Key Developments

After a largely quiet first half of the week, there are a number of noteworthy developments today. The most important of which is arguably Moody's downgrade of Spain to Aa2 and maintaining a negative outlook. It is important because it took place hours before the Bank of Spain is to publish each bank's capital needs. Spanish officials have indicated that it would not exceed en toto 20 bln euros or 2% of GDP. Moody's says it could really cost up to 50 bln euros.

The government seems livid. Greece, which Moody's cut three notches earlier in the week is also irate, complaining to the EU and there has been some suggestion of legal action. The euro fell on the unexpectedly timed to almost $1.3800 where demand, purportedly from Middle East and sovereigns, emerged and lifted the single currency back toward yesterday's lows near $1.3850. Talk that the ECB has continued for the second day to buy peripheral bonds also may have helped stabilize the situation.

In addition Moody's downgrades, note that reports over the past couple of days suggests the bank stress tests may not be as robust as hoped after last's July's disappointment and the compromise over the competitive pact is also an exercise is dilution--less surrender of sovereignty--which means less required action.

Two countries adjusted interest rates. The Reserve Bank of New Zealand delivered a 50 bp rate cut. The market was largely divided between a 25 and 50 point move. After the initial drop, the New Zealand dollar has continued to trade heavily and appears capped near $0.7380. The rate cut is best understood as a temporary move that the central bank says will have to be reversed once the rebuilding begins. While it acknowledged the economy was under-performing its expectations even prior to the earthquake, central bank head Bollard suggested that he anticipated no additional rate cut unless the situation deteriorates further. Separately, as widely anticipated

South Korea hiked key rates 25 bp to 3%. It is the second hike this year and comes after inflation surpassed the target for two consecutive months. Recall Thailand hiked rates earlier this week. Ironically, the South Korean won was the worst performing Asian currency, losing a little more than 0.5% against the US dollar. Although the Kospi's 1% decline was in line with the other major Asian equity market losses, foreign selling pressure was particularly acute with almost $1.1 bln in sales today, brings brings the week-to-date liquidation to $1.55 bln, compared with about $2 bln liquidation in the year up to this week.

Lastly, note that China's 3-month bill rate has risen for the second consecutive week and other money market rates would seem to be consistent with heightened expectations of a near-term PBOC rate tike.

China unexpectedly reported a trade deficit for February. The $7.3 bln shortfall is the largest monthly trade deficit in seven years. The consensus was for a surplus of around $5 bln. While some observers may see in the data the long awaited shift toward internal/domestic led growth, such a conclusion seems premature. The data was skewed by the lunar New Year.

Germany reported a smaller than expected trade surplus in January of 10.1 bln euros about 30% smaller than expected. The key to the disappointment was that exports fell 1% on the month instead of rise the 0.7% the consensus expected. Another look at the data reveal the re-orientation on German exporters that is one of the important aspects of its economic prowess. Exports within the euro zone rose almost 19% from a year ago. Exports outside of the EU increased by nearly 31%. Yet if the net exports may weigh on German growth at the start of the year,

France looks to have accelerated a bit. January industrial production rose 1%, twice what the market expected. The UK also reported better than expected industrial output figures (0.5% vs 0.4%) led by a 1% rise in manufacturing. The year-over-year growth of industrial production (4.4%) and manufacturing (6.8%) are the strongest since late 1994.

Lastly, in terms of data, while the Australian dollar is trading heavily, it is not because of the jobs data. The headline loss of 10k jobs is misleading as there was a large shift from part-time jobs (-57.7k) to full-time (+47.6l). The rise in full-time jobs was more than twice the consensus forecast of total job creation.