Well the dollar took a break on its march higher versus the yen on Monday, leading to some weakness in the Nikkei as gold and oil moved higher. Treasury yields are down slightly. Yellen speaks later today on the state of the jobs market.
The greenback is coming off six straight weeks of gains as is the Dow. Specs are long… really long:
The BoJ meets this week. Here’s a brief preview from Deutsche Bank:
Our main scenario is (1); that is, the BoJ will continue to use fixed-rate operations and an increase in its normal JGB purchasing operations to correct any unacceptable divergence from its 10y JGB yield target. A temporary acceleration in the JGB purchasing pace will be a negative, but the bank could offset this with a deceleration in purchasing once the UST yield hike halts. (Our fixed income research team forecasts a 10y UST yield of 3.1% at end-2017.) The advantage of this option is a weakening in the yen from the widening of the US-Japan rate spread. In (2), the extent of disparity from the target will be arbitrary, a problem from the standpoint of monetary policy governance. However, this will allow the bank to maintain accommodative monetary conditions by keeping the target. Options (3) and (4) are effectively the same. Once the 10y yield target is raised, we believe financial markets will expect such hikes in the target when yields rise. Consequently, JGB yields will continue to rise in line with UST yield trends, and the BoJ will have to adjust its target accordingly. This is essentially the same as abandoning the target, as in (4). In addition, the BoJ will have little incentive to halt a favorable environment where external conditions were positive for its inflation target. We should recall that the core inflation rate has recently been negative.
As WSJ notes, “European bank stocks were also under pressure, with shares of troubled Italian lender Banca Monte dei Paschi di Siena down around 7% after initially failing to open in the first day of a share sale. The bank needs to raise about €5 billion ($5.23 billion) by the end of the year to avoid being nationalized.”
Germany’s IFO business survey ended the year on a positive note. Here’s Barclays with the brief summary:
The December IFO business climate indicator surprised slightly to the upside, rising 0.6 points to 111.0 – a 34-month high, against consensus and our expectations of a marginally smaller increase. Both the assessment of the current situation and the business expectations index rose by 1.0 and 0.1 points, respectively. This is in line with the December ZEW survey where the current assessment indicator increased by 4.7 points and the expectations component remained stable, indicating that sentiment about economic conditions in the end of Q4 remain upbeat.
Getting back to US equities, there are good reasons to believe we could see Dow 20,000 before Christmas – not the least of those reasons are the Santa Rally and of course window dressing. “Window dressing, Santa Claus rally. Call it what you will. This reflation move is real,” Wells Fargo’s Paul Christopher says. If you say so.
Finally, here’s the overnight wrap from Deutsche Bank:
Welcome to the penultimate week of 2016. That gives you two weeks to complete any final New Year’s resolution goals that were set 354 days ago, or in some cases start them. As you might expect with markets winding down ahead of the holiday season this week’s diary shouldn’t prove to be too much of a distraction. Of the things to look out for though, Fed Chair Yellen will deliver her final address of the year this evening at 6.30pm GMT when she speaks at the University of Baltimore. The title of her discussion is the state of the job market although given that this is a mid-year commencement address its unlikely that the speech will throw up much new information. We’ll also have the final big Central Bank meeting of the year when the BoJ take up centre stage tomorrow morning. Neither us nor the market is expecting any surprises or changes in policy but given that a potentially big theme for next year is whether the BoJ’s yield cap is tested by the market, it’s still worth listening out for any interesting comments from Governor Kuroda in the press conference that follows. On the politics front one event which could be interesting comes tomorrow when UK PM Theresa May is due to be questioned by the House of Commons Liaison Committee about her Brexit plans. Finally on the data front the day to probably focus on is Thursday where in the US we’ll get the third revision to Q3 GDP along with a first look at the November durable and capital goods orders data. As well as that to look ahead to then, it’ll be interesting to see if there is much further reaction in markets today after geopolitical tensions rose on Friday following that news concerning China’s seizure of a US naval drone. Unsurprisingly this has largely dominated the column inches over the weekend and while the Pentagon has confirmed that China has agreed to return the surveillance device that came after President-elect Trump had already taken to twitter to voice his criticism at the act. China’s Communist Party-affiliated Global Times has since portrayed a mocking of Trump’s demeanour and called it as ‘lagging far behind the White House spokespersons’. It’s worth noting that debates over the South China Sea issues have intensified in the wake of Trump’s victory so incidents like these are worth monitoring closely. Away from that, with much of the focus having been rightly on the Italian Banking sector recently, it’s worth noting the news out of the Ukraine too late last night where the country’s government announced that it is to nationalize Ukraine’s largest and (as per the FT) most systemically important commercial bank, PrivatBank, with looming concerns about the state of the bank’s balance sheet. This follows a failed rescue bid by the billionaire owners with the Government now acquiring 100% of the bank as a result in a coordinated transaction with the IMF. Back to China quickly, our China Chief Economist, Zhiwei Zhang, highlighted in a note late last week