While the trading world, or at least the kneejerk-reaction algos, is focused on today's US nonfarm payrolls due out in just 2 hours (consensus expects 240K, with unemployment declining from 5.8% to 5.7%) the key event overnight came out of China, (where inflation printed at just 1.5% while PPI has imploded from -1.8% in September to -2.2% in October to -2.7% in November to a whopping -3.3% in December) because as per BofA “soft domestic demand over-capacity issue have kept inflation pressures low”. This extended a record stretch of negative PPI prints and was the steepest drop in factory-gate prices in two years. “The oil price drop is one factor, but the more important factor of the PPI decline is the weakness of the global economy — look at Europe and Japan,” said Larry Hu, head of China economics at Macquarie Securities Ltd. in Hong Kong. “With trade and other inflation transmission methods, the whole world is facing disinflation pressure.”
Europe promptly followed with big news of its own, thanks to a Bloomberg report that as recently as Wednesday ECB staff “presented policy makers with models for buying as much as 500 billion euros ($591 billion) of investment-grade assets… options included buying only AAA-rated debt or bonds rated at least BBB-, the euro-area central bank official said. Governors took no decision on the design or implementation of any package after the presentation.” In other words less than two weeks before the fateful ECB meeting and Mario Draghi not only still hasn't decided on which of three public QE version he will adopt, but the ECB has reverted back to a private QE plan. Not surprisingly the EURUSD jumped back over 1.18 on the news (and USDJPY and stock markets dropped) on the news that Europe still is completely unsure how to proceed with QE despite the endless jawboning.
In other news, and as reported last night, Fed's non-voting, and outgoing, dove Kocherlakota said the Fed should not raise US interest rates this year and raising interest rates would slow progress towards inflation goal. Kocherlakota added that Fed stimulus is insufficient to hit inflation target and sees few years for inflation to return to 2%. Unlike Evan's “catastrophe” comment, stocks not only had no response but actually retreated on the comment.
Speaking of China, something peculiar happened in its stock market when the Shanghai Composite Index fell, erasing a gain of as much as 3.4 percent in the last half hour of trading, as traders weighed the prospect of stimulus amid data signaling a deeper economic slowdown. Energy companies led declines after Chinese factory-gate prices posted their sharpest drop in two years.
European equities (EuroStoxx50 -1%) also traded lower after the abovementioned report that ECB staff are said to have outlined EUR 500bln investment grade QE plan although have said not to have taken any decision on QE. Furthermore, IBEX (-2.45%) is the underperforming index and financial names are leading the way lower for Europe as Santander (-9.6%) have resumed trade this morning following yesterday's news that they are to boost capital. However, Chairwoman Botin refuted claims that the bank are interested in Banca Dei Monte Paschi (-4.9%) after the Italian lender were seen higher by 12.4% yesterday on the back of rumours of Santander interest. Fixed income remains tentative with light volumes observed in the Bund as it trade flat with while the ECB reports propelled periphery paper higher.
The USD-index (-0.24%) remains offered in the session following yesterday's remarks from Fed's Kocherlakota saying that the Fed should not raise US interest rates this year, raising interest rates would slow progress towards inflation goal, however these comment did not impact the fixed income or equity markets. The subsequent ECB comments lifted EUR/USD back above the 1.1800 handle after initially moving lower before reports that the ECB confirmed that no decision on QE had been made. Separately, GBP/USD saw some strength ahead of the UK Manufacturing and Industrial Production with rumours circulating that the releases were positive, however the data points came in mixed causing GBP/USD to come off session highs.
