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Futures Unchanged Ahead Of Payrolls

It has been a quiet overnight session, following yesterday's epic short-squeeze driven - the biggest since 2011 - breakout in the S&P500 back to green for the year, with European trading particularly subdued as the final session of the week awaits US nonfarm payroll data, expected at 230K, Goldman cutting its estimate from 250K to 210K three days ago, and with January NFPs having a particular tendency to disappoint Wall Street estimates on 9 of the past 10. Furthermore, none of those prior 10 occasions had a massive oil-patch CapEx crunch and  mass termination event: something which even the BLS will have to notice eventually. But more than the NFP number of the meaningless unemployment rate (as some 93 million Americans languish outside of the labor force), everyone will be watching the average hourly earnings, which last month tumbled -0.2% and are expected to rebound 0.3% in January.

European shares are slightly lower with the travel & leisure and personal & household sectors underperforming and bank, financial services outperforming. The main source of volatility in Europe continues to be Greece whose Alpha and NBG banks Goldman downgraded from Buy to Neutral, saying it is "make or break" time and that ECB help is crucial, an ECB which yesterday was said to allow Greek banks up to $68b in emergency funding (an ELA which was boosted to accomodate the fund needs now that Greek banks have no eligible GGB collateral). German December industrial production below estimates. RBA lowers Australian GDP forecast which sent local stock higher.

Equities and fixed income have traded without direction this morning, with most major European indices opening slightly lower, while consumer staples is the worst performing sector. German Bunds are 1 bps tighter, as are Japanese 10 Years, with both the 10 Years Bund and JGB trading literally on top of each other as Europe has now officially mutated into a deflationary, money-pritning Japan (which going back over a decade, is now on QE12... no really).

Elsewhere, all is relatively quiet with regards to Greece, with the Athens Stock Exchange lower by just under 1% despite the Bank of Greece governor Stournaras commenting that Wednesday's decision by the ECB to revoke its waiver on the use of Greek bonds as collateral can be overturned if the country reaches another bailout deal with the EU.

Interestingly, the FT has reported that the ECB decision to revoke the waiver on Wednesday was fairly evenly split between members between removing early or waiting until the end of the month when the current programme expires. The move was pushed through however as some of the members who wanted to wait were not eligible to vote this time round. Next week the focus moves to a potential emergency Eurogroup meeting on Wednesday where Greece would no doubt be front and centre.

The energy complex has experienced a bout of strength today following on from yesterday’s gains, with WTI March crude futures now up 20% on last week’s low. This has left many confused because yesterday Saudi Arabia cut pricing for March oil sales to Asia, a sign according to Bloomberg that the desert kingdom is continuing to fight for market share. “This is further evidence that they are hellbent on protecting their market share in China,” Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis, which oversees $2.4 billion, said by phone Thursday. “They are trying to stay competitive in what is the biggest area of growth.” Middle Eastern producers are increasingly competing with cargoes from Latin America, Africa and Russia for buyers in Asia. Meanwhile Citadel's algos continue to misread the real signals and try to stop hunt each and every day's "crude bottom" as oil now trades in a 10% daily range, just like you typical pennystock.

In US specific news, Fed’s Plosser (Non-Voter, Hawk) said at the Fed’s Jan meeting there was no agreement about whether to drop the ‘patient’ phrase from their statement and how to replace it. While elsewhere Twitter reported a beat in expectations aftermarket (Q4 Adj. EPS USD 0.12 vs. Exp. USD 0.06. Q4 revenue USD 479mln vs. Exp. USD 453.6mln), while today sees Aon, Moody’s Marsh & McLennan and Dominion all report at 1200GMT/0600CST.

Over in Asia, equities traded mixed despite a strong Wall Street close spurred by a surge higher in oil prices during yesterday’s session which saw the S&P 500 finished up 1%. Hang Seng (-0.35%) and Shanghai Comp (-1.93%) trade in the red, the latter on course for its longest weekly losing streak since May, despite this week’s PBoC RRR rate cut. The decision was downplayed as a sign of further monetary easing, with officials saying its aim was to address liquidity conditions ahead of the lunar New Year. Nikkei 225 (+0.8%) rose while the ASX 200 (+0.3%) set a record 12th day of gains.

While FX markets have seen choppy price action, with GBP seeing a mild downtick as a result of a larger trade deficit than expected (-10154mln vs. Exp. -9100mln, Prev. -8848mln, Rev. -9283mln) and AUD holding onto their overnight gains on the back of a less dovish than expected RBA statement on monetary policy.

