The ongoing battle between global monetary policymakers continues, leaving investors to ponder the potential collateral damage. A surprise rate cut announcement by the Reserve Bank of Australia (RBA) brings the benchmark cash rate to a record low of 2.25 percent. In Europe, with the tailwind of the European Central Bank quantitative easing announcement pushing European bond markets higher, for the first time today, the yield on German ten-year sovereign debt fell below that of Japanese government securities of the same tenure. For investors who have now become completely accustomed to a deflationary environment lacking yield, the challenge of finding attractive return-on-investment remains daunting. Equity markets are not providing an easy solution. To date, U.S. large-cap earnings for the past quarter have proven to be less than inspiring. With more than half the S&P 500 having reported, the aggregate growth in earnings has been a sluggish 2.1 percent year-over-year and just 1.4 percent for revenues, as the energy sector continues to reel from the ongoing plunge in oil prices.
Rhetoric out of Athens softens. Freshly installed Greek Prime Minister Alexis Tsipras and Finance minister Yanis Varoufakis today back pedaled from demands for a restructuring of existing sovereign debt in favor of a bond swap that would have largely the same effect but without adjusting the principal owed. As the duo tour European capitals this week, seeking to win support for their proposals, the basic message remains the same, despite becoming more contrite: Greece wants to roll back austerity measures in favor of deficit spending.
Europe posts weak inflation data. Euro zone aggregate producer price index levels for December released today were lower than forecast, with the headline measure registering a 1 percent contraction from the prior month and a decline of 2.7 percent year-over-year. With deflationary pressure continuing to erode business confidence, the path is open for the ECB easing program to get fully underway.
U.S. car sales and factory numbers to be released. Factory orders for December will be released in the U.S. today. Consensus forecasts predict a sharp pullback on a monthly terms. This would be the fifth consecutive such retreat as a strong U.S. dollar continues to weigh on exports. Separately, Autodata vehicle sales for January are expected to remain steady at an annual pace of roughly 17 million, representing a marginal softening from the frenetic pace of mid-2014 but would mark the strongest start to a new year since 2006.
Earnings reporting season marches on. Archer Daniels Midland topped earnings forecasts in its fourth-quarter 2014 release today, as record harvest levels kept processing demand strong. The Chicago–headquartered agribusiness giant reported $1.08 per share on net-income of $701 million. Consensus estimates were to report earnings of 94 cents per share. On a total revenue basis, the company fell short of expectations at $21 billion for the final three months of 2014 versus consensus estimates of $23 billion.
Portfolio Perspective: Smoke Equals Fire — Kit Juckes, Société Générale
There is, apparently, fire where there is smoke. Or at least, that’s the case in Australia, where the RBA cut rates by 25 basis points and sent the Australian dollar tumbling further. With core inflation likely to fall near 2 percent, the lower end of the RBA’s target range by the end of 2015, the RBA is grabbing the opportunity to drive the Australian dollar lower — and lower it will go.
The RBA crucially repeated today that the Australian dollar remains above most estimates of its fundamental value, highlighting a desire to see it fall further, especially on a broader trade-weighted basis. We remain bearish on the Australian dollar for now but at these levels, the case for shorts on the currency is becoming less compelling than the case for weakness on the Canadian or New Zealand dollars.
The biggest knock-on effect from the RBA may be on the Japanese yen, at least within the Group of 10. What were once the lowest rates around are beginning to look less extraordinary. Lower inflation is supporting real interest rates in Japan, and the Bank of Japan has not embraced negative rates. The weakness of the yen versus the U.S. dollar is probably one spike in risk aversion and further softness against the greenback is now predicated on further action from the Bank of Japan or tighter Fed policy. Lower global bond yields also point to the risk of further lows in yen crosses.
Kit Juckes is a macro strategist for Société Générale in London.
