With traders focused on President Trump’s address to Congress tonight where he is expected to outline his economic priorities and provide plan details, European stocks are little changed for a second day and Asian stocks decline modestly as U.S. futures trade around the flatline. Oil declines, trading just under $54, while the dollar is little changed. Before the open, the US reports the second reading of 4Q GDP, with attention also on the Chicago PMI print as well as the Conference Board consumer confidence index. Salesforce and Ross Stores are among companies reporting.

World stocks hover just shy of all-time highs and are on course for a fourth straight month of gains on Tuesday, as investors awaited a speech by U.S. President Donald Trump for signals on infrastructure spending and tax cuts. Global share markets have risen more than 10 percent since Trump won power in November and investors are hoping a speech to U.S. Congress later will detail his “big” spending promises.

Traders are in a holding pattern ahead of Trump’s State of the Union address before a joint session of Congress. It actually is technically called the State of the Union as it’s his first address but it’s the annual event that will become it. Yesterday’s headlines were largely dominated by reports of Trump proposing to boost military spending by $54bn, offset by cuts in nonmilitary budgets. The President was also reported as telling governors yesterday that “we’re going to start spending on infrastructure, big” but in reality markets were largely unmoved by the headlines and clearly just waiting for the main event.

As DB’s Jim reid writes, perhaps the biggest focus for the market in the address are clues as to whether the President supports the much talked about border adjustment tax – a key feature of House Speaker Ryan’s tax reform plan. Economists believe that the President will not directly mention the BAT but will highlight the necessity of increasing economic growth and work wages. Other topics which could be addressed include repealing of the Affordable Care Act, pulling out of trade agreements, immigration, de-regulation and of course other tax cuts. In terms of timing the address is scheduled for 9pm EST in the US tonight.

Ahead of Trump, asian markets were subdued overnight but some upbeat company earnings helped European stocks add 0.1 percent as the region looked to pull out of a three-day lull and extend a 2.5-percent gain this month. The Stoxx Europe 600 Index was little changed by 10:08 a.m. in London, after four straight days of losses. The index is still up 2.6 percent for February. Asia stocks erased gains after Japan’s Topix gave up almost all of a 1 percent rise, with the steepest paring coming in the final half hour of trading. The MSCI Asia Pacific Index trimmed its monthly gain to 2.2 percent.

In the currency markets, the dollar which has not taken to the Trump trade quite so enthusiastically, was treading water against most of its major peers, with the only notable move a dip against the yen to 112.25.

As Bloomberg cautions, even as global equities climbed to record levels, investors have remained wary as they await details of Trump’s economic policies and watch for signals on the timing for higher rates. The White House began sketching out plans Monday, as Trump followed promises of infrastructure spending with a caution that tax details won’t become clear until after the costs of repealing the Affordable Care Act are known.

“Tonight is going to be about laying out the agenda,” Paul Kavanagh, chief executive officer of Patronus Partners Ltd. in London, said in an interview on Bloomberg radio. “The bond markets and the stock markets are going to be listening. To push through on many of the initiatives that he’s looking for over the next few months, he’s got to be relatively downbeat about the things that he will want to change.” Fed Bank of Dallas President Robert Kaplan said policy makers should raise interest rates “sooner rather than later” and not pay excessive attention to market expectations. The chance of a rate hike at the central bank’s March 14-15 meeting jumped to 50 percent, federal funds futures showed, from 34 percent just five days ago.

“Dollar bears should take caution if Trump follows through on infrastructure and Yellen ratchets up the rate-hike rhetoric to end the week,” said Stephen Innes, senior currencies trader in the Asia Pacific at Oanda Corp. “The big question for the market is, will Trump use tonight’s platform to execute?”

Gold was also steady, having hit a 3-1/2 month high on Monday and 10-year U.S. Treasury yields hovered at about 2.36 pct, some 10 basis points down on where they started the year. That suggests that bond investors at least are fully convinced about a substantial pick-up in U.S. growth and higher interest rates.

“While markets no doubt appear to like what they are hearing, the president now needs to deliver, he’s talked the talk and he now needs to walk the walk,” CMC markets chief strategist Michael Hewson said.

Trump met U.S. state governors at the White House on Monday and said he sees “big” infrastructure spending and that he is seeking a “historic” increase in military spending of more than 9 percent. That means some $54 billion of military spending is now on the table, though that appears to be funded by cuts elsewhere in government. Led by engineering, construction and defense firms, Wall St stocks eked out another all-time high, with the Dow Jones recording its 12th straight record, a winning streak not seen since 1987. Futures pointed to it struggling to keep the run going later.

