Futures Flirt With Unchanged Despite BOJ's "Surprising", If Completely Factored-In, Announcement
The key event overnight was the monetary policy announcement by the BOJ in which its kept it QE unchanged while the Board decided by unanimous vote to double the scale of two funding facilities, namely the Stimulating Bank Lending Facility and Growth-Supporting Funding Facility and to extend the application period for these facilities by a year. Both facilities are designed to stimulate the provision of funding to Japanese banks, allowing them to borrow from the BoJ at a fixed rate of 0.1%pa, for a period 4 years now, instead of 1-3 years previous. Some are arguing that by expanding its funding programmes but not changing its asset purchase targets, the BoJ has signalled its intention to ease policy whilst preserving firepower for extra stimulus in coming months when a sales-tax hike is due to kick-in. The result was a surge in both the Nikkei and USDJPY. The problem, and confirmation that once again the market is now a bunch of cluless automatons unable to analyze even one sentence below the headline level, is that as Goldman explained overnight, the "surprise" announcement was already fully factored in.
As of January 31, the growth-supporting funding facility had provided ¥4 tn (already beyond its planned scale), while the stimulating bank lending facility had provided ¥5 tn for a total of ¥9.16 tn. The bank issued a target for the combined balance of loans to reach ¥18 tn by December 2014 when it announced its quantitative and qualitative easing program on April 4, 2013. With the end-March 2014 deadline for new applications approaching, the BOJ needed in practical terms to extend and expand the two facilities as it announced today in order to meet the end-December target. Today’s facility extension/expansion is already factored into the bank’s monetary base target.
Doesn't matter: if the Nikkei is up by 3.15% by non-news, it will take it.
In other perhaps just as important news, the PBOC engaged in its first liquidity withdrawing repo in 8 months, when it conducted 48b yuan ($7.9b) of 14-day repos at 3.8% according to a statement posted on its website. The monetary authority last issued such contracts on June 6, when it sold 10b yuan of 28-day repos. In other words on one hand China provides record liquidity with one hand and bails out every insolvent WMP and Trust it can get its hands on, on the other it pretends to withdraw liquidity. Go figure.
In Europe, the bad news continues when the German ZEW index slid to 55.7, median est. 61.5; said investors concerned about U.S. economy losing momentum, expectations for Germany have declined; also note emerging market volatility. Also in Spain, the banking sector is not doing too hot following the latest news that bad loans as a percentage of total lending rose to 13.6% in December, marking a fresh record as credit shrank on a monthly basis.
Stocks in Europe failed to benefit from the decision by the BoJ to double the scale of its lending facilities which consequently saw the Nikkei 225 gain over 3% and JPY depreciate across the board, as attention turned to liquidity draining op by the PBOC, which was the first one since June. This prompted profit taking in gold and commodity linked currencies and in turn supported the bid tone in safe-haven assets. Demand for more defensive assets was further buoyed by the release of somewhat mixed German ZEW survey, while the release of softer than expected inflation data from the UK encouraged squaring of steepening bets. As a result, GBP underperformed its peers, while in spite of the release of weaker macroeconomic data and somewhat cautious sentiment, EUR/USD remained in positive territory, supported by the overnight surge by EUR/JPY. Going forward, market participants will get to digest the release of the latest Empire Manufacturing and TIC Flow reports.
US Event Calendar:
- 8:30am: Empire Manufacturing, Feb., est. 9.00 (prior 12.51)
- 9:00am: Net Long-term TIC Flows, Dec. est. $30b (prior - $29.3b)
- Total Net TIC Flows, Dec. (prior -$16.6b)
- 10:00am: NAHB Housing Market Index, Feb., est. 56 (prior 56) Central Banks
- 11:00am: POMO - Fed to purchase $3.75b-$4.5b in 2018-2019 sector
News bulletin from Bloomberg and RanSquawk
- JPY depreciated across the board and the Nikkei 225 index settled up over 3% after BoJ decided to double the scale of its Growth Supporting Funding Facility and Stimulating Bank Lending Facilities.