Market Wrap

  • S&P 500 futures up 0.1% to 2056.8
  • Stoxx 600 down 0.2% to 371.6
  • US 10Yr yield down 1bps to 1.81%
  • German 10Yr yield down 1bps to 0.36%
  • MSCI Asia Pacific up 0.3% to 142.1
  • Gold spot up 0.2% to $1267.8/oz

Bulletin Headline Summary from Bloomberg and RanSquawk

  • The European session has been quiet, as is usual ahead of Nonfarm payroll data. In addition, today also sees Canadian unemployment rate, as well as Fed’s Lockhart at 1745GMT/1145CST
  • The energy complex has experienced a bout of strength today following on from yesterday’s gains, with WTI March crude futures now up 20% on last week’s low.
  • Treasuries mixed, with long-end rallying before employment report forecast to show U.S. economy added 230k jobs in January while unemployment rate remains steady at 5.6%.
  • Prime Minister Tsipras is preparing to set out the most detailed account yet of his plans to revive the Greek economy after a diplomatic push ended with a rebuff from Germany and a warning shot from the ECB
  • ECB will allow the Greek central bank to provide as much as EU59.5b ($68b) in emergency funding for the country’s lenders, a euro-area central-bank official familiar with the decision said
  • Spain’s bonds are set to underperform their Italian peers for the fifth time in six weeks amid concern the rise of a Spanish anti-austerity party will lead to the sort of turmoil that followed Syriza’s victory in Greece
  • Saudi Arabian Oil Co. lowered its official selling price for Arab Light crude by 90 cents to $2.30 a barrel less than Middle East benchmarks, the lowest in at least the 14 years since Bloomberg began gathering data
  • After cutting Denmark’s deposit rate for a fourth time this year, matching Switzerland’s key rate of -0.75%, central bank governor Lars Rohde said he’s ready to do more to prevent the “unthinkable” outcome that the country might lose its euro peg
  • Australia’s central bank lowered its 2015 growth and inflation forecasts and predicted unemployment will rise, underscoring this week’s decision to cut interest rates
  • Merkel and Hollande will press Vladimir Putin for a cease-fire in Ukraine on Friday as U.S. and Russian officials expressed skepticism that a quick resolution to stem the spiraling violence is possible
  • Sovereign yields mixed, Greece 10Y rises ~24bps to 9.93%. Asian stocks mixed; European stocks mostly lower, U.S. equity-index futures rise. Brent, WTI, gold rise; copper falls

US Event Calendar

  • 8:30am: Change in Nonfarm Payrolls, Jan., est 230k (prior 252k)
    • Change in Private Payrolls, Jan., est. 223k (prior 240k)
    • Change in Mfg. Payrolls, Jan., est. 12k (prior 17k)
    • Unemployment Rate, Jan., est. 5.6% (prior 5.6%)
    • Average Hourly Earnings m/m, Jan., est. 0.3% (prior -0.2%)
    • Average Hourly Earnings y/y, Jan. , est. 1.9% (prior 1.7%)
    • Average Weekly Hours All Employees, Jan., est. 34.6 (prior 34.6)
    • Underemployment Rate, Jan. (prior 11.2%)
    • Change in Household Employment, Jan. (prior 111k)
    • Labor Force Participation Rate, Jan., est. 62.7% (prior 62.7%)
  • 3:00pm: Consumer Credit, Dec., est. $15b (prior $14.081b) Central Banks
  • 12:45pm: Fed’s Lockhart speaks in Naples, Fla.

DB's Jim Reid concludes the overnight recap

It was a continuation of the themes we’ve seen for most of the week yesterday, with Greece dominating the headlines and another 5% handle move in oil markets. We’ll take a look at the moves in oil and what was a better day for US risk assets later, but firstly running through the Greece news over the last 24 hours. Markets unsurprisingly opened weaker yesterday as Greek equities initially tumbled 10%, banks fell 30% and 5y yields widened nearly 250bps following the news that the ECB had removed the waiver on Greek debt as collateral. Sentiment improved however over the course of the day as markets were lifted by the news by that the ECB had upsized the ELA facility to €59.5bn, an increase of €9.5bn. Greek equities recovered throughout the session as a result, paring back around 7% of initial losses to finish -3.37% at the close. Greek banks recovered too somewhat although still finished down 10% whilst 5y yields recovered and finished 32bps wider at close.

Our resident expert George Saravelos noted yesterday that current Greek bank funding stands at between €70-€80bn, €30bn of which relies on EFSF-based collateral. This leaves the remaining - up to €50bn - at the level of the ELA. So on a back of the envelope calculation this implies a €10bn cushion in the now larger facility. The ELA is currently under review every two weeks so questions now will likely centre on how long the ECB is willing to let the facility run and how large they allow it to grow to. Pressure on funding requirements for Greek banks was mounting following large deposit outflows in the last month. The situation is clearly very fluid and dominated by headlines but George expects that a likely outcome would be an offer for negotiations on a new third programme, but accompanied by a pre-commitment to respect various conditions.