Yields on 10-year Treasuries were little changed after climbing five basis points on Monday. European government bonds traded in a tight range. The German 10-year yield rose two basis points to 0.22 percent. Peripheral bonds extended Monday’s gains as 10-year Italian yields fell three basis points to 2.1 percent.

* * *

Market Snapshot

• S&P 500 futures down 0.01% to 2,368.00
• STOXX Europe 600 down 0.02% to 369.45
• MXAP down 0.2% to 144.81
• MXAPJ down 0.1% to 466.05
• Nikkei up 0.06% to 19,118.99
• Topix up 0.09% to 1,535.32
• Hang Seng Index down 0.8% to 23,740.73
• Shanghai Composite up 0.4% to 3,241.73
• Sensex down 0.3% to 28,728.63
• Australia S&P/ASX 200 down 0.2% to 5,712.22
• Kospi up 0.3% to 2,091.64
• German 10Y yield rose 0.9 bps to 0.207%
• Euro down 0.02% to 1.0585 per US$
• Brent Futures down 0.2% to $55.81/bbl
• Italian 10Y yield fell 6.1 bps to 2.134%
• Spanish 10Y yield fell 3.5 bps to 1.624%
• Brent Futures down 0.2% to $55.81/bbl
• Gold spot down 0.2% to $1,250.87
• U.S. Dollar Index down 0.02% to 101.11

Top Overnight News from BBG

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• Starbucks to Make Italian Debut With Upscale Roastery Cafe
• Comcast Says Wireless Service Will Only Be Available as a Bundle
• Takata’s U.S. Guilty Plea Sets Stage for Sale of Air-Bag Maker
• Fiesta Restaurant Drops 15%; Suspends Sale Evaluation Process
• Monsanto Cancer Suits Turn to EPA Deputy’s ‘Suspicious’ Role
• Google Can’t Avoid Privacy Suit Over Biometric Face Prints

Asia equity markets were modestly lower, continuing the lacklustre lead from Wall Street where all 3 major US indices closed in the green and the DJIA notched a 12th consecutive daily gain amid outperformance in the energy sector, although upside was minimal as participants looked ahead to Trump’s appearance at Congress. ASX 200 (-0.2%) saw similar outperformance in energy names as WorleyParsons shares surged 30% although the index then turned negative at the settlement. Nikkei 225 (+0.3%) was underpinned by JPY weakness seen in the prior session, while Shanghai Comp. (+0.4%) and Hang Seng (-0.7%) were somewhat indecisive after another uninspiring liquidity injection by the PBoC, with participants in Hong Kong also awaiting earnings from the major casino operators. 10yr JGBs were lower amid an increased risk appetite in Japan, with mild pressure also seen following a 2yr auction in which the b/c fell and tail-in price widened from prior.

Top Asian News

• Japan Factory Output, India GDP Growth: Asia Economic Takeaways
• Korean Prosecutors to Indict Samsung Heir on Graft Charges
• BOJ Gives More Details on Bond Purchases to Provide Clarity
• China’s CLSA Shuts Down U.S. Equity Research, Cutting 90 Workers
• China’s Top Diplomat Meets Trump as North Korea Worries Rise
• BOJ Looks Set to Buy More 5-to-10-Year Bonds, Less Short- Term
• Hong Kong’s Biggest Developer Sees Profit Rise 57% as Sales Soar
• MTR Awards Wong Chuk Hang Site to Road King, Pingan Real Estate
• IPT: NAB EU500m 9/2022 Green Bond MS +Low 30s
• Galaxy Entertainment 4Q Adj. Ebitda Tops Est., Plans Special Div
• Tata, Docomo Settle $1.2 Billion Wireless Dispute in India
• BOJ Hands Out More Details on Bond Purchases to Provide Clarity

European bourses are trading relatively flat, albeit on the softer side with slight underperformance in materials, with the likes of Randgold Resources and Fresnillo lagging in the FTSE 100. Although the slightly negative tone is largely owing to the cautiousness among investors ahead of Donald Trump’s speech to a joint sitting of the US Congress at 2100ET. Across fixed income markets, the GE-FR spread has seen another bout of narrowing with the spread tighter by around 2.5bps, while peripheral yields has been tightened against the German benchmark. However, gilts have underperformed after the latest Lloyds Business Barometer rose to its highest level since Mar’16 suggesting a potential rise in the upcoming PM! survey’s next month.

