forecast while keeping policy unchanged, he said "as I’ve said many times, we aim to achieve the 2% price goal as soon as possible, and I’ve repeatedly said that we are ready to adjust monetary policy, even with additional easing and such, without hesitation if needed. As for the means, I don’t think there’s a limit at all.

Alas, as last night's credibility-denting action showed, there is. However, in order to prevent a plunge in the USDJPY which may have unleashed a tumble in stocks on the last end of the best month for the S&P500 (at least in point terms), promptly after the BOJ's disappointing announcement there was a conveniently planged reported at the BOJ's favorite Nikkei news outlet, that Japan govt may consider boosting the extra budget size from the >3 trillion yen currently being mulled if GDP figures to be announced on Nov. 16 show the economy needs shoring up, Nikkei reports.

This news supposedly led to a surge in the USDJPY, which in turn sent the Nikkei from red on the day to a +0.8% green close, while pushing US equities higher. However, it did not take long for this ruse to be faded, and both Nikkei fitires and the USDJPY...


... not to mention S&P futures have faded the entire move higher overnight, and were now largely unchanged as attention once again returns to concerns that a hawkish Fed may indeed hike rates in December, and that contrary to the Wednesday's market reaction, this will not be good at all for risk.


Meanwhile in China, the 5th 5 Year Plenum concluded, and saw the SHCOMP dip ever so slightly, with China A and H retreated 1.1%/2.1% (as of Thu) this week, dragged by Financials and Utilities, after rebounding 12%/13% from their respective Sep lows. More interesting was news about looser capital controls which led to the biggest jump in the Onshore Renminbi since 2005. More on that shortly.

In any case, absent some cataclysmic news, today will be as we previewed previously, the biggest monthly point gain in the S&P500, and the biggest percentage jump in European stocks since July 2009...

Happy days. Skies are blue. European stocks +8.4% this month, the best month since July 2009

— Jamie McGeever (@ReutersJamie)

.... on what has been another month of atrocious global economic data, and where the following WSJ headline summarizes what has happened on every day in the past quarter best.

Global stocks up amid stimulus hopes

— Wall Street Journal (@WSJ)


A summary of key overnight events: Bank of Japan lowers 2016 core CPI forecast, pushes back forecast time period to reach 2% target; leaves monetary policy unchanged. Hong Kong dollar peg intervention rises to biggest since 2009, Chinese stocks head for first monthly gain since May. U.S. avoids debt default as Congress passes budget measure.

Looking closer at regional markets, Asian stocks traded mostly higher after recovering from the initial disappointment of the BoJ standing pat on monetary base as widely expected, while there were also reports Japan is said to mull an additional JPY 3 trl budget. At the same time, the BoJ pushed back its 2% CPI target to H2 FY 2016 in their semi-annual outlook.

This saw the Nikkei 225 (+0.8%) break 19,000 to the upside, while the ASX 200 (-0.3%) underperformed weighed by financials as ANZ Bank continued its declines. Shanghai Comp. (-0.1 %) resided in mild positive territory with gains capped due to weak earnings from large banks and petrol names. 10yr JGBs tracked its US counterparts lower with the failure of the BoJ to act also keeping the paper in negative territory.

Stocks in Europe failed to hold onto the best levels of the session and heading into the North American open, stocks are seen somewhat mixed, with the Spanish IBEX underperforming following earnings by BBVA (-3.8%) and IAG (-4.35%) pre-market. At the same time, the somewhat cautious sentiment in part stemming from the fact that the BoJ refrained from further policy easing, together with month-end extension related flow supported the bid tone by Bunds.

In terms of US related commentary, US has avoided a default on its debt as a result of Congress passing a budget while PIMCO said it increased holdings of government debt and that it sees the Fed likely moving towards a hike in December.

In the commodity space, there was little in terms of energy related news, though both WTI and Brent crude futures pared some of overnight losses to trade near the unchanged mark.

