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Draghi CUTS!

Draghi delivered on the market’s expectations for a rate cut today, the first since July 2012. At today’s “away” press conference in Bratislava, Slovakia the ECB cut the main refinancing rate by 25bps to 0.50%; cut the marginal lending facility rate 50bps to 1.00%; and kept the deposit facility rate unchanged at 0.00%. (Click here to read Draghi’s prepared remarks). The cuts had “prevailing consensus” from the council and a future cut to the deposit rate was not ruled out by Draghi.

 

Draghi CUTS! - rr. ECB rates

 

Draghi had little to say about the precipitous drop in inflation (to 1.2% in APR Y/Y from 1.7% in MAR) beyond the impact of lower energy prices and an earlier Easter shift – all of which doesn’t exactly add up. Beyond the cut Draghi extended non-standard measures into at least Q2 2014, but gave little context on how the Bank may improve the clogged credit conditions and support the region beyond the OMT. In large part equity markets and the EUR/USD were down on the announcement (as we predicted), as the market once again digested how little Draghi can do to turn around weak underlying fundamentals.

 

On what Draghi can’t directly influence, we'll highlight: Eurozone Unemployment remains at an all-time high of 12.1% (with youth unemployment across the periphery at 50%+); PMIs remain worrisome; and loans to households and corporations continue to fall (to name a few).

 

Draghi CUTS! - rr. ecb loans

 

That said, our call remains that it will still pay to play Draghi’s OMT put. The disconnect between the capital markets and underlying fundamentals remains disconcerting, however until more meaningful risks arrive, we will acknowledge the trend.

 

On the positive front:

  • Cyprus is clearly rear view
  • Slovakia is out of sights (for now at least)
  • Italy has formed a coalition government and is in discussion about its future budget
  • Domestic deposits in most countries are rising
  • Target 2 Balances continue to go down, and stabilize
  • The European Commission (alongside the key Eurocrats) remain dovish and positioned to extend deficit targets (in Spain and France in particular) and lessen the bite of austerity
  •  There’s an improved risk picture, with 10YR sovereign yields across the periphery at some of their lowest levels in years (Italy’s at 3.84% and the 2YR is at an all-time low of 1.07%!)
  • Bond issuance YTD has largely been priced at lower yields even for the region’s “troubled” countries. 

EUR/USD Implications


We expected the EUR/USD to slip on a rate cut from the ECB. Keith opportunistically covered our Real-Time short position in the EUR/USD via the etf FXE this morning. Our critical quantitative lines on the EUR/USD are outline in the chart below. Beyond immediate term TRADE support of $1.29 we do not see any meaningful support until around $1.22.

 

Draghi CUTS! - rr. eur usd

 

Draghi on Austerity


Diverting from his normal script, Draghi discussed the improvements in the fiscal landscape, noting that the average government deficit declined from 4.2% of GDP in 2011 to 3.7% in 2012 and the average government debt rose from 87.3% to 90.6% of GDP.  As usual he encouraged countries to keep up their structural reforms, but alongside the commentary showed the limitations of the Bank to have any influence over the fiscal states.  This supports our thinking that while Draghi may have influence over the capital markets, he has little influence over reforming the underlying economies of 17 distinct nations.

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Click here for a video on the launch of the new €5 note.

 

Matthew Hedrick

Senior Analyst


EVEP Dial-in Info and Materials

We're hosting a conference call to discuss our presentation "EV Energy Partners (EVEP): Beyond the Yield" TODAY at 1pm EST.

 

Dial-in info:

  • Toll Free Number:
  • Direct Dial Number:
  • Conference Code: 866296# 

MaterialsEVEP: Beyond the Yield

 

I hope you can listen in live, but if not, there will be a replay.

 

Kevin Kaiser

Senior Analyst

 



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Jobless Claims: Bullish Overtones

Today's initial jobless claims came in at 342,000 on a seasonally-adjusted basis, the lowest reading since January 2008. As a result of the improving economy, the US stock market has rallied on the news. The chart below shows where we are in the context of past cycles. Currently, at 342,000, initial jobless claims are still a fair amount above their historical cycle troughs in the 300k range. This suggests the bull market still has legs from a fundamental recovery standpoint. As long as we don't undergo a sharp reversal, we're likely to continue to see an upward trend in the market.

 

Jobless Claims: Bullish Overtones - image001


INITIAL CLAIMS: GOOD NEWS, A DIVERGENCE IS DEVELOPING

Takeaway: Something interesting is happening in the labor market.

The last four weeks have seen a notably positive divergence from both trend and historical perspectives. The last two weeks have shown the sharpest improvements. Our preferred method for evaluating labor conditions is the year-over-year rate of change in the non-seasonally adjusted initial jobless claims. In the last three weeks, that figure has been -3.8%, -6.2% and today -8.6%. In other words, rolling NSA claims are 8.6% lower than last year. 

