Monday Blues: Consolidative Markets Ahead of Yellen and Carney

There has been a little follow through from pre-weekend moves, with the euro edging up to $1.3650 and the dollar firming to near JPY102.65.  A consolidative tone has emerged, with participants apparently waiting for fresh directional cues by Yellen and Carney (tomorrow and Wednesday). 

 The controversy surrounding the German Constitutional Court ruling has failed to prevent the euro from rising to a 7-day best. Nor does it appear to be much of a factor in peripheral bond market, where most yields are marginal higher. It is true that Portugal's 10-year yield is rising a bit more than others. Although some may try to tie it to the German court ruling, more likely reflects positioning ahead the 10-year bond sales scheduled for Wednesday.

The euro initially edged higher against the Swiss franc to reach 7-day high, but has reversed lower in the European morning. The market is trying to assess the implications of referendum over the weekend, which by a slim majority agreed to limit annual migration from the EU, ending the policy of free movement that has been in place since 2002. Immigration quotas will be reintroduced. 

As one would expect, the referendum results elicited a quick and negative response from EU officials. They are threatening to re-examine the entire EU-Swiss relationship on the grounds that as the President of the EU Parliament put it "It is difficult to limit free movement of citizens and not free movement of services, for example." The Swiss results may embolden anti-immigration forces in other countries, such as the UK Independence Party (UKIP), ahead of the May EU parliament elections. 

Italy and France have followed Germany's lead in reporting disappointing industrial output figures for December.  Recall at the end of last week Germany reported a 0.6% decline in December industrial output.  The consensus had looked for a 0.3% increase, especially before it had learned the previous day that factory orders fell 0.5% rather than increase by 0.2%.  Still, the negative news for the world's fourth largest economy was mitigated by 0.5% upward revision to the November output figures (2.4% from 1.9% initially). 

France and Italy had no such mitigating factor.  Industrial output fell 0.3% in France and the November series was revised to 1.2% from 1.3%.  Manufacturing output was flat instead of gaining 0.3% as the consensus had forecast.  In Italy, industrial output fell 0.9% in December, but did not post the substantial increases in November as France and Germany did.  

Both countries report preliminary Q4 GDP figures at the end of the week.  There are downside risks to both.  The consensus calls for the French economy to have expanded by 0.2% after a 0.1% contraction in Q3.  French GDP is in a sawtooth pattern in the sense that since H2 11, it has not posted two consecutive quarter of either contraction or growth, but instead alternating between the two on a quarterly basis. 

Many had hoped that the flat Q3 GDP in Italy after contracting for eight consecutive quarters heralded an upturn.  However,'s today's industrial output figures raise doubts about the consensus forecast of 0.1% growth in Q4.    This, in turn, casts doubts on the government's forecast of 1.1% GDP here in 2014.   Confindustria expects 0.7% growth this year, while the IMF has penciled in 0.5%.  

The Norwegian krone is the strongest of the major currencies today, gaining 0.75% against the US dollar and euro.  It was aided by a stronger than expected January inflation reading.   The flat January reading contrasted with expectations for a 0.3% decline.  The year-over-year rate increased to 2.3% from 2.0% in December.  The underlying rate rose to 2.4% from 2.0%.  The consensus had expected an unchanged year-over-year rate.  The euro had been moving lower since peaking last Tuesday near NOK8.5260.   Today's report dashing what lingering hopes there may have been that the Norges Bank could ease policy and gave the market incentive to push the euro through NOK8.40. The next important support level is seen near the year's low set in mid-January near NOK8.31. 

News that Japan reported a record current account deficit in January failed to provide new trading incentives.  The trade balance (BOP basis) actually narrowed slightly (JPY1.212 trillion from JPY1.254 trillion in November), while the investment income balance deteriorated slightly as is its seasonal pattern.   Separately, the weekend election of the LDP-backed candidate Masazoe as the new Governor of Tokyo failed to excite investors. 

We note that Chinese equities were the strongest in the Pacific with the Shanghai Composite advancing 2%, recouping about 2/3 of this year's losses.  The smaller-cap Shenzhen Composite tacked on 2.7%  ( bringing the year-to-date rise to 6.7%) on heavy volume( most since late 2010 according to reports) amid talk of delaying some of the IPOs scheduled this month.    There is also some speculation that the PBOC could cut reserve requirements.   Note that over the course of this week, China is expected to report yuan loans and aggregate financing (which are expected to have risen sharply) and CPI figures (expected to be little changed from the 2.5% year-over-year pace seen in December.

Lastly, we note that the Australian dollar has been beaten back.  After testing the $0.9000 before the weekend, it was returned to almost $0.8900 level, a three-day low.  Sentiment remains poor, even though the RBA has adopted a neutral policy.  News that Toyota will join the other foreign auto producers in closing manufacturing plants in Australia (by 2017) was seized upon by the bears.  Given the size of last week's run-up (from $0.8730 last Tuesday), corrective forces may not be all that surprising.  It probably requires a break of the $0.8860 area to signal the bears are back in control.