Draghi Takes Center Stage

The euro remains heavy as the market awaits the ECB's press conference where Draghi is expected to provide more details on the bond buying program that is expected to be launched as early as next week.  The euro slipped to new multi-year lows near $1.1025 in late-Asian turnover.  Market talk suggests large optionality and bids are stacked between there and the $1.10 level itself.     Peripheral bond yields are lower, spreads a bit tighter, and European equity markets edge higher. 

Outside of some generalities, investors largely are in the dark about the operational details of the Eurosystem's bond purchase program. Simply put, investors do not know the rules of engagement and more details are expected.  The needed details involve how the purchases will be made (reverse auctions or directly from dealers), how the program will be monitored and under what criteria.  Draghi has indicated that negative yielding instruments will be included, but did not say how the losses will be recorded.  There are also concerns that large holders of European bonds, like banks, insurance companies, and pension funds may not be so eager to sell to the ECB.   There is also some interest in exit strategies.  

The ECB's inflation and growth forecasts will be updated, and for the first time, extended into 2017.  Inflation is expected revised lower.  This year's estimate stands at 0.7%.  It could be cut in half, and it could drag the 2016 forecast to 1.0% from 1.3%.    On the other hand, this year's GDP will likely be revised higher, maybe to1.3% from 1.0%.  Next year's growth may be revised slightly higher from 1.5%.  

A healthy 30-year bond auction in Japan coupled with firm US 10-year yields, and  firmer equities are conspiring to push the dollar above JPY120.  Resistance is pegged in the JPY120.25-50 band.  After a few weak auctions, the MOF 's sale of JPY700 bln 30-year bonds was over-subscribed 3.76x compared with 2.67x last month.  The tail (spread between low and average bid) was compressed to 0.34 from 0.54.  The BOJ is buying more than 90% of the JGB issuance this year. 

Separately, the weekly MOF portfolio flow data shows no evidence of repatriation ahead of the end of the fiscal year as Japanese investors continued to buy both foreign bonds and stocks.  Some of this likely reflects the ongoing diversification of the Government Pension Investment Fund (GPIF) and other pension funds.   

Elsewhere, there are a few developments to note.   German factory orders in January fell nearly 4%, offsetting almost completely the 4.4% increase in December (initially 4.2%).  Sweden, on the other, hand, reported a 3.1% rise in industrial orders following a 4.1% increase in December (was originally 5.1%).  Industrial output rose 1% in January, and the December reading was revised to 2.1% from 1.7%.   The real sector in Sweden appears to be doing fine, the negative repo rate and bond purchases are aimed at deflation.  The Feb CPI will be reported next Wednesday.  The krona has appreciated 2% against the euro in the past week and a half.  The euro briefly slipped through SEK9.20 today for the first time since last November.  Riksbank Governor Ingves leaned against it today, declaring the krona strengthening as "unwelcome".    The timing could be good as technically it looks stretched. 

The Bank of England meeting is a non-event today.   Pushed down by a firmer dollar, sterling slipped to new three-week lows near $1.5225.  This is a bit more than a 50% retracement of its advance from $1.4950 on January 23 to $1.5550 on February 26.    The next retracement objective comes in near $1.5180. 

Canada reports its IVEY PMI.  It is notoriously volatile.   The Canadian dollar remains firm in the aftermath of the Bank of Canada's decision to stand pat.  The subsequent statement suggests the central bank has little sense of urgency to take out more insurance (rate cut).  Key support is seen in the shelf carved out last month in the CAD1.2350 area. 

US Q4 productivity and unit labor costs revisions are predicated on the downward revision of Q4 growth.  That is likely to translate into weaker productivity and higher unit labor costs.  Initial jobless claims are expected to fall back below 30k, but the labor market focus is on tomorrow's national report.  The durable goods orders report steals the thunder from today's factory orders.  

The key interest in the US comes after the market's close today.  The Federal Reserve announces the results of its stress tests on large banks.  It is looking at capital ratios, revenues, and loss estimates under a hypothetical scenario that includes a 9-quarter 6% decline in GDP, a sharp equity market slide, a spike in oil and a jump in European yields.  Next Wednesday the Fed will issue its Comprehensive Capital Analysis and Review.  It is here that the Fed announces the results of the banks' capital plans, including dividend payout and stock buyback programs.