 

One of our central tenets in thinking about the big picture for Financials has been this recurring dynamic in seasonal distortions, as it has correlated tightly with sector performance for the last three years. Interestingly, the strength in the underlying labor market over the last few weeks is strong enough to more than offset the seasonality distortions. This is, for now, turning the sell-in-May dynamic on its head. It doesn't hurt that the housing metrics are also strengthening, though this shouldn't be surprising as the two (labor & housing) are closely co-integrated.

 

How Low Can Claims Go?

Thinking longer term about the setup, rolling claims (SA) are currently at 342k with the most recent week at 324k. The first chart below shows the claims history (rolling SA) back to 1967. Every economic cycle since the late 1970s has seen claims trough at around 300k. To be precise, in prior cycles, claims bottomed at:

 

* 312k  November, 1978

* 287k  January, 1989

* 266k  April, 2000

* 286k  February, 2006

 

This works out to an average of 288k with a standard deviation of 19k (on a very small sample). In other words, we're still 54k above historical cycle troughs or roughly 2.8 standard deviations, a pretty healthy margin of error for the bull case.

 

The Numbers

Prior to revision, initial jobless claims fell 15k to 324k from 339k WoW, as the prior week's number was revised up by 3k to 342k.

 

The headline (unrevised) number shows claims were lower by 18k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -16.5k WoW to 342.25k.

 

The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -8.6% lower YoY, which is a sequential improvement versus the previous week's YoY change of -6.2%

 

INITIAL CLAIMS: GOOD NEWS, A DIVERGENCE IS DEVELOPING - 9

 

INITIAL CLAIMS: GOOD NEWS, A DIVERGENCE IS DEVELOPING - 1

 

INITIAL CLAIMS: GOOD NEWS, A DIVERGENCE IS DEVELOPING - 2

 

INITIAL CLAIMS: GOOD NEWS, A DIVERGENCE IS DEVELOPING - 3

 

INITIAL CLAIMS: GOOD NEWS, A DIVERGENCE IS DEVELOPING - 4

 

INITIAL CLAIMS: GOOD NEWS, A DIVERGENCE IS DEVELOPING - 5

 

INITIAL CLAIMS: GOOD NEWS, A DIVERGENCE IS DEVELOPING - 6

 

INITIAL CLAIMS: GOOD NEWS, A DIVERGENCE IS DEVELOPING - 7

 

INITIAL CLAIMS: GOOD NEWS, A DIVERGENCE IS DEVELOPING - 8

 

INITIAL CLAIMS: GOOD NEWS, A DIVERGENCE IS DEVELOPING - 10

 

INITIAL CLAIMS: GOOD NEWS, A DIVERGENCE IS DEVELOPING - 11

 

INITIAL CLAIMS: GOOD NEWS, A DIVERGENCE IS DEVELOPING - 12

 

INITIAL CLAIMS: GOOD NEWS, A DIVERGENCE IS DEVELOPING - 13

 

INITIAL CLAIMS: GOOD NEWS, A DIVERGENCE IS DEVELOPING - 14

 

Yield Spreads

The 2-10 spread fell -4.7 basis points WoW to 143 bps. 2Q13TD, the 2-10 spread is averaging 150 bps, which is lower by -17 bps relative to 1Q13.

 

INITIAL CLAIMS: GOOD NEWS, A DIVERGENCE IS DEVELOPING - 15

 

INITIAL CLAIMS: GOOD NEWS, A DIVERGENCE IS DEVELOPING - 16

 

Joshua Steiner, CFA

 


FINALLY A NICE Q OUT OF MGM - BULLISH

Yes, hold was a little high but Vegas beat our number and we were above the Street.  As we pointed out in our positive MGM preview note on 4/18/13, Macau held low in the Q but should post around $200 million in hold adjusted EBITDA.  Since they hit our actual estimate of $180 million we are sticking to our hold adjusted estimate – a definite positive for the stock. City Center also likely had high hold, but high hold seems to be more of the norm for that property. 

 

Stock will be up obviously on the open but we think the momentum could persist through the quarter.  Management should be very bullish on the LV turnaround and Q2 trends to date.  They didn’t mention the hold impact in Macau in the release but they should be on the call.  MGM Macau is a legitimate $200 million per quarter property.  We know April finished up 13% for the market and our expectation is that growth will accelerate in May.

 

We also think there is incentive for MGM to do an equity deal at higher levels to de-lever.  Therefore, they probably won’t hold back on this call.  We remain concerned over the long-term with US gaming demographic and slot trends but MGM could go a lot higher over the near and intermediate term.

 

FINALLY A NICE Q OUT OF MGM - BULLISH - mgm1


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