Top European News

• Erste Sees No Growth This Year as Charges Mar Last Quarter
• Merkel Risks Tension With Erdogan Over Turkish Reporter’s Arrest
• Greece Said to Expect Revised Bailout Proposal for Tuesday Talks
• German DAX Merits Bullish Stance as Records Set, Jefferies Says
• Salzgitter Slumps; Warburg, Lampe Say Pretax Outlook Below Ests.
• Erdogan Says Steps Taken Against ‘Outrageous’ Hurriyet Story
• Jimmy Choo and Roof Racks Top Small-Cap Picks for UBP (Correct)

In currencies, the Bloomberg Dollar Spot Index fell less than 0.1%. The yen added 0.3 percent to 112.35 per dollar, after sliding 0.5 percent Monday to snap a three-day winning streak. Tt has been a very quiet morning in FX so far, with the markets looking to get the Trump address to Congress out of the way before initiating some fresh direction on the USD. Month end flow can produce some erratic price action, and this will further hamper liquidity as traders are content to stay on the sidelines for now. Both the EUR and JPY hold their ground vs the greenback despite a modest rise on UST yields; EUR is keeping in touch with 1.0600 but perhaps of greater focus is USD/JPY still hovering ominously above the 112.00 mark. US data today — GDP Q4 second reading, trade and wholesale inventories may (of may not) back some of the increasing odds of a March move, with some seeing the probability moving up to a little over 50%. Concerns that the Fed is falling behind the curve due to the inflationary impact on real yields the key driver. The British pound slipped 0.1 percent to $1.2425. The currency is down 1.2 percent for the month.

In commodities, gold has pulled back as the USD index recovers in line with yields, and is now trading closer to $1250.00 after briefly piercing the $1260.00 level. Little else behind this, with Silver following lower in tandem, but the relatively tight ranges are reflective of the uncertainty over president Trump’s speech to the joint session of Congress later today. Oil prices have moved off better levels again as OPEC reiterates the disparity in compliance on production cuts between members and non members. WTI has slipped back under USD54.00 again. Base metals continue to tread water across the board, with Zinc outperforming to a modest degree again.

Looking at the day ahead, the main highlight on the data front will be the second reading on Q4 GDP. The market expects the reading to be revised up to 2.1% qoq annualized (from 1.9%). Also due out is the January advance international goods trade deficit reading, wholesale inventories for January, the S&P/Case-Shiller house price index reading for December, Chicago PMI for February, consumer confidence reading for February and Richmond Fed manufacturing index for February. Away from that there’s no shortage of Fedspeak with Harker (3pm ET), Williams (3.30pm ET) and Bullard (6.40pm ET) all on the slate. That all comes before what is likely to be the main event though when President Trump delivers his aforementioned quasi State of Union address overnight. So strap in.

US Event Calendar

• 8:30am: GDP Annualized QoQ, est. 2.1%, prior 1.9%; Personal Consumption, est. 2.6%, prior 2.5%; Core PCE QoQ, est. 1.3%, prior 1.3%
• 8:30am: Advance Goods Trade Balance, est. $66.0b deficit, prior $65.0b deficit, revised $64.4b deficit
• 8:30am: Wholesale Inventories MoM, est. 0.4%, prior 1.0%; Retail Inventories MoM, prior 0.0%
• 9am: S&P CoreLogic CS 20-City MoM SA, est. 0.7%, prior 0.88%;  20-City YoY NSA, est. 5.4%, prior 5.27%
• 9:45am: Chicago Purchasing Manager, est. 53.5, prior 50.3
• 10am: Conf. Board Consumer Confidence, est. 111, prior 111.8; Present Situation, prior 129.7; Expectations, prior 99.8
• 10am: Richmond Fed Manufact. Index, est. 10, prior 12
• 3pm: Fed’s Harker Speaks on Economy in Philadelphia
• 3:30pm: Fed’s Williams Speaks in Santa Cruz
• 6:40pm: Fed’s Bullard Speaks in Washington

DB’s Jim Reid concludes the overnight wrap

A decade ago this morning I set the alarm for 4.30am, jumped out of bed and immediately started work on the first Early Morning Reid after some preparation the night before. Approximately 2500 editions later and the pattern hasn’t changed much. Thanks to all the main contributors to this piece over the last decade. This piece wouldn’t have gone out without them. In today’s edition we’ve republished the first copy from February 28th 2007 where we discussed how we were moving underweight credit as the silent destruction of the US sub-prime market had started with BBB ABX tranches moving from par to the mid-80s that month. As such we’ve always felt that the financial crisis started in February 2007.