- PBOC drained CNY 48bln (14-day repo op) for the first time since June, highlighting concerns over recent decline in money market rates.
- UK headline CPI rate came in below exp. and below BoE's target for first time since Nov. 2009. ONS said that the largest downward contributors to the Y/Y rate were recreation and culture, furniture, alcohol and tobacco.
- Treasuries gain, 5Y and 7Y notes lead while 10Y yields trade near YTD highs amid gains for Nikkei, weakness in JPY.
- The BOJ doubled a funding tool to JPY7t ($68b) and said individual banks could borrow twice as much low-interest money as previously under a second facility. It left unchanged a pledge to expand the monetary base by JPY60t to JPY70t/year
- Japan’s GDP grew 1% in 4Q vs median estimate for 2.8% growth while capital spending rose by the most in two years and consumption picked up, trade deficits from surging imports and limited gains in exports dragged on the expansion
- Germany’s ZEW index slid to 55.7, median est. 61.5; said investors concerned about U.S. economy losing momentum, expectations for Germany have declined; also note emerging market volatility
- The Bundesbank said it is “open to a potential adjustment of current liquidity-absorbing operations” if such stabilize money market and liquidity conditions and “thereby signals more clearly than so far the accommodative monetary-policy stance of the Eurosystem”
- U.K. inflation unexpectedly cooled in December, slowing to below the Bank of England’s 2% target for the first time since November 2009
- The PBOC conducted 48b yuan ($7.9b) of 14-day repos at 3.8% today, according to a statement posted on its website. The monetary authority last issued such contracts on June 6, when it sold 10b yuan of 28-day repos
- Italy’s designated Prime Minister Matteo Renzi will start talks with party leaders today in a bid to win their support for his political program
- Ukrainian protesters seeking President Viktor Yanukovych’s ouster clashed with police as they tried to reach parliament to pressure lawmakers struggling to end a deadly three-month political standoff
- Three former Barclays Plc employees were charged by U.K. prosecutors with conspiring to manipulate Libor, bringing the number of people accused in global probes to more than a dozen
- Sovereign yields mostly lower. EU peripheral spreads tighter. Asian stocks mixed; Nikkei +3.13%, Shanghai -0.9%. European stocks lower, U.S. stock-index futures little changed. WTI crude higher, gold and copper lower
The BoJ decided to double the scale of its Growth Supporting Funding Facility and Stimulating Bank Lending Facility with the main growth funding program increased to JPY 7trl and both lending schemes extended by 1 year beyond the March 2014 deadline. Furthermore, the Bank of Japan unanimously retained its plan for JPY 60trl-70trl annual rise in the monetary base. (BBG) The extended programs were initially slated to expire in March of this year.
PBOC drained CNY 48bln (14-day repo op) for the first time since June, as money market rates fall to lowest level in at least 3 months (BBG). The move highlights that the central bank is somewhat uncomfortable with the recent decline in money market rates and with the growth of bank lending in January.
EU & UK Headlines
German ZEW Survey Expectations (Feb) M/M 55.7 vs Exp. 61.5 (Prev. 61.7) - ZEW says decline in expectations was caused by 'some uncertainties'
- German ZEW Survey Current Situation (Feb) M/M 50.0 vs Exp. 44.0 (Prev. 41.2)
UK CPI (Jan) Y/Y 1.9% vs Exp. 2.0% (Prev. 2.0%) - Below BoE target for first time since Nov. 2009. ONS says largest downward contributors to the Y/Y rate were recreation and culture, furniture, alcohol and tobacco.
BoE's Miles (Soft Dove) said there is no immediate case for higher rates, any rate increases are likely to be gradual, adding that a rate hike is too blunt for the housing market. Miles said recent increase in GBP is not trivial. (BBG) Miles' comments are a reiteration of the Bank's Quarterly Inflation Report, adding nothing new to Carney's press conference.