In FX, the JPY traded firmer across the board, with vols collapsing following the aforementioned news, while NZD extended on its yesterday's gains after China scrapped its one-child policy which in turn supported dairy-related names, with additional support seen after New Zealand ANZ Business Confidence (10.5 vs. Prey. -18.9) rose for the 1st time in 5-months. Also of note, upside by EUR/GBP amid the usual month-end related flow was capped by looming redemptions out of Italy and Spain next week (combined around EUR 44.3bIn).

Market Wrap

  • S&P 500 futures up 0.1% to 2084.5, Euro Stoxx 50 down 0.1%
  • Equities: Nikkei 225 (+0.8%), IBEX (-0.6%), FTSE 100 little changed, CAC 40 up 0.4%, DAX up 0.3%, IBEX 35 down
    -0.6%, FTSE MIB up 0.3%
  • Bonds: German 10yr yield down -2bps to 0.52%, Greek 10yr yield down -11bps to 7.85%, Portugal 10yr yield down -2bps to 2.48%, Italian 10yr yield down -3bps to 1.45%,
  • Commodities: LME 3m Nickel (-1.8%), WTI Futures (-0.9%)
  • FX: Yen spot (+0.4%), Euro (+0.3%)
  • Vstoxx Index falls -3.2% to 20.37
  • U.S. Chicago purchasing manager, Michigan confidence, ISM Milwaukee, employment cost index, personal income, personal spending due later.

Bulletin Headline Summary from RanSquawk and Bloomberg:

  • Cautious sentiment dominated the price action in early European trade, with Bunds better bid on the back of month-end related flow
  • JPY traded firmer across the board after the BoJ refrained from announcing further easing, though the central bank also pushed back its 2% CPI target, while reports of additional JPY 3trl budget supported the domestic index
  • Going forward, market participants will get to digest the release of the latest US employment cost index, PCE, Chicago PM! and University of Michigan survey
  • Treasuries rise overnight after U.S. Congress passed a two-year budget deal that reduces the chance of a government shutdown.
  • The Bank of Japan declined to step up its monetary stimulus Friday even as it postponed its time-frame for reaching a 2% inflation target for the second time this year
  • Euro-area consumer prices halted a decline in October as the ECB stepped up preparations for more stimulus
  • Nick Kounis, head of macro research at ABN Amro Bank NV, is recommending Federal Reserve Chair Janet Yellen and her key counterparts unite to deliver a globally coordinated increase in inflation targets
  • Credit Suisse’s decision to stop making a market in government bonds across Europe may be the tremor that presages an earthquake for investors
  • U.S. and Swiss authorities are investigating Credit Suisse’s relationships with FIFA officials named in a U.S. criminal indictment, the lender said
  • Spanish economic growth slowed in the third quarter, indicating the recovery may have peaked after the fastest expansion in eight years. Output increased 0.8% q/q compared with 1% in 2Q
  • $19.5b IG, $4.7b HY priced yesterday. BofAML Corporate Master Index OAS narrows 1bp to +165, YTD range 180/129. High Yield Master II OAS narrows 4bp to +593, YTD range 683/438
  • Sovereign 10Y bond yields mixed, with Greek 10Y yield 12bp lower. Asian and European stocks mostly lower; U.S. equity- index futures rise. Crude oil and copper fall, gold gains

US Economic Docket

  • 8:30am: Employment Cost Index, 3Q, est. 0.6% (prior 0.2%)
  • 8:30am: Personal Income, Sept., est. 0.2% (prior 0.3%)
    • Personal Spending, Sept., est. 0.2% (prior 0.4%)
    • Real Personal Spending, Sept., est. 0.2% (prior 0.4%)
    • PCE Deflator m/m, Sept., est. -0.1% (prior 0%)
    • PCE Deflator y/y, Sept., est. 0.2% (prior 0.3%)
    • PCE Core m/m, Sept., est. 0.2% (prior 0.1%)
    • PCE Core y/y, Sept., est. 1.4% (prior 1.3%)
  • 9:00am: ISM Milwaukee, Oct., est. 44 (prior 39.44)
  • 9:45am: Chicago Purchasing Managers, Oct., est. 49.4 (prior 48.7)
  • 10:00am: U. of Mich. Sentiment, Oct. F, est. 92.5 (prior 92.1)
    • U. of Mich. Current Conditions, Oct. F (prior 106.7)
    • U. of Mich. Expectations, Oct. F (prior 82.7)
    • U. of Mich. 1 Yr Inflation, Oct. F (prior 2.7%)
    • U. of Mich. 5-10 Yr Inflation, Oct. F (prior 2.6%)

