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Daily Agenda: Central Banks Still Support Market Bulls

Royal Bank of Scotland and Standard Chartered announce cost-cutting measures; Federal Reserve releases Beige Book today.

For now at least, central bank intervention is running with the bulls. Going into the European Central Bank’s meeting tomorrow, concerns over Greece appear to have faded almost completely from the investor psyche in light of improving activity measures in core European Union economies and ECB stimulus. Military tensions in eastern Ukraine have failed to cast a shadow over financial markets in Europe. In Asia, central banks delivered a couple of surprises today: the Reserve Bank of India lowered its benchmark repo rate to 7.5 percent in the second cut year to date and the People’s Bank of China reduced rates for commercial lenders by 50 basis points.

U.K. income returns to pre-2008–’09 financial crisis levels. A report issued today from the Institute for Fiscal Studies, an independent research group, indicates that median U.K. household income in 2014–’15 has reached the same level as in 2007–’08, though still 2 percent below the peak of 2009–’10. The study notes that the recovery in living standards has been slow because of weak growth in earnings despite improving employment rates.

Europe retail sales rise sharply. Euro zone retail sales figures for January released today by Eurostat came in at 3.7 percent year-over-year, significantly higher than consensus forecasts. This marks the fourth consecutive increase in sales for the region as well as the biggest one-month increase in nine years.

Standard Chartered rejects need for capital. Despite reporting full-year earnings that missed analysts’ consensus targets, Standard Chartered today announced that it would leave its shareholder dividend unchanged and had no need to raise additional capital. In a conference call with investors, CEO Peter Sands said that the firm will continue to sell riskier assets and cut costs to improve the firm’s financial footing.

PMI data softens in Europe. At a reading of 53.3, final February euro zone composite purchasing manager index levels released by Markit this morning were softer than initial estimates but yet are still a multimonth high. Among the primary individual states, Germany saw both manufacturing and service sector gauges contract from initial estimates while France saw marginal improvement.

RBS to trim investment bank. Following last week’s announcement of structural changes at Royal Bank of Scotland, media reports today noted that the financial institution will cut more than 14,000 positions from its investment banking unit, a 74 percent cull. Bank management intends to refocus on core consumer and commercial segments going forward.

U.S. macro data on deck. In the U.S. ADP employment data is expected to show a rebound in private-sector job creation after a unexpected slowdown in January. Final nonmanufacturing activity figures from the Institute of Supply Management will also be released today, with expectations for a marginal pullback. Energy Information Administration oil inventory data for the week is expected to show that supplies remain high despite sustained low crude prices as well as a rebound in distillate stockpiles after the coming to a resolution of labor disputes in refineries on the Gulf of Mexico. The Federal Reserve releases its monthly Beige Book this afternoon of anecdotal information on regional economic conditions.

Portfolio Perspective: U.S. Markets Focus on Friday’s Employment ReportKarl Haeling, Landesbank Baden-Württemberg

Recent market action needs to be seen in the context that in recent years, the four days ahead of each monthly U.S. jobs report have tended to be the only relatively consistently bearish period for Treasuries. This seems to be because the employment data come out early in the month, soon after support from month-end duration extensions leaves the market. Nonfarm payrolls have been strong while the unemployment rate has fallen steadily, fueling bearish expectations.

Consensus forecasts for the February data to be released Friday are looking to be no exception, with nonfarm payrolls expected to be up 235,000 jobs and the unemployment rate expected to fall 0.1 percentage point to 5.6 percent. The huge amount of corporate supply Tuesday certainly added to this week’s bearish pressures.

There are still a couple of days for the bears to push prices down before Friday’s data but increasingly, the key question involves how bonds will trade after the employment report. One factor behind the strong price action that has typically followed most of the jobs reports in recent years involves the lack of strong growth in average hourly earnings. After a surprise 0.2 percent drop in this component in December followed by a strong 0.5 percent jump in January, consensus forecasts are for a 0.2 percent increase in February.

Such an outcome should thus be bond-supportive. Another crucial variable will be the extent to which foreign investors step in to buy following the upward trajectory in U.S. yields in recent weeks. Typically Japanese buying is relatively low in March ahead of their fiscal year end. We do expect the ECB’s quantitative asset purchase program, among other factors, to limit bearish pressures on Treasuries. That does not mean that Treasury yields have to hold at any specific level short-term as the U.S. market is currently one of the most available-to-trade globally, given the lower degree of local central bank intervention. But global pressures are still oriented toward deflation and disinflation.

Karl Haeling is a vice president of capital markets at Landesbank Baden-Württemberg’s New York office.

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