House Republican leaders, having dispensed with the debt limit and put immigration reform on the back burner, will return to their political comfort zone with a legislative agenda focused on attacking the Obama administration and government excess. (TheHill)
Spanish IBEX-35 index underperformed its peers, with banks under pressure following reports that Spanish banks' bad loans as a percentage of total lending rose to 13.6% in December, marking a fresh record as credit shrank on a monthly basis. Looking elsewhere, consensus beating earnings release by BHP Billiton, which saw its shares gain over 2% at the open, supported the FTSE-100 index, which heading into the North American open is trading near the unchanged mark.
Touted buying by model accounts saw USD/JPY advance to its highest level since 31 of Jan following the BoJ’s move overnight, however as heading into the North American open, the pair is trading off its best levels, weighed on by offers from exporter type accounts. GBP/USD failed to sustain the downward momentum following the release of softer the expected UK inflation data, with the pair reversing some of the losses following the release of weaker ZEW survey and further expectations of more easing by the ECB.
Despite the fact that both spot gold and silver are lower today, it is worth noting that both crossed respective 200DMA levels to the upside last Friday for the first time in a year. On that note, FT Alphaville notes that even though Fed's Reverse Repo Facility (FRRP) continues to absorb excess liquidity, keeping rates near zero, gold prices continue to remain supported by expectation that the program will have to be expanded.
- If not for the Fed's reverse repo, GC rates would likely be trading at zero, which makes gold look more attractive for investors. However with no FPPR, overnight rates would most likely be trading near 0%, highlighting the shortage of safe assets and the need for the Fed to expand the counter-party limit.
Global gold demand in 2013 fell 15% to 4-year lows of 3,756 tons, as investors sold bullion, but heavy disinvestment is tailing off this year, pointing to a recovery, according to the World Gold Council. (BBG)
- Chinese demand for gold hit a record high of 1,065.8 tonnes in 2013, becoming the worlds largest bullion consumer, which is seen as set to continue due as a rising Chinese middle class sustains demand.
Rusal has announced its total aluminium output fell 8% last year against the year before, down to 3.857mln tonnes, but global aluminium demand will rise 6% this year, stretching supplies of the light metal. (BBG)
South Sudanese rebels have attacked the oil producing state capital, Malakal, in the first fighting since a ceasefire was signed in January. (RTRS)
President Obama, Canadian Prime Minister Harper and Mexican President Meade are expected to focus on commerce and economic issues at the NAFTA summit, set to start on Wednesday, with focus to also turn to the proposed Keystone XL pipeline and a possible deal to transport Canadian crude deep into the US. (RTRS)
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We conclude with the overnight recap of DB's Jim Reid
Overnight markets traded with little direction in the lead up to the BoJ policy meeting, but the central bank’s subsequent post-meeting policy statement (at around 3:30am LDN time) has given the Nikkei (+3.3%) a well-needed boost. Though the BoJ kept its monetary base targets unchanged (as was widely expected), the Board decided by unanimous vote to double the scale of two funding facilities, namely the Stimulating Bank Lending Facility and Growth-Supporting Funding Facility and to extend the application period for these facilities by a year. Both facilities are designed to stimulate the provision of funding to Japanese banks, allowing them to borrow from the BoJ at a fixed rate of 0.1%pa, for a period 4 years now, instead of 1-3 years previous. Nonetheless there are lingering questions whether those programmes will be fully utilised by banks.
Some are arguing that by expanding its funding programmes but not changing its asset purchase targets, the BoJ has signalled its intention to ease policy whilst preserving firepower for extra stimulus in coming months when a sales-tax hike is due to kick-in. USDJPY spiked 70pips following the BoJ announcement, and is trading at around 102.7 as we type. The Japanese iTraxx credit index is trading about 2bp tighter following the BoJ (-2.25bp on the day) though gold has failed to receive a significant boost (-0.8% on the day).
