As expected, this morning the ECB announced no change to its main interest rates.
ECB President Mario Draghi reiterated much of the same policy stance and outlook since his December meeting of last year. The EUR/USD rallied throughout the conference.
Draghi again stressed that the Eurozone may experience a “prolonged period of low inflation”, that the Bank would maintain accommodative monetary policy for “as long as is necessary”, and to expect that key rates would remain “at present or lower levels for an extended period of time.”
What was not spoken? Draghi did not include measures to suspend sterilization of the SMP, leaving it as an instrument for future consideration. He also spoke of no concrete plans to free up credit to the “real” economy (SMEs in particular). Draghi gave the following reasons on why the ECB took no action today:
- Baseline forecast confirmed, with modest economic recovery
- News out since last meeting, by in large on the positive side
- PMI data is strongest in 2.5 years
- PMI services a huge component of job in the region, very positive
- Metric gaps between Germany and Spain &Italy narrowing
- Unemployment high, but stabilized
Updated Staff Projections for March versus December moved ever so slightly on the 2014 outlook, boosting GDP 10bps higher, and inflation 10bps lower:
GDP Staff Projections: 1.2% in 2014 (+10bps vs DEC); 1.5% in 2015; 1.8% in 2016
CPI Staff Projections: 1.0% in 2014 (-10bps vs DEC); 1.3% in 2015, 1.5% in 2016
Other Key Takeaways from Draghi:
- Eurozone government deficit is expected to have declined to 3.2% of GDP in 2013 and is projected to be reduced to 2.7% of GDP in 2014
- Eurozone government debt is projected to peak at 93.5% of GDP in 2014
- Emerging Market impact on Eurozone has so far been muted. In fact there have been flows into Europe that have helped to narrow the spreads between countries
- On Ukraine: Draghi said he does not suggest strong contagion. But geopolitical risks could become substantial and generate significant consequences. The Bank has not assessed scenarios.
- On the Eurozone slipping into Japan-like Deflation: Draghi said ECB has taken early and decisive action on monetary policy to prevent anything like Japan’s situation. He remains confident in the 2% inflation anchor.
- To read a copy of Draghi’s prepared remarks click here.
- We remain marginal European equity bulls of US equities. Our preferred investment in the region is long German and UK equities (EWG and EWU) and long the Pound/USD (FXB) – note that today the BOE also left the main interest rate unchanged (at 0.50%) and maintained the asset purchase target (as expected), which is supportive of our long call. The GBP/USD is up +2.4% in the last month.
- Broadly, we believe Draghi’s continued posture of “ready and willing to act” (to ensure the survival of the Eurozone at any cost and keep financial conditions accommodative) will continue to support the common currency and strengthen investor confidence in the equity market.
- EUR/USD: we expect Yellen to likely pull back on the tapering program to a more dovish position that should weigh on the USD to the downside. See our levels below.
Takeaway: We continue to see a gradual, but steady, deterioration in the rate of improvement in the labor market that began seven weeks ago.
The Labor Market Continues its YTD Cooling Trend
Labor market data continued its deteriorating trend this past week, bringing to almost seven the number of consecutive weeks this has been happening. Notwithstanding a brief studder-step two weeks ago the progression of the labor market data has been progressively negative every week for almost the last two months, or, alternatively, since the start of the year. As a reminder, we look at the year-over-year rate of change in the rolling NSA initial claims. Specifically, we look for inflections in the trendline rate of improvement as the series naturally converges towards zero as the economy reaches full steam. Here are the last seven data points with the most recent data point first: -3.5%, -4.4%, -5.6%, -5.1%, -5.7%, -7.3%, -7.9%, -8.5%. Since we're looking at the rate of change in year-over-year initial jobless claims a more negative number is better as it implies a faster rate of improvement.
To be clear, we're not yet sounding the alarm on the labor market, but it's important to note that the rate of improvement is decelerating steadily and if that trend continues then we could see, in the not too distant future, the labor market reverse course, i.e. claims begin to rise.
Prior to revision, initial jobless claims fell 25k to 323k from 348k WoW, as the prior week's number was revised up by 1k to 349k.
The headline (unrevised) number shows claims were lower by 26k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -2k WoW to 336.25k.
The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -3.5% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -4.4%
The 2-10 spread rose 4 basis points WoW to 238 bps. 1Q14TD, the 2-10 spread is averaging 242 bps, which is higher by 1 bps relative to 4Q13.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT
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Takeaway: In our most recent cruise pricing survey, Carnival (CCL) emerges as the standout, while Norwegian (NCLH) is still struggling a bit.
Editor’s Note: This is part of a research piece originally published on March, 5 2014 at 3:40 PM in Gaming, Lodging & Leisure. For more information on how Hedgeye can help you, click here.
Have you been outside lately? It’s been a brutal winter for most Americans. But now, with snowstorms abating, are consumers still booking vacation cruises to sunnier destinations?
In the Caribbean, we saw discounting across the board among the lower priced itineraries in the Caribbean in mid-February, but the Carnival (CCL) brand pricing stood out in March, outperforming its peers.
