Key news
- In Italy the vote on the austerity bill was moved forward to Sunday after government bond yields reached new euro era highs yesterday.
- Greece once again postponed the announcement of a new PM.
- Main focus today is the political development in Greece and Italy, US initial jobless claims, Swedish CPI and core inflation in Norway.
Markets Overnight
This week's news flow has so far been dominated by reports from Italy and Greece, and last night was no different. In Italy the vote on the austerity measures has been moved forward so it can pass in the lower house on Sunday. This came after a day in which Italian government bond yields reached new euro era highs, with 10-year yields ending the European session in 7.23%. President Napolitano announced that Mario Monti (former EU commissioner) has been named senator for life, which would make it easier for him to lead a “technocrat” unity government, see WSJ.In Greece the announcement of the new PM for the interim unity government was once again postponed. In a statement last night Papandreou announced his socialist government‟s resignation without naming his successor. Apparently former ECB Vice President Lucas Papademos has been reintroduced as the main candidate after other options were discussed, see FT.
In China exports in October increased 15.9% y/y (cons: 16.1% y/y), broadly in line with expectations, while imports increased 28.7% y/y (cons: 22.2% y/y). The overall picture is that exports continue to weaken with in particular exports to Europe having deteriorated markedly. On the other hand, growth in China‟s imports signals a pick-up consistent with our view of a relatively resilient domestic economy. In Japan machinery orders in September dropped 8.2% m/m (cons: 7.1% m/m) largely reflecting a payback on a 11.0% m/m increase in the previous month.
The negative sentiment from the European trade session carried over to the US stock markets. The S&P 500 dropped 3.7%. The Asian stock markets are also trading in negative territory this morning. Nikkei is down by 2.8% and Hang Seng by as much as 4.5%, partly fuelled by the Chinese trade data.
US bond yields decreased overnight as risk appetite decreased. The 10-year yields rebound somewhat this morning and are trading at around 2.0%. In the FX market the decrease in EUR/USD continued and this morning it is trading just above 1.35.
Global Daily
Focus today will continue to be on Italy: how high will yields rise and how will Italy respond. With this development there is a long time to the vote on the budget for 2012. Action is likely to be needed before that. ECB is in the market, but is likely to be reluctant to act with real force until Italian politicians have voted in favour of the budget. On the data front we have US trade balance and initial jobless claims, but these will be less important relative to the developments in Italy.In the fixed income markets all eyes are on the consequences of the sudden spike in Italian yields above the critical 7% that was „the point of no return‟ for Greece, Italy and Portugal. The market will also be alert to see if ECB becomes more active in buying Italian bonds compared to the last couple of days. Finally, today's Italian EUR5bn 1y t-bill auction will be followed closely. There has been speculation that the auction would be cancelled, but yesterday the Italian Treasury confirmed it will go through. Italy will also be in the market on 14 November, when the country will try to issue 5y bonds. All in all it looks like another day with bunds being well supported.
The story is very similar in the FX markets: all focus on Italy. If the Italian t-bill auction fails today, we should see new significant selling pressure on the euro. Yesterday EUR/USD fell from 1.38 to just above 1.35. The European debt crisis has no doubt moved into a new critical phase and the euro is currently very exposed to a new sell-off. Hence, significant moves lower in EUR/USD, EUR/GBP and especially EUR/JPY are certainly possible in the next couple of days. With regard to EUR/GBP we keep a close eye on the BoE meeting today. We do expect the asset purchase programme to be left unchanged at GBP275bn.
Scandi Daily
In Sweden inflation for October is likely to be a side event. Partly since focus is elsewhere (Euroland), partly since the trigger for any rate cut is not current inflation but rather disastrous developments abroad and the growth outlook (thus future inflation). Our forecast on CPIF is 0.2/1.5% and CPI 0.3/3.3%, which is line with consensus and the Riksbank forecast (1.6 and 3.3% respectively). Normally the hearing of Mr Ingves in the finance committee is somewhat of a non-event, repeating what was said two weeks ago, but given the turbulent and fast deteriorating developments abroad and the ECB cut it may turn out to be quite informative this time.
Inflation figures are normally the most important data release from Norway, but given the current state of the world, this will not be the case this time, in our view. Moreover, the market's reaction to the inflation numbers will probably be asymmetrical: surprisingly high inflation would not be enough to provoke a rate hike, while surprisingly low inflation would stoke market expectations of a cut. We estimate that the CPI-ATE (core inflation excluding taxes and energy) was 1.2% y/y (0.0% m/m). If this pans out, market reaction would be almost non-existent, in our opinion. That said, the surprise increase in import prices in September makes the degree of uncertainty greater than normal. Either the increase was a one-off effect that will reverse in October, meaning annual growth would be lower than expected, or it heralds a new trend of higher global prices, which would mean higher annual growth rates than expected. Central bank governor Olsen will give a speech today at 15.00 CET. The text will not be published, but he might take part in a Q&A, which might find its way to the media.