Central Banks

  • 10:00am: Fed’s Williams speaks in Washington
  • 11:25am: Fed’s George speaks in Kansas City

DB's Jim Reid completes the overnight wrap

Over the past week we've had a dovish surprise from the ECB, a surprise rate cut from China and a hawkish surprise from the Fed. Completing the big four, this morning the BoJ has refrained from action voting by a majority (8-1) to keep the current pace of annual asset purchases as is at ¥80tn. The BoJ’s semi-annual outlook is set to be released after we go to print at 6am London time, while Governor Kuroda is due to speak at 6.30am so we should have a better idea as to what this means for any potential policy change further down the line.

The BoJ’s decision came despite another fall in prices in Japan. Headline inflation slowed two-tenths in September to 0.0% yoy (as expected) and to the lowest level now since May 2013. The core (ex fresh-food) stayed at -0.1% yoy and the core-core (ex food and energy) rose one-tenth to +0.9% yoy. Our colleagues in Japan estimate that the CPI excluding fresh food and energy, the focus for the BoJ, rose to +1.2% yoy which was faster than the +1.1% in August. As well as this, we also got wind of the latest employment numbers where the jobless held steady at 3.4%, in-line with the market.

The next big macro event is on Sunday where we’ll get the official Chinese October manufacturing and non-manufacturing PMI numbers which will keep markets busy first thing Monday morning. If the house view on China growth stabilisation is right it would be helpful to see the first signs of it here.

Back to the market reaction following the BoJ, the Yen did initially rally +0.6% following the news to touch 120.3, only to retreat back to 121.2 now and pretty much flat on the day. 10y JGB yields are a couple of basis points higher, while the Nikkei did fall as low as -0.8%, but has reversed course and is currently +1.09% as we go to print. Elsewhere this morning, it’s fairly mixed although moves are modest. The Shanghai Comp (+0.44%) is higher, while the Kospi (-0.10%), Hang Seng (-0.06%) and ASX (-0.52%) have fallen a touch.

Staying in Asia, yesterday our Chief China Economist Zhiwei Zhang published a note highlighting the key takeaways from the Plenum which concluded yesterday. Summarising, Zhiwei noted in particular that: 1) innovation will play a critical role in the growth strategy over the next five years; 2) the one-child policy will be further loosened; 3) price liberalization will pick up speed; 4) the social safety net will be strengthened; 5) further policy easing may be coming to boost growth in the short term. There was no mention of growth targets just yet and we may have to wait a couple of weeks to hear the official outcome, but as we highlighted yesterday a strong hint was made by the Chinese Premier that targeted annual growth may be downgraded to closer to 6.5%.

Markets yesterday were characterized by another weak session for government bonds as they further digested the hawkish snippets from the FOMC on Wednesday. 10y Treasury yields were up another 7.2bps to settle at 2.173%, a two-day move higher of 13.6bps now to the highest close since September 21st. A lot of the pressure was on the longer end of the curve however where 30y yields rose 8bps. Part of this blame is being attributed to a bumper session for US IG issuance with 10 new deals said to have priced totalling nearly $20bn of issuance in the busiest day this month – likely a reflection of issuers waiting on the sidelines for the Fed meeting to pass. Yesterday’s primary issuance included a big slug from Microsoft which priced $13bn across 7 tranches (including $5bn for maturities of at least 20years), the seventh biggest offering in the US this year.