Carnival sequential pricing picked up among the Eastern Caribbean itineraries. More importantly, sequential pricing rose among the Western Caribbean itineraries for 2H 2014.
This is encouraging given that Western Caribbean pricing has lagged. While Caribbean pricing overall remains sluggish and pricing has been quite volatile in the busy, promotional period of Wave Season, we continue to see Carnival as best positioned due to easy comps and low Street expectations.
Not surprisingly, the picture is starkly different in Europe. The Royal Caribbean (RCL) brand and Norwegian (NCLH) are leading the charge in a rosy booking and pricing environment. CCL has the most exposure to Europe but it is still trying to find a solid footing there with mixed pricing performance in March.
The Ukraine-Russia situation could be a wild card.
So far, no Black Sea sailings have been rescheduled or canceled on RCL and CCL brands. There’s speculation that Baltic Sea itineraries could eventually be impacted; that would be significant for CCL and RCL if it happens.
Alaska will be the weakest market pricing wise in 2014 – who wants to go somewhere cold nowadays?
While our study focused on sequential pricing trends and pivots, we would point out that YoY pricing for Carnival is up significantly due to the lapping of the Triumph fire incident in 2013. RCL and NCLH face more difficult comparisons in the Caribbean.
The Street is finally catching onto the low bar set by Carnival as even the most bearish sell-side have been raising yield and EPS estimates for CCL before they report earnings in three weeks. According to Factset, recent FY2014 estimate changes have trended around the $1.75 EPS range (at the upper end of CCL’s $1.40-$1.80 guidance). Our $1.90 EPS and 0.3% yield forecast for FY2014 remains unchanged from our note in December “CCL: $2 ON THE HORIZON.”
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LVS, WYNN, MGM, MPEL, CZR, MTN, H, HLT
EVENTS TO WATCH: UPCOMING EARNINGS/CONFERENCES
TODAY, March 6
- Todd in Boston
Friday, March 7
- Employment Report for February
Monday-Thursday, March 10-13
- 2014 Cruise Shipping Miami Conference
Monday, March 11
- CZR 4Q 2013 conference call
Tuesday, March 12
- MTN FY2Q 2014 conference call
Friday, March 14
- Hyatt Investor Day
LVS: Las Vegas Sands executive Chris Cahill resigning
LVS executive vice-president of global operations, Chris Cahill, is resigning. Cahill oversees the company’s property operations, corporate marketing and human resources, among other things. LVS gave him a 5-yr contract in April 2012.
Takeaway: We're not reading anything into yet but other companies seem to be poaching some LVS personnel.
OEH: Selling an asset
The Inn at Perry Cabin, featuring 78 rooms, will be sold for $39.7 million.
Takeaway: We applaud managements efforts to sell an asset, not officially listed for sale, and we expect any cash proceeds will be used to reduce outstanding debt.
HLT: Announced additional hotel in Saudi Arabia
Hilton Worldwide announced a signing agreement with Al Jazeera Group, for a new 180-room Hilton Al Ahsa, Kingdom of Saudi Arabia is expected to open in 2016.
Takeaway: Continues the company's plan to increase the non-US hotels and room count.
JAPAN: Bill delayed
One of the legislators, Takeshi Iwaya, spearheading the bill to legalize casinos in Japan says passage might be delayed. Iwaya said he is extremely worried the bill might not get passed mid-year despite cross-party support because of procedural issues. Iwaya did comment on potential projects, saying ideally foreign casino operators would join forces with local Japanese companies on projects. Japan needs the expertise and knowledge of foreign companies, but foreign operators might have trouble adapting to Japan’s particular characteristics, he said.
Takeaway: We believe such statements are merely efforts by Japanese officials to "save face" while also reaffirming the keiretsu business structure. However, it seems that Japan is a huge focus for investors and expectations are high for passage of favorable legislation this year.
MACAU: Work on new border crossing to start in 2015
Work on the new border crossing in Ilha Verde will start halfway through next year and should be complete in 2016. The new crossing will be open 24 hours a day.
Takeaway: One of many transportation infrastructure developments that should help the Mass business
BERMUDA: May pursue online gaming
Finance Mister David Burt suggested Bermuda establish a legislative committee to examine rules and laws for creating an on-line gaming industry. Bermuda, home to many corporate headquarters as well as the reinsurance industry, is a preferred corporate domicile due to its favorable tax laws and positive business environment.
Takeaway: Bermuda with its strong infrastructure (telecom and data centers), coupled with favorable tax laws has the potential to become the next Cyprus for online gaming. Additionally, the easy air travel access is a major advantage as compared to Cyprus.
Hedgeye remains negative on consumer spending and believes in more inflation. Following a great call on rising housing prices, the Hedgeye Macro/Financials team is turning decidedly less positive.
Takeaway: We’ve found housing prices to be the single most significant factor in driving gaming revenues over the past 20 years in virtually all gaming markets across the US.
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