Other Asian equity indices have received a small boost from the BoJ, with gains seen on the Hang Seng (+0.1%) and S&P500 futures (+0.2%) once again nears the record highs. 10yr US treasury yields are also up 1.5bp (2.76%). On a more downbeat note, Chinese equities are underperforming today (HSCEI -0.5%, Shanghai Comp -0.6%) led by banks (-0.8%) and financial services companies (-2.5%). This follows news that the PBoC has moved to incrementally rein in liquidity by issuing 14-day repos today. Following a bumper month of Chinese lending in January, the central bank drained around US$8bn from money markets today using repos for the first time in eight months (Financial Times). So an interesting day of contrasts in Asia with the BoJ seeking to boost liquidity while the PBoC does the opposite. Elsewhere in Asia Pac, the AUDUSD appreciated by 0.2% after the RBA repeated that "the most prudent course (of policy) would likely be a period of stability in interest rates".
On the topic of China, yesterday we wrote about Jilin Songhua River No.77 Trust which is set to become the second high-profile trust to be restructured in the last few weeks for the benefit of making-whole retail investors. Our Chinese rate strategists believe that the recent negative sentiment caused by credit events at Chinese trusts, and fears of a credit freeze and systemic crisis are overly pessimistic. They take a more optimistic approach reflecting their view that authorities have the intention and ability (resources) to manage an orderly default process for trust/WMPs products at risk; the fundamentals underlying the trust products have been improving in the past years; and financial risks are being addressed by reforms. On the last point, new prudential regulations on trust products/WMP markets should also impose better risk control and information disclosure by the issuers, distributors and borrowers, in their view. These sorts of developments in China’s trust sector look set to be an ongoing theme this year. It still feels we live in an environment where allowing the free market to determine defaults/recoveries involves too much systemic risk. China is seemingly now going through what DM has been going through over the last few years.
Coming back to Europe, risk convergence was a central theme in the fixed income market across both rates and credit yesterday amid a session of thin liquidity. European periphery bond yields continued to tighten against bunds. Indeed, the spread of Spanish 10yr yields bunds fell to 185bp, which is the lowest gap since April 2011. Similarly, the spread of Italian bonds to bunds fell to 193bp which is the tightest since July 2011. In the credit space, the European subordinated financials index compressed to a spread of just 41bp to the European senior financials index, which is the lowest spread since May 2008. Even at this time last year, the spread between these two indices was as much as 125bp. In European corporate credit, the Xover to Main spread grinded into 203bp, which is the tightest since June 2007. So it appears that markets have been happy to trade-off quality for yield in an environment of still-abundant liquidity.
Staying in Europe, the latest in Italy is that Matteo Renzi will spend the next few days finalizing his cabinet and corralling the support of coalition partners before seeking a vote of confidence in parliament later this week. Though his policies are still not exactly clear, Renzi has set himself a 100-day agenda which includes proposed changes to the electoral law. In terms of who will be the next finance minister, a number of technocrats have been floated including Lucrezia Reichlin, a professor at the London School of Economics and former board member of the ECB.
Before we preview the day ahead, DB’s European bank analyst Matt Spick has published a report revisiting the profitability of corporate lending in Europe in light of higher funding costs and capital requirements. Matt highlights that for the average bank, corporate lending in 2014 should be profitable again for SMEs. For large corporates, he writes that even AA banks will struggle to earn cost of capital. But he sees European DCM growth / bank disintermediation already under way, leaving him upbeat that credit supply should be sufficient to sustain a weak European recovery.
Looking ahead to today, we have a relatively busier 24-hours ahead starting with the German ZEW survey and UK inflation report. Consensus is expecting no change in the UK headline rate of CPI at 2.0% YoY. Stateside, markets return from the President’s Day long weekend - the dataflow includes the February Empire manufacturing survey and NAHB homebuilder sentiment index. The impact of the weather is expected to affect both surveys. In EM, there will be some focus on the Turkish and Hungarian central banks. Our EM economists expect the CBT to be on hold after the substantial tightening of last month, whereas in Hungary they expect the NBH to cut again in its last easing of the cycle.