prev

ECB and BOE Preview

Thursday has announcements from the ECB and BOE on monetary policy. We do not expect moves from either bank in interest rate levels or calls for additional non-standard measures or QE.

 

Although the ECB does need to cut its main interest rate as the region is dragged into recession, we’ll likely see Draghi remain on hold due to the timing of the 2nd 36 month LTRO (€529.5 billion) just last week and given that there’s plenty of runway left in 2012 to cut off the 1.00% bound. Another gauge that may weigh on inaction is the improvement in the EURIBOR-OIS spread, down 40% year-to-date to 58bps. However, as the chart below shows, a fair amount of the LTRO’s credit may be flowing to safety in the ECB’s overnight deposit facility (which is hitting new highs), and not to its intended audience of corporates and personal loans.   

 

ECB and BOE Preview - 1111. MEIN

 

Remember, Draghi revised the language on the main outlook on the Eurozone economy in the last meeting (on 2/9) to “tentative signs of stabilization in economic activity at a low level” versus “substantial downside risks” in the previous report. We could see a return to his previous language.

 

Recent data since the last meeting that will weigh on the decision, and collectively hasn’t shown “tentative signs of stabilization”, includes:

 

Eurozone Q4 GDP -0.3% Q/Q vs 0.1% in Q4 2011

Eurozone M3 2.5% JAN Y/Y (exp. 1.8%) vs 1.6% DEC

Eurozone Unemployment Rate 10.7% JAN vs 10.6% DEC  (highest since ‘97)

Eurozone CPI Y/Y 2.7% FEB (exp. 2.6%) vs 2.7% JAN

Eurozone PPI 3.7% JAN Y/Y (exp. 3.5%) vs 4.3% DEC  [0.7% JAN M/M (exp. 0.5%) vs -0.2% DEC]

 

Eurozone Retail Sales 0.0% JAN Y/Y vs -1.3% DEC   [0.3% JAN M/M vs -0.5%]

Eurozone PMI Manufacturing  49 FEB vs 48.8 JAN

Eurozone PMI Services  48.8 FEB vs 50.4 JAN

 

Eurozone Business Climate Indicator -0.18 FEB vs -0.21 JAN

Eurozone Consumer Confidence -20.3 FEB Final vs -20.7 JAN

Eurozone Economic Confidence 94.4 FEB (exp. 94) vs 93.4 JAN

Eurozone Industrial Confidence -5.8 FEB (exp. -6.9) vs -7 JAN

Eurozone Services Confidence -0.9 FEB (exp. -0.6) vs -0.7 JAN

------

 

The BOE should also maintain its 0.50% benchmark rate and £325 Billion bond purchasing program, following a £50 Billion increase last month. Fundamental data hasn’t shown signs of material improvement, though improvement on the margin, but again, there’s a lot of runway left in 2012 for monetary policy and still much uncertainty surrounding the direction of the Eurozone, the UK’s main trading partner.

 

In the last meeting, David Miles and Adam Posen pushed for £75 Billion in stimulus, and looser monetary policy, so we’ll have to wait for the minutes to see if the two had any more influence on the committee.

 

Recent data weighing on the decision includes:

 

UK Q4 GDP -0.2% Q/Q vs 0.6% in Q4 2011

UK CPI 3.6% JAN Y/Y (exp. 3.6%) vs 4.2% DEC 

UK PPI Output 4.1% JAN Y/Y (exp. 3.7%) vs 4.8% DEC

UK PPI Input  7.0% JAN Y/Y (exp. 6.8%) vs 8.9% DEC

 

UK RPI   3.9% JAN Y/Y (exp. 4.1)  vs 4.8% DEC

UK ILO Unemployment Rate 8.4% DEC vs 8.4% NOV

UK Jobless Claims Chg 6.9K JAN (exp. 3K) vs 1.9K

UK Avg Wkly Earnings 2.0% DEC Y/Y vs 1.9% NOV

 

UK Net Consumer Credit 0.1 B GBP JAN vs 0.0B GBP DEC

UK Mortgage Approvals 58.7K JAN vs 55K DEC

UK M4 Money Supply -1.8% JAN Y/Y vs -2.5% DEC

UK Nationwide House Prices 0.9% FEB Y/Y (exp. 0.3%) vs 0.6% JAN

 

UK PMI Manufacturing 51.2 FEB vs 52.0 JAN  

UK PMI Services 53.8 FEB vs 56.0 JAN

UK PMI Construction 54.3 FEB (exp. 51.3) vs 51.4 JAN

 

 

Matthew Hedrick

Senior Analyst


THE CALENDAR IMPACT

An extra day and an easy weather comparison should produce a strong February and Q1 for the regionals.  If Missouri is any indication, it may not be good enough.

 

 

YoY gaming revenue growth in Missouri will come in between 3 and 4% for the month of February.  On the surface and relative to trend, that may seem like a positive.  However, there was a massive storm on February 1st of last year and Feb 2012 obviously contained one extra day.  We would argue that growth should be at least 5%.  January was an unfavorable month from a calendar perspective and same-store gaming revenues fell a combined 4% in the mature regional markets.  However, the regional gaming stocks spiked as calendar driven expectations were low.

 

The calendar tailwind continues for one more month.  March 2012 contains 2 extra weekend days versus last year. 

 

However, it all reverses in Q2:

  • April:  1 less Friday and Saturday; 1 more Sunday
  • May:  1 less Sunday
  • June:  1 less Friday and Saturday

If the regional markets are only going to be up 3-4% in January and February, that won’t bode well for Q2, particularly if gas prices continue to increase.  Of course, Missouri is only one state and one month from one state does not make a trend.  We’ll have more commentary after the states release gaming revenues over the coming weeks.

