Sterling's March: In like a Lion out Like a Lamb

Official had hoped that last week’s EU/IMF deal on Greece would have put the issue to rest for a little bit, but it hasn’t. Month-end considerations appear to be offsetting the impact on the euro. Mediocre to weak demand for Greek bonds this week has resulted in widening premium Greece is being forced to pay. While the Greek government indicates that next month’s funding needs have been taken care of, it still needs to raise another roughly 11.6 bln euros by then end of May and another roughly 21 bln euros by the end of the year. In the first three months of the year it has raised about 18 bln euros. Greece budget appears to assume about a 5% interest rate and it is not seeing that. In order to bring down its borrowing costs, Greece appears to be looking at shortening maturities and is devising a regular bill issuance schedule. This poses its own roll-over risks. In addition, Greece is considering a dollar-issue in the next couple of months. Meanwhile, Moody’s warned that Italy, will have to generate a large primary budget surplus (budget balance excluding debt servicing), but Italian bonds appeared to shrug it off. In this vein, we note that Portugal, which was downgraded last week, has seen its spread (over Germany) narrow by about 11 bp over the past week.

In Japan, improved exports and corporate profitability has not translated into higher wages. Wages (including overtime and bonus pay) fell 0.6% year-over-year in Feb, the 21st consecutive negative monthly reading. In Jan, wages were 0.2% below year ago levels. Even a ten-month low in the unemployment rate has failed to push wages up. However, the bigger economic story is the Tankan survey due out in early Tokyo on Thursday. The market expects improvement, but with the diffusion index for both large manufacturers and large non-manufacturers to remain in negative territory. Given the importance of capex for the Japanese economy, the market will be very interested its reading. Recall that in the Dec survey, capex was expected to contract nearly 14%. Another decline is expected, but much smaller—less than 1%. Lastly, we note that the calculation of TIBOR (Tokyo Interbank Offered Rate) will include two more foreign banks starting tomorrow. This is potentially important because foreign banks typically have lower rates than Japanese banks. TIBOR rates are at a premium to LIBOR. For the benchmark 3-month tenor, TIBOR is about 18 bp above the 24 bp LIBOR fix.

The euro zone did report Feb unemployment at 10% (from 9.9), the highest since Q3 08. Germany reported its March figures. Unemployment fell 31k, contrary to expectations that called for a small rise. On top of that, the 7k rise in Feb was revised to -1k. The market did not respond much. Nor did it respond to the sharper than expected rise in the euro zone CPI. The market had expected a small increase from the 0.9% pace seen in Feb, but the 1.5% year-over-year rise was well above expectations. The euro zone employment report may offer a stark contrast with the US jobs report released on Friday. One of the reasons we suspect that European unemployment may be more intractable than in the US is that the real challenge in Europe is with integrated young people into the labor market. Fro person under the age of 25, Ireland has an unemployment rate of nearly 29%, Italy is near 26%, France is a little above 22% and Portugal is close 21%. Spain has the dubious honor of first place with an unemployment rate among young people of a little more than 40%.