To the present now where the last 24 hours and likely the next 19 hours or so has pretty much been about prepping the stage for President Trump’s State of the Union address before a joint session of Congress. It actually is technically called the State of the Union as it’s his first address but it’s the annual event that will become it. Yesterday’s headlines were largely dominated by reports of Trump proposing to boost military spending by $54bn, offset by cuts in nonmilitary budgets. The President was also reported as telling governors yesterday that “we’re going to start spending on infrastructure, big” but in reality markets were largely unmoved by the headlines and clearly just waiting for the main event.

Perhaps the biggest focus for the market in the address are clues as to whether the President supports the much talked about border adjustment tax – a key feature of House Speaker Ryan’s tax reform plan. Our US economists highlighted in their daily yesterday that their best guess is that the President will not directly mention the BAT but will highlight the necessity of increasing economic growth and work wages. Other topics which could be addressed include repealing of the Affordable Care Act, pulling out of trade agreements, immigration, de-regulation and of course other tax cuts. In terms of timing the address is scheduled for 9pm EST in the US tonight. For those in Europe you’ll want to set your alarms for 2am GMT tomorrow morning.

In terms of markets yesterday, after European stocks turned in a fairly cautious session (Stoxx 600 -0.13%, DAX +0.16%), bourses in the US chopped and changed for much of the afternoon before closing with another round of very modest gains. Still the Dow (+0.08%) notched up its 12th consecutive record close which is the longest such streak since January 1987 while the S&P 500 edged up +0.10%. Gains for the energy sector appeared to help after WTI Oil rose a little over 1% at one stage, only to then retrace into the close. Of some excitement we did see the VIX rise over 5% and in doing so closed above 12 (at 12.09 to be precise) for the first time since January 19th.

The direction was a bit more obvious in bond markets yesterday. Both Treasuries (+5.3bps to 2.366%) and Bunds (+1.3bps to 0.197%) undid a portion of Friday’s rally however it was more of the same for OATs (-4.4bps to 0.872%) and the periphery (-5bps to -6bps lower) seemingly after the weekend passed without any negative market developments in the French election campaigns.

Over in the Asia this morning it’s actually been an overall fairly decent session. Bourses in Japan in particular are performing well (Nikkei +0.78%, Topix +0.93%) despite an overall mixed bunch of data releases. Industrial production in Japan in January was unexpectedly soft (-0.8% mom vs. +0.4% expected) however that was offset by a better than expected retail sales print (+0.5% mom vs. +0.3% expected). Elsewhere in markets the Shanghai Comp (+0.28%), Kospi (+0.34%) and ASX (+0.29%) have also edged higher while the Hang Seng is little changed.

Moving on. Yesterday we published a new Credit Bites – “Credit Foundations Creaking?” – looking at 5 year swap spreads and its relationship with credit. Over the last few weeks 5 year Euro swap spreads have widened to the highest level outside of the 08/09 GFC and the 11/12 Euro sovereign crisis. So far credit spreads to governments haven’t matched the move and as such ASWs are looking tight given the external developments. If bunds are rallying because of a possibility of being redenominated back into DEM at some point, credit should not be following the yield move lower and should be widening given the turmoil that such a scenario would bring. Clearly if Le Pen fails to become President (as the vast majority believe) then bunds will eventually sell-off, swaps spreads will tighten and the pressure will be taken off credit spreads but for now European fixed income is sending conflicting messages of the potential risks. See the report from yesterday morning for more. Email Sukanto.Chanda@db.com if you haven’t got a copy.

With regards to yesterday’s dataflow, in the US headline durable goods orders came in a better than expected +1.8% mom in January (vs. +1.6% expected) driven by a sharp rebound in aircraft orders. Disappointing however were the core capex orders where orders fell -0.4% mom (vs. +0.5% expected). Shipments (-0.6% mom vs. +0.2% expected) also fell unexpectedly. There was better news in the Dallas Fed manufacturing survey however where the reading rose 2.4pts in February to 24.5 and so reaching the highest level since April 2006. Finally pending home sales in January were revealed as declining -2.8% mom.

Closer to home, the European Commission’s economic sentiment index reading was reported as rising a very modest 0.1pts to 108.0 this month and so touching a six year high. Our economists also noted that the ECB’s January M3 and credit data showed stable money supply growth but improving credit flows. Since a soft Q3 2016, euro area bank credit has accelerated, with January the strongest month for net private sector bank lending (EUR +31bn) since 2008. Loans flows over the past four months are equivalent to annual credit growth of close to 3%. The only other data to note is that of the ECB’s CSPP buying. Total holdings last week was reported at €66.6bn which works out to net purchases settled last week of €1.7bn or an average daily run rate of €335m. That’s a shade below the €366m average since the program started.