US credit was actually the relative underperformer yesterday with CDX IG 1.2bps wider with US equities pretty much flat to a smidgen lower (S&P 500 -0.04%, DOW -0.13%) in what was a fairly benign day of price action in equity markets particularly considering the volatile moves post-FOMC on Wednesday night into the close. In fact, of the 210 trading days in the US so far this year, yesterday’s 9.9pt range in the S&P 500 was the 20th smallest this year and is well below the average range of closer to 22pts so far in 2015. For further context the average intraday points range was around 33pts in September.

Much of the focus leading into yesterday was on the US Q3 GDP report. The 1.5% saar print was a tad below expectations of 1.6% and a sharp decline from the 3.9% we saw last quarter. The big drag came from inventories which subtracted 144bps from Q3 output. That meant final sales came in at 3.0%, down from 3.9% last quarter. Personal consumption rose 3.2% (vs. 3.3% expected) during the quarter having risen 3.6% previously. Meanwhile the core PCE deflator, the Fed’s preferred inflation metric, was up just 1.3% in the quarter and from four quarters earlier.

One of the interesting parts of the GDP report was that nominal GDP slipped to a YoY rate of 2.9% in Q3 - the joint second lowest of this 5 year + recovery. Regular readers will remember our analysis from earlier this year that suggested that in the 118 Fed rate hikes since the 1950s, only twice have the central bank raised rates with nominal GDP below 4.5% YoY and both these were quarterly statistical anomalies with the following quarter seeing double digit YoY nominal growth. So if the Fed does raise before YE it’s fair to say they've never raised with nominal growth consistently this low. This is one of the problems they face and why the risks are high that it would be a policy error.

Meanwhile, the remaining data in the US was mixed. Initial jobless claims were up 1k last week to 260k (vs. 265k) although the four-week average has now dropped to the lowest level since December 1973 at 259k. Elsewhere, pending home sales data for September was soft, with sales down -2.3% mom last month (vs. +1.0% expected) for the second consecutive monthly decline.

It was a similar story for markets in Europe yesterday too. The Stoxx 600 (-0.03%) finished pretty much unchanged at the close, while govvie bond yields surged higher having previously declined for much of the week on the back of the dovish ECB. 10y Bunds (+9.2bps) closed back above 0.50% again yesterday while the periphery was up anywhere from 7bps to 12bps. Much of the move coincided with the rise in Treasury yields also some slightly better than expected German CPI data helping at the margin. The October flash reading of 0.0% mom bettering expectations for a negative reading and helping to support a lift in the YoY rate to +0.3% from 0.0% last month and the joint-highest since June. Meanwhile German unemployment held steady at 4.6% while in the UK we saw September mortgage approvals decline surprisingly to 68.8k (vs. 72.4k expected). Elsewhere, Euro area consumer confidence was up in October, rising 0.3pts to 105.9 after expectations for a drop to 105.1.

Finally, earnings yesterday in the US were a bit of a mixed bag. 49 S&P 500 companies reported yesterday with 38 (78%) beating consensus EPS expectations but just 15 (31%) coming in ahead of revenue estimates. That compares with the overall trend so far, after 321 reporters, of 76% and 44% respectively – so a weak day for revenue numbers in particular yesterday continuing a trend of weak revenues this quarter.

Moving to the day ahead now. There’s more inflation data for us to keep an eye on this morning when we get the October Euro area reading where expectations are for the headline to nudge up one-tenth to 0.0% yoy and the core to stay unchanged at +0.9% yoy. We’ll also get Italy’s CPI data, along with German retail sales and French consumer spending data. In the US this afternoon the highlight looks set to be the Q3 employment cost index, while the September PCE deflator and core readings will also be closely watched. Personal income and real spending data, the Chicago PMI and the final October University of Michigan consumer sentiment read rounds off a busy day for data. There’s also Fedspeak for us to focus on with Williams due to speak around 2pm London time and George shortly after. As usual earnings season will warrant much attention with 21 S&P 500 companies due to report, with the big oil producers – Chevron and Exxon Mobil – the highlights. In Europe 17 Stoxx 600 companies are due to report, including RBS, BNP Paribas and AB Inbev.