that the Central Economic Working Conference (CEWC) concluded on Friday. He noted that the press release indicated that the government will focus on stability in 2017 and will target a growth rate of 6.5%. This target hadn’t been disclosed in the press release but is set to be officially announced in the National People’s Congress on March 5th. Refreshing our screens this morning it’s been a fairly mixed start to trading in Asia. The Nikkei (-0.22%) and Hang Seng (-0.79%) are both in the red while the Shanghai Comp and Kospi are little changed. The ASX (+0.69%) is the notable outperformer although we should note that volumes generally in the region are at the usual holiday-season lows. Meanwhile the US Dollar has continued to edge a bit lower and Treasury yields have also dipped a bit. There’s also been a bit of data this morning. Exports in Japan were reported as falling -0.4% yoy in November which was a bit better than the consensus (vs. -2.3% expected) and also up from -10.3% in the month prior. Meanwhile in China property prices (excluding government subsidized housing) were reported as rising in 55 of the cities tracked by the government in November, compared with 62 in October Moving on and a quick wrap of how markets closed out Friday. For the most part it was a fairly dull end to an eventful week. After equity markets had generally edged a bit higher in Europe (Stoxx 600 +0.34%) mainly as a result of a decent boost across the energy sector with WTI (+1.96%) rebounding back towards $52/bbl, US equity markets largely faded into the close. Indeed the S&P 500 closed -0.18% and as a result nudged back into a very modest loss (- 0.06%) for the week. As has been the recent trend however moves in the rates market were a bit more exciting. Indeed most notable in the early going was the move lower for yields across the Bund curve culminating in 2y Bund yields closing at a fresh record low of -0.815% (down a couple of basis points on the day). US Treasuries were also initially stronger before some hawkish Fedspeak (more on that shortly) sent yields spiking higher. In fact 10y yields touched an intraday high of 2.619% and a shade away from the recent high in the cycle. That was before the China drone news hit the wires however which sent yields scurrying lower. The 10y finished little changed around 2.593% by the end of play but still with another decent near 7bps high-to-low intraday range. There was a similar trend for the Greenback which pared early gains into the close for the same reason. In terms of the data that was released, in the US housing starts were reported as falling sharply in November (-18.7% mom vs. +12.8% expected) to an annualized rate of 1090k. That comes following an upwardly revised +27.4% mom surge in October however. Meanwhile permits were also down unexpectedly (-4.7% mom vs. +3.3% expected) although again follows a +2.9% mom in the month prior. Meanwhile, in Europe all eyes were on the November CPI report for the Euro area although there was little in the way of surprise with the headline CPI print confirmed at -0.1% mom and +0.6% yoy. In France confidence indicators generally edged higher (business confidence to 105 from 102) while in the UK the December CBI manufacturing survey reported orders of 0 versus -3 in the month prior. Back to that Fedspeak quickly, one of the more hawkish policy makers, Jeffrey Lacker, said that ‘there is a range of paces of interest rate hikes that would qualify as gradual, including paces more rapid than one or two or three a year’. Indeed Lacker went as far as to say that ‘my guess would be more than three’. Separately, St Louis Fed President, James Bullard, confirmed that with regards to the new Trump administration, ‘we think there is some upside risk because the new administration wants faster growth and it is possible some of the things they are talking about will drive productivity higher’. He did however also suggest that this would be more of a 2018 or 2019 consideration, rather than in 2017. Turning over to this week’s calendar now. The sole release in Europe this morning comes from Germany where the December IFO survey will be released. This afternoon in the US the only data of note are the remaining December flash PMI’s (services and composite readings). Tomorrow morning we kick off in Japan with the BoJ decision followed just after by Governor Kuroda’s press conference. Over in Europe we start with Germany again with the latest PPI print while in the UK the latest CBI reported retail sales data for this month will be out. There’s nothing of note in the US tomorrow afternoon. Wednesday is another quiet day with France PPI, UK public sector net borrowing data, Euro area consumer confidence and US existing home sales data due up. We’ll finally get a bit of action on Thursday. While the morning session is quiet, with Germany’s import price index reading the only data, during the afternoon in the US we’ll get the third reading for Q3 GDP along with a first look at the November durable and capital goods orders data. Also due out will be the November personal income and spending reports, core and deflator PCE readings, initial jobless claims, FHFA house price index, Kansas City Fed’s manufacturing survey and the Conference Board’s leading index. We close out the week in Asia on Friday with the MNI business indicator in China. During the European session we’ll get consumer confidence data in Germany along with the final UK and France Q3 GDP revisions. We finish the week in the US on Friday with new home sales data and the final University of Michigan consumer sentiment reading. There’s not a huge amount else away from the data. Fed Chair Yellen is due to deliver the keynote address at the University of Baltimore’s Midyear Commencement this evening while the ECB’s Weidmann also speaks today. UK PM Theresa May is then due to by questioned by the UK Parliament Panel about her plans for leaving the EU tomorrow. Finally it’s worth noting that the US Treasury market and London Stock Exchange are due to close for a half day on Friday ahead of the holiday weekend.