Trading with point and figure

DOW updated

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- Digesting encouraging China trade data, poor Japan Q3 GDP revision as
markets zero in on ECB policy meeting; UK RICS, US Jobless Claims and
Mexico CPI also on the agenda

- ECB: focus on expected QE extension, programme tweaks and new staff
forecasts; markets not well prepared for anything less accommodative

- China: commodity 'hoarding' a clear contributor, but broader perspectives
suggest improving domestic and external demand

..........................................................................

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** EVENTS PREVIEW **
********************

Once the overnight China Trade data has been digested, the day indubitably belongs to the highly anticipated ECB council meeting and policy decision. In the 'also ran' category of statistical roadkill, there are the overnight UK RICS House Price Balance and Australia Trade Balance ahead of US weekly jobless claims and Mexican CPI, the latter being closely watched for signals on the extent of the upward pressure on inflation from the steep decline in the MXN. Central banks in Serbia and Ukraine are expected to hold key policy rates at 4.0% and 14.0% respectively. On Italy, it is worth noting that Mr Renzi's speech yesterday evening had all the hallmarks of a politician planning to remain in the frontline of politics, and with a very live vision of what needs to be done to improve Italy's fortunes. It remains to be seen whether his PD party will continue to back him. In terms of the run of Asian data, this was a classic tale of China's economy showing further signs of improvement, while Japan's revised Q3 GDP underlined that domestic CapEx remains very weak with no signs that the BoJ's super easy policy is accruing any benefits on the investment front. As for China, sales tax breaks continue to support strong Auto Sales (up 19.8% in November and 15.7% year to date), while the much better than expected Exports and Imports data would appear to suggest domestic and external demand is improving. The strength of commodity imports may well reflect some hoarding, or rebuilding of inventories, as local producers attempt to offset the impact of a weaker CNY and rising commodity prices, with the speculative rush that has been seen on China's commodity exchanges clearly making a key contribution, at least on the industrial raw materials side of the equation. By contrast the accompanying report that China grains output has fallen (albeit very modestly at -0.8% y/y) for the first time since 2003 would suggest that the boost to agricultural imports is rather more demand and domestic output driven, and may well reverse China's swing to net exporter in grains (above all corn) in recent years, which in turn should help to underpin prices, even if this year's floods more than likely account for the drop.

** Eurozone - ECB policy decision **
- While one can certainly suggest that the ECB has been considerably more circumspect in managing expectations ahead of this morning, at least in comparison to last December's debacle. There have been broad hints that, contrary to the consensus of economic forecasters that the QE programme will be extended for a further 6 months to September 2017 at the current EUR 80 Bln total per month, there could be a reduction in the volume, as well as other changes, such as removing the Depo rate yield cut off, and/or that the maximum amount that the ECB can buy of an individual bond issue may be increased. Eminently the latest staff forecasts need to provide a rationale for the ECB to extend its programme, and they will contain the first forecast for 2019 CPI, which is expected to be around the ECB's target of just below 2.0%, which could be construed as an obstacle to additional / incremental easing measures. But with many ECB speakers zeroing in on the flat profile of core CPI at a very unsatisfactory 0.8% y/y since August, and down from January's 1.0% y/y, this offers a very logical (even if slighly contrived) rationale for the ECB 'doubling down' in its efforts to achieve its target, particularly as it will certainly underline that a broad array of economic and political uncertainties skew the risks to its latest forecast to the downside of projections. Given that the ECB is more than well aware of the markets' Fed Taper Tantrum, and indeed last year's debacle, the ECB will want to tread carefully in terms of tapering, more than aware of the gap risk for peripheral and semi-core govt bond yields, and may as such want to couch any changes, particularly any cut to the monthly volume of QE as being more technical in nature. There are however two big problems with that line of reasoning: a) at some stage the ECB is going to have to taper, and because of the aforementioned gap risk, couching this initially as being more technical merely heightens the risk associated with when it tapers 'in earnest'; b) if the ECB were to argue that a cut in the monthly volume is technical, it would effectively be a fairly explicit admission that its policy firepower is now very limited and constrained, which begs the question: if the wheels fell off the economy tomorrow, then would it be in any position to respond? The interesting point to ponder is whether it might think about tapering to force the hand of the political fraternity to finally start taking action on the structural reforms, which the ECB has been demanding, and which are very clearly needed. This appears unlikely in so far as it amounts to a form of scorched earth policy, which hardly seems advisable in the best of circumstances, let along against the current fraught political backdrop. On balance, and in light of price action in bonds and equities in recent days (though not EUR FX rates), it would appear that markets are vulnerable to a less accommodative ECB stance than is currently anticipated.

from Marc Ostwald
 
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