 


THE CALENDAR IMPACT

An extra day and an easy weather comparison should produce a strong February and Q1 for the regionals.  If Missouri is any indication, it may not be good enough.

 

 

YoY gaming revenue growth in Missouri will come in between 3 and 4% for the month of February.  On the surface and relative to trend, that may seem like a positive.  However, there was a massive storm on February 1st of last year and Feb 2012 obviously contained one extra day.  We would argue that growth should be at least 5%.  January was an unfavorable month from a calendar perspective and same-store gaming revenues fell a combined 4% in the mature regional markets.  However, the regional gaming stocks spiked as calendar driven expectations were low.

 

The calendar tailwind continues for one more month.  March 2012 contains 2 extra weekend days versus last year. 

However, it all reverses in Q2:

  • April:  1 less Friday and Saturday; 1 more Sunday
  • May:  1 less Sunday
  • June:  1 less Friday and Saturday

If the regional markets are only going to be up 3-4% in January and February, that won’t bode well for Q2, particularly if gas prices continue to increase.  Of course, Missouri is only one state and one month from one state does not make a trend.  We’ll have more commentary after the states release gaming revenues over the coming weeks.


Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

Short Covering Opportunity: SP500 Levels, Refreshed

POSITION: Long Utilities (XLU), Short Consumer Discretionary (XLY)

 

That beta “down-shift” from 1 was good for 30 handles, or -2.2%, in the SP500. We’ll take that – literally. At a minimum, you should be covering oversold short positions here.

 

Across all 3 core risk management durations in my model, here are the lines that matter most right now: 

  1. Immediate-term TRADE resistance = 1366
  2. Immediate-term TRADE support = 1346
  3. Intermediate-term TREND support = 1283 

Snapping that 1366 line yesterday is now yesterday’s risk management news.

 

Now we’re right at support. This is a Short Covering Opportunity.

KM

 

Keith R. McCullough
Chief Executive Officer

 

Short Covering Opportunity: SP500 Levels, Refreshed - SPX


Shorting The Pursuit of Inflation: FXY Trade Update

Conclusion: The Japanese yen carries a great deal of asymmetric downside risk over the long-term TAIL. This view is supported by the combination of incrementally aggressive inflation targeting and accelerating sovereign debt risk.

 

Position: Short the Japanese Yen via the ETF: FXY

 

This morning, Keith used this morning’s short-term pop in the Japanese yen to short the currency via the ETF FXY, which tracks the USD/JPY pair in lockstep across multiple durations. As we have seen in recent years, that cross continues to be dominated largely by the spread between short-term interest rate expectations emanating from Federal Reserve and Bank of Japan monetary policy.

 

Shorting The Pursuit of Inflation: FXY Trade Update - 1

 

Longer term, we think the yen will come under increased selling pressure as the Bank of Japan looks to meaningfully step up its pursuit of inflation, which would serve to erode the real yield advantage of holding Japanese fixed-income assets – including JGBs, which are an asset we have flagged in recent weeks for its heightening risk profile.

 

For more details behind these conclusions, refer to our Triangulating Asia note from MAR 5 and our DEBT, DEFICIT & DEMOGRAPHIC RECKONING presentation from MAR 2: 

Our quantitative risk management levels on the yen are included in the chart below.

 

Darius Dale

Senior Analyst

 

Shorting The Pursuit of Inflation: FXY Trade Update - 2


Shorting Misguided Expectations: STPP Trade Update

Position: Short the iPath U.S. Treasury Steepener (STPP)

 

Yesterday afternoon in our Virtual Portfolio, Keith shorted the iPath U.S. Treasury Steepener ETN (STPP). By shorting this security, we are making an explicit call that we expect the U.S. Treasury curve to compress. Our conviction in this position is rock solid – especially given that we’re already long the iPath U.S. Treasury Flattener ETN (FLAT) in our Virtual Portfolio.

 

Broken TRADE and TREND, the U.S. sovereign debt market is not confirming higher-highs in U.S. equities – at least for now. That could of course change, but we need to see more data to assign a higher probability to the view that the equity market will lead domestic bond yields higher. After all, long-term Treasury yields have led U.S. equities lower in every market sell-off dating back to 2007.

 

Shorting Misguided Expectations: STPP Trade Update - 1

 

For now, we maintain our conviction that Growth Slows As Inflation Accelerates and that the latter is largely driven by weak-dollar monetary and fiscal policy out of D.C. – which remains the one factor [among many] that few investors analyze with any real scrutiny. Moreover, why consensus continues to confuse accelerating inflation expectations with a faster outlook for growth via storytelling about topics such as “peak oil”, “emerging market demand”, and “U.S. manufacturing/exports” is far beyond our ability to comprehend at this point.

 

While it is not our style to search for confirmation from talking heads, it’s comforting to know that Federal Reserve Bank of Dallas President Richard Fisher shares our sentiment to some degree:

 

"I am personally perplexed by the continued preoccupation, bordering upon fetish, that Wall Street exhibits regarding the potential for further monetary accommodation… Trillions of dollars are lying fallow, not being employed in the real economy. Yet financial-market operators keep looking and hoping for more. Why? I think it may be because they have become hooked on the monetary morphine we provided when we performed massive reconstructive surgery."

 

Consistently misguided growth expectations are personally perplexing indeed.

 

Darius Dale

Senior Analyst

 


get free cartoon of the day!

Start receiving Hedgeye's Cartoon of the Day, an exclusive and humourous take on the market and the economy, delivered every morning to your inbox

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.

next