Looking at the day ahead, this morning in Europe we’ll be kicking off in France where the preliminary CPI figures for January will be released, alongside Q4 GDP data and January consumer spending data. Over in the US this afternoon the main highlight on the data front will be the second reading on Q4 GDP. Both the market and our US economists expect the reading to be revised up to 2.1% qoq annualized (from 1.9%). Also due out is the January advance international goods trade deficit reading, wholesale inventories for January, the S&P/Case-Shiller house price index reading for December, Chicago PMI for February, consumer confidence reading for February and Richmond Fed manufacturing index for February. Away from that there’s no shortage of Fedspeak with Harker (8pm GMT), Williams (8.30pm GMT) and Bullard (11.40pm GMT) all on the slate. That all comes before what is likely to be the main event though when President Trump delivers his aforementioned quasi State of Union address overnight. So strap in.

2016 was a rough year for the so-called brick-and-mortar retailers with several mall-based apparel companies, including Aéropostale, Pacific Sun and American Apparel, being forced to seek chapter 11 bankruptcy protection.  Meanwhile, The Sports Authority didn’t even bother with a reorg plan as creditors decided that a liquidation was the best way to maximize value for creditors.

But it’s not just the niche apparel retailers that are having a hard time competing for those scarce consumer dollars.  Target plunged as much as 14% on the open this morning after announcing that steep price cuts would be required in 2017 to compete with the likes of Wal-Mart and the online retailing giant, Amazon (see “Target Plunges 12% After Missing Lowest EPS Estimate, Slashing Outlook“).

Unfortunately, at least according to Moody’s retail credit analyst Charlie O’Shea, the environment for retailers in the U.S. is likely to get worse before getting better. As Moody’s notes, the number of distressed U.S. retailers has more than tripled since the Great Recession of 2008-2009, and with $5 billion worth of debt maturities over the next 4 years, the situation is likely to get much worse.

Over the past six years the number of US retailers on the lowest and distressed tier of its rating spectrum has tripled, Moody’s Investors Service says in a new report. Not since the 2008-09 recession has the percentage been so high, and the rising tide coincides with an increasing number of such companies across all industries.

 

“Moody’s-rated US retailers rated Caa or Ca today make up just over 13% of our total rated retail portfolio, which is the highest level since the Great Recession, when this group comprised 16% of the portfolio,” said Moody’s Vice President Charlie O’Shea. “And the increase comes at the same time as the broader universe of Caa rated companies is likewise growing.”

Meanwhile, the latest round of retailing failures is just another example of the unintended consequences of the Fed’s “lower for longer” interest rate policy as private equity sponsors took advantage of cheap debt capital to snap up retailers with minimal equity exposure.  As Moody’s accurately notes, once the retail meltdown starts, companies can either choose to give up volume to preserve margin or slash prices resulting in a ‘race to the bottom’…

This situation comes on the heels of a protracted period of low interest rates, when the availability of cheap money serves as a “dinner bell” for sponsors to feast on target companies, O’Shea says in “Distressed Retailers Are on the Rise; Who’s Next?” Each such cycle begets a new pool of B2 or B3 rated companies, which don’t have far to fall into the lowest rating tier. Among companies, Claire’s, J Crew, Tops and rue21 have all been hamstrung with weak credit metrics after taking on high levels of debt to fund acquisitions.

 

And while the number of low-rated retailers is growing, so are debt maturities, Moody’s says. The 19 Caa/Ca companies in the agency’s retail portfolio owe roughly $5 billion in debt through 2021, with about 40% of this due by the end of 2018 and a spike during 2019. While the credit markets remain open to companies up and down the rating spectrum, that could change abruptly if investor sentiment turns. Among other considerations, interest rates have begun to trend upward, while US speculative-grade companies have a record $1 trillion of debt coming due in the next five years, which could make refinancing much more difficult for distressed names.

 

Meanwhile, a larger pool of low-rated retailers also poses challenges for their stronger competitors. “As they struggle to survive, distressed retailers can take more desperate measures, including highly promotional pricing that can border on irrational,” O’Shea added. “This leaves stronger firms with the choice of either competing in a race to the bottom, or giving up sales in order to preserve margin.”

…clearly Target has chosen the “race to the bottom” approach…