Aside from the ECB ELA announcement, Greek finance minister Varoufakis yesterday met with German finance minister Schaeuble with the meeting appearing to yield little in the way of progress. According to Reuters, Varoufakis was reported as saying after the meeting that ‘we didn’t even agree to disagree’. Meanwhile Prime Minister Tsipras was reported on Bloomberg as saying that the ‘new government will negotiate hard for the first time in years and will put a final end to the Troika and its policies’ in a talk to his fellow Syriza lawmakers.

Interestingly, the FT has reported that the ECB decision to revoke the waiver on Wednesday was fairly evenly split between members between removing early or waiting until the end of the month when the current programme expires. The move was pushed through however as some of the members who wanted to wait were not eligible to vote this time round. Next week the focus moves to a potential emergency Eurogroup meeting on Wednesday where Greece would no doubt be front and centre.

Turning our attention over to US markets yesterday, the S&P 500 closed +1.03% and the Dow finished +1.20% firmer at the close of play. US markets are in fact now back in positive territory YTD. The S&P 500 is now +0.18% for 2015 after a +3.4% rally in February so far. Credit markets also firmed yesterday with CDX IG ending 2.2bps tighter. With the better tone Treasuries weakened, the yield on the 10y benchmark closing 6.9bps tighter at 1.820. Aside from the better sentiment out of the ELA news, oil markets gave a boost to risk assets yesterday. A +4.45% rally for Brent and +4.19% gain for WTI means oil markets have traded in a $5 range this week, albeit with considerable swings between gains and losses. In fact the CBOE Crude Oil Volatility Index closed at the highest level in six years yesterday as markets digest various production level indicators. Unsurprisingly, energy stocks (+1.45%) closed stronger although in reality it was a stronger day for all sectors. The healthcare (+1.64%) component in particular benefiting from the news that Pfizer has agreed to buy drug-maker Hospira for $17bn – the latter closed 35% firmer following the announcement.

With much of the focus this week having been on Greece, data has largely taken a backseat. Today’s payrolls print however should put some of the focus back on the US. DB’s Joe Lavorgna notes that today’s employment report will likely be the last major piece of labour data Yellen has before her semi-annual monetary policy testimony to Congress which takes place later this month. Meanwhile, Hilsenrath notes in the WSJ that given Fed officials will have been able to digest two more employment reports prior to the next policy meeting in March, he believes that ‘if officials think a June interest rate increase is a possibility, they will need to remove an assurance that the central bank will be ‘patient’ before raising rates’.

So it’ll be interesting to see what a strong reading today would mean for those more dovish members of the Fed. In terms of today, market expectations are currently for a +230k print. Rounding up yesterday’s macro data, jobless claims rose 11k to 278k however the print was below consensus and lowered the four-week average to 293k. Elsewhere non-farm productivity weakened in Q4 (-1.8% from +2.3%) and unit labour costs jumped to 2.7%, ahead of 1.2% expected. Finally there were some dovish comments out of the Boston Fed’s Rosengren yesterday who was quoted on Reuters as saying that ‘given how low total and core inflation have fallen in most developed countries, a policy of patience in the US continues to be appropriate’.

Wrapping up market moves yesterday, after trading softer for most of the day European equity markets received a late boost from energy stocks to close mostly unchanged. Indeed, the Stoxx 600 (+0.11%), DAX (-0.05%) and CAC (+0.15%) finished relatively flat although the IBEX (-0.40%) and FTSE MIB (-0.59%) were weaker. The move in the Euro was significant, the single currency actually wiped out Wednesday’s losses to trade +1.16% versus the Dollar at $1.1478. The better sentiment was perhaps also as a result of upgraded eurozone growth forecasts out of the European Commission. The EC upgraded both its 2015 and 2016 forecasts for growth to 1.3% and 1.9% respectively, a 20bps increase from previous estimates for each year. 10y Bund yields finished unchanged at 0.366%.

Elsewhere the Bank of England left rates unchanged yesterday at 0.5% as expected however there was more easing surprise (although perhaps becoming less of a surprise) out of Denmark with the Nationalbanken cutting its deposit rate by a further 25bps to -0.75% - in a move which signaled continued defense for the Krone. The move marked the fourth rate cut in less than three weeks and puts them in line with Switzerland with the joint lowest rate globally.

Before we take a look at the today’s calendar, despite the better finish in the US last night equity markets in Asia this morning are generally mixed with the Nikkei (+0.80%) and ASX (+0.16%) both firming, but the Hang Seng (-0.12%) and Kospi (-0.10%) weaker.

Looking at the day ahead, the focus this morning will likely be on Germany where we have the industrial production print for the region. As well as this, we’ve got trade data due for both France and the UK along with industrial output for Spain. Over in the US this afternoon and away from the aforementioned payrolls highlight, we’ve also got other employment indicators due including the unemployment rate, average hourly earnings and participation rate. Consumer credit for the US rounds off the day’s releases. Finally, the Fed’s Lockhart is due to speak today.