Euro Mulls Italian Debt Auction This Morning

Italy is set to auction 5- and 10-year debt just a day after the election earthquake as the market also looks for signs of whether the elected can cobble together a functioning government.

Impressive US data
US Confidence bounced strongly in February, according to the Conference Board’s US Consumer Confidence survey, which suggests that the meltdown in January may have mostly been due to the hubbub over the fiscal cliff. US New Home Sales also surprised massively higher. There are a number of nuances to that story (big investment money buying up housing to rent out houses because of the yield available for buy to rent and home buyers finding less inventory among existing homes because under-water mortgage holders can’t move, etc…)

Let’s see a couple more months of data, but this improvement is interesting, particularly in light of the decrease in pay that has occurred due to the expiry of the payroll tax cut. Perhaps the US economy is doing slightly better than expected – the economic surprise numbers are back on the rise and in positive territory, though we’ve had a confusing mix of numbers of late (consumption is weak and let’s see what those February consumption numbers looks like after the payroll tax cuts), and the sequester will be hitting full speed in the coming months, providing a near-term drag.

Bernanke testimony
Bernanke’s testimony was largely as expected, and he of course came down in defense of further easing, saying that the risks were justified in light of the potential benefits. Still, the prominence of even discussing the risks was notable, in my view, and less dovish than everything appeared in the headlines. More testimony today from the Fed Chairman. The clear partisan lines in the questioning show the degree to which the renomination/new nomination process for the next chairman term (starting end of Jan 2014) will be a political flashpoint, perhaps some time this summer.

Plenty of BoE Noise over the last 24 hours
The pound has been crawling weaker again versus the Euro despite the implications of the Italian elections as we had first BoE deputy governor Tucker out yesterday (http://www.telegraph.co.uk/finance/economics/9895068/Bank-of-England-mulls-negative-interest-rates.html) talking up the idea of negative interest rates for banks deposits with the central bank and then the BoE’s Fisher was out late yesterday saying more stimulus is needed. Interesting, this morning, ex-BoE member Posen said that he doubted King would move with further stimulus, an idea I am actually sympathetic with as long as the pound is as weak as it has been lately, and to avoid any legacy issues with Carney coming on board in the summer.

Looking ahead
Immediately ahead, we have the Italian bond auction of 5 and 10-year debt, which the market will closely follow for near term direction on the Euro. But the bigger issue is the general uncertainty that this Italian election has generated and whether the parties seek to avoid another election – the only possible apparent route to that eventuality is through a so-called grand coalition – but is that a pill that Berlusconi and Bersani can swallow? Interesting days ahead for the EU as we look for signals on this.

EURUSD resistance area remains 1.3120-50 near term and the big support is the 1.3020-1.3000 zone.

We also have UK Q4 GDP data up this morning and then Euro Zone confidence data, followed by US Durable Goods Orders and Bernanke’s second day of testimony – this time before a House committee. In Asia, we get a look at the latest Japan manufacturing PMI.

Economic Data Highlights

• New Zealand Jan. Trade Balance out at -305M vs. +125M expected and +534M in Dec.
• Japan Jan. Retail Trade rose +2.3% MoM and fell -1.1% YoY vs. +0.9%/-1.5% expected, respectively, and vs. +0.3% YoY in Dec.
• Germany Mar. GfK Consumer Confidence out at 5.9 as expected and vs. 5.8 in Feb.
• Switzerland Feb. KOF Swiss Leading Indicator out at 1.03 vs. 1.00 expected and vs. 1.12 in Jan.
• Sweden Jan. Trade Balance out at +6.0B vs. +6.5B exp. and vs. +0.4B in Dec.

• UK Q4 GDP (0930)
• UK Dec. Index of Services (0930)
• UK BoE’s Bean to Speak (0940)
• Euro Zone Feb. Economic, Industrial, Consumer, and Services Confidence surveys (1000)
• US Jan. Durable Goods Orders (1330)
• US Jan. Pending Home Sales (1500)
• US Fed Chairman Bernanke to give semi-annual testimony before House (1500)
• US Weekly DoE Crude Oil and Product Inventories (1530)
• US Fed’s Fisher to Speak (2130)
• New Zealand Jan. Building Permits (2145)
• Japan Feb. Markit/JMMA Manufacturing PMI (2315)
• Japan Jan. Industrial Production (2350)
• Australia Jan. HIA New home Sales (0000)
• New Zealand Feb. ANZ Business Confidence (0000)
• UK Feb. GfK Consumer Confidence (0001)