Recap 2014-12-11

Commentary:

The weak LTRO take up means that consensus now expected ECB to conduct QE in 1Q. Estimates seem to be 500bn-1Trn, though views on timing are split between January and March. No surprise there. However, banks seem to think that QE will depress German yields further. I disagree with that – QE is defacto risk sharing, and should depress the credit premium for periphery credit. It is possible that, like in the US, the start of QE caused the risk free asset to sell off, and lower credit instruments to appreciate. This interesting chart from CreditSights, via FTA, suggests that Bund yields are already discounting a ~400bn expansion of the ECB’s balance sheet:

Separately, here’s an updated intraday chart of HY CDX spreads vs S&P futures:

Couple of interesting links:

http://ftalphaville.ft.com/2014/12/10/2067681/the-bank-of-canada-on-the-risks-of-high-household-debt-and-overpriced-housing/

http://dealbook.nytimes.com/2014/12/10/lending-club-prices-i-p-o-at-15-a-share-surpassing-expectations/?_r=0

Notable:

• US Retail Sales were strong, rising 0.7% MoM vs 0.4% exp. The Control group rose 0.6% vs 0.5% exp
• Jobless Claims ticked down to 294k vs 297k exp and prev
• US import prices declined to -2.3% YoY vs -2.6% exp and -1.8% prev
• AU Employment jumped 42.7k vs 15k exp, driven by part time employment. UER ticked up to 6.3% as exp vs 6.2% prev, as the participation rate ticked up to 64.7 vs 64.6 prev
• UK RICS House Price Balance declined to 13 vs 15 exp and 20 prev
• Japan Machine Orders declined to -4.9% YoY vs -0.3% exp and +7.3%
• The 3rd LTRO had a take up of €129 bn allocated vs. expectations of €120-180 bn
• A Reuters poll of economists revealed that 25 of 27 think the ECB will buy sovereign bonds in the next few months, with March looking the most likely for the announcement.
• Norway surprised with a 25 basis point rate cut to 1.25%. As Europe’s largest oil exporter, the drop in oil prices is hurting economic growth. The bank sees a 50/50 chance for another cut next year.
• BoE moving to same-day publication of policy decisions, MPC minutes and Inflation Reports, as of August 2015
• China is adding ~400bn yuan (~$65bn) of liquidity to the market through a policy bank, the China Development Bank. This comes after the PBOC 500bn injection in September. Officials are worried that if they outright cut the RRR it could lead to too much lending to sectors already suffering from overcapacity. WSJ
• Fitch warned it is likely to downgrade Japan’s credit rating sometime early next year after the government delayed the sales tax hike.

Upcoming:

• Thu: New Zealand PMI
• Fri: China Retail Sales, IP, US Core PPI, UMichigan Confidence, Japan Tankan
• Mon: US Empire Mfg, NAHB Survey, RBA Minutes, China HSBC Mfg PMI,
• Tue: EU PMI, UK CPI, German ZEW, US Housing Starts, Markit Mfg PMI, Japan Trade Balance
• Wed: BoE Minutes, UK Employment, US CPI, Oil Inventories, FOMC, SEP, NZ GDP
• Thu: German IFO, US Jobless Claims, Markit Services PMI, Philly Fed, NZ Business Confidence, UK GfK Consumer Confidence