Monday Morning Quarterback

Denard 'Shoelace' Robinson
of University of Michigan who
have the Highest Winning Percentage
In College Football History

The US dollar is mixed to start the week, though market conditions remain thin due to the holiday. The constructive employment report before the weekend has kept the greenback bid against the euro and Swiss franc. Opinion polls in the UK suggest the Tory Party may be pulling ahead, with an election announcement expected as early as tomorrow. The dollar has been confined to less than half a yen range against the Japanese currency. Some export-related dollar sales helped cap it near JPY94.80, but the market does not appear done probing the upside. The Australian dollar remains firm ahead of the RBA meeting tomorrow where another rate hike seems likely in a close call.

Many markets remain closed for the long Easter holiday, but those markets that were open in Asia saw equity prices move higher. The MSCI Asia-Pacific Index rose 0.3%. The Nikkei gained 0.4% to reach its highest level since Sept 08, encouraged by the weaker yen and ideas that the BOJ may upgrade its assessment of the economy late this week.

Of note, the Malaysian market extended its advancing streak to the 10th consecutive session; helped by news that exports for the third month and are up almost 18.5% from a year ago. The Malaysian ringgit is at its best level against the dollar since July 2008.

Indonesia’s Jakarta Composite tacked on 2% to hold on to its leadership in the region (~14% year-to-date). Ideas that the central bank will hold rates steady tomorrow may have spurred some buying, but sentiment has been underpinned by the central bank recently revising up growth forecasts and the early S&P upgrade. US shares are called slightly higher at the opening. Last week was the fifth consecutive weekly advance of the S&P 500, which begins this week at an 18-month high.

With European debt markets closed today, the focus is squarely on central bank meetings this week and the US Treasury auctions. The US Treasury will sell $82 bln worth of paper this week and after the tepid response to the recent sales the reception will be closely watched. The US 10-year note yield reached its highest level since last June and is edging close to the 4% threshold, which given the still subdued inflation measures, may attract buyers.

Also note that the FOMC meets for a regularly scheduled discount rate meeting. Another discount rate hike, as part of the effort to normalize the spread between the discount rate and Fed funds rate is possible and is one is delivered, expect only a very short-term market response as officials will underscore its function as a liquidity tool not change in monetary policy.

The world economy appears to be re-accelerating after an arguably weather-induced slowdown at the turn of the year. This is the key take away from last week’s purchasing managers’ surveys. China posted its best PMI since July 04. Japan’s Tankan survey was the strongest since 2008. In the Europe, new cyclical highs were recorded. German readings were the highest in nearly 14 years. Swiss readings were the highest in 3 years. Some suggest the PMI readings are consistent with 2.5% growth in the euro zone. Consumption is the laggard, but exports, capex and slowing of inventory destocking are fueling the better growth prospects.

Turning our attention to the US, we note that Norbert Ore, the head of ISM suggested that the US reading of 59.6, a new cyclical high, based on past relationships, is roughly consistent with 5.4% growth. While this strikes one as a bit high, the US economic recovery does appear to be broadening and deepening. The private sector added 123k jobs in March and the Jan-Feb upward revisions were good for another 75k. More people were working and the work week increased. This is good for output and income. Wages and salaries have risen at a little more than a 4.5% annualized pace over Q1 and this should help underpin consumption. Auto sales in March were healthy and unbeknownst to many apparently, GM took over the top spot for the first time since 1998.

The risk of a hung parliament in the UK has been a drag on sterling. However, polls late last week were confirmed over the weekend that the Tory Party may be edging ahead and this appears to be lending support to sterling. Two opinion polls over the weekend showed the Tories lead has widened to 10-11 percentage points. The timing is significant because the election draws closer. In fact, there is much speculation in the UK press that the long awaited election announcement could come as early as tomorrow for a May 6th election date.

Many valuation models point to the relative cheapness of sterling. We have argued that the political uncertainty offsets this. However, as the political uncertainty lifts, sterling may find better traction. However, a resurgence of sterling may be blunted by the still fairly strong US dollar. Cable is encountering resistance near $1.53, but a move above $1.5380 is needed to confirm a tradable bottom may be in place. The Bank of England also meets this week and no change in policy is expected. For its part, the euro is finding support in front of GBP0.8800.

The US Treasury announced that it was delaying its report to Congress on currency market manipulation for three months. It is not unusual for this report to be delivered late. The ostensible reason for the delay are the number of high level meetings in the coming weeks, including Chinese President Hu Jintao attendance at the nuclear summit in the US on April 12-13.

Recall that the US has not cited any country for currency market manipulation since 1994. Although the odds had seemed to grow in favor of citing China this time, we detected a change last week with Chinese more cooperative attitude regarding Iran and the US Trade Representative annual report which remained focused on trade itself not the currency.

Treasury Secretary Geithner seemed to hold out the possibility that China moves on its currency in the next three months. At the end of last year, we cited three pre-conditions for China to let the yuan appreciate and these have largely been met. Exports are growing. Inflation has turned positive. Chinese officials have taken or are taking senior posts at the IMF and World Bank. China could also widen the yuan-dollar band, which currently is 0.5% and even that is not being wholly explored. Last week, the Chinese 12-month NDFs rose the most in 3-months, implying a 2.6% appreciation. If China does go, most seem to expect a repeat of 2005, with a modest ~2.0-2.5% one-off revaluation followed by some gradual appreciation.