Calmer Tone Unlikely to Last

A somewhat calmer tone is evident in the global capital markets, but the underlying tone is fragile and the market appears merely to be catching its collective breath.  The Bank of England did not change interest rates not did it announce a change in its asset purchases, which means it joins the ECB and Fed on the sidelines. 

The major currencies are largely confined to yesterday's ranges against the dollar and showing little momentum presently.    Benchmark 10-year bond yields are mostly little changed.  The MSCI Asia-Pacific Index was down fractionally, but European shares are a bit heavier, with basic materials and consumer goods leading the way lower.  Of note Spain's stock market is bucking the down draft with technology, oil and gas and telecom, leading the way.  Financials are up on the day following news that the government took a 45% stake in Bankia, helping fuel ideas that a larger program will be unveiled tomorrow. 

The fact that the gaps created by the sharply lower opening in Asia at the start of the week in the euro and Swiss franc have not been filled still seems important.  If unfilled, the gaps will appear on the weekly charts as well which increases their significance.  That the gaps remain unfilled warns then that they may not be just "normal" gaps, but could be breakaway gaps or a measuring gap (which would imply a move toward $1.2860.  The one development that would negative this negative tone would be for the euro to gap higher.  That would be technically a very constructive sign.  Unlikely, but constructive.

The economic news stream is jam-packed today.    If there is a theme, it is that appearances can be deceiving.  China reported a trade surplus of $18.4 bln , nearly twice the $9.9 bln of the Bloomberg consensus.  Yet, it is not because of strong exports.  Exports rose 4.9% year-over year.  In March they ahd risen 8.9%.  The real story was imports.  They dried up, increasing 0.35.  The Bloomberg consensus had a 10.9% increase.   One of the factors that have weighed on oil prices is that China's oil imports fell to 4-month lows in April.  

The weakness in China exports seems to be part of a larger regional pattern.  Philippines exports unexpectedly fell in March and yesterday Malaysia reported the first decline in exports since 2009.   This has weighed on Asian equities and the MSCI posted its lowest close since January yesterday. 

Australia reported a 15.5k increase employment and the Aussie has bounced on the news, though still not taken out yesterday's high.  The optics are better than the details.  There was a loss of 10.5k full time jobs.  Part time jobs rose 26k.  The decline in the unemployment rate to 4.9% from 5.2% was partly a function of the decline in the participation rate.  After the 50 bp rate cut last week, the pendulum of market sentiment swung too hard too fast toward a June rate cut.  A modest adjustment is taking place. 

In contrast the optics in UK and French industrial production data were worse than the details.  UK industrial output fell 0.3%, but manufacturing rose 0.9%, nearly twice what was expected.  French industrial production dropped 0.9% , but manufacturing output rose 1.4%.  Italy also surprised with a 0.5% increase in industrial output.  The market had been looking for a small decline.  It appears the PMI surveys were negative than the real sector reports. 

Sweden and Norway reported softer than expected inflation figures.  When coupled with the disappointing Swedish industrial production data (0.4% rise in March rather than 3.0% the Bloomberg consensus expected) raises the possibility of a Swedish rate cut.    Norway's core CPI was slashed to 0.7% from 1.5% and well below expectations.   Norway's central bank meets today and while it is not the base case, it could surprise and cut rates. 

Japan reported a JPY1.59 trillion current account surplus in March after a JPY1.18 trillion surplus in Feb.  It offers a useful reminder that what drives Japan's current account is not the trade balance (it was JPY42 mln in March).  Rather it is the investment income balance JPY1.8 trillion surplus (JPY1.64 trillion a year ago).   The time series that investors should be more concerned about the weakness in bank lending.  It is up 0.3% in April from a year ago.  In March it was up 0.8%.  Corporate funding supported by the reconstruction efforts helps underpin the CP market, but bank lending more broadly is poor. 

Note that India took additional measures to stem the decline of the rupee.    The determination of the government is becoming move convincing.  A break of INR52.65 would suggest a top of some significance for the dollar may be in place. 

In the US, weekly jobless claims may be of greater interest insofar as it is the first report since last week's disappointing national report.  Yet it is March trade figures that have the potential to impact Q1 GDP revision guestimates.   Growth differentials favor a widening of the trade imbalance on a trend basis.