More Lull than Turn Around Tuesday

A more stable tone in the capital markets is evident today.  The "turn around Tuesday" may simply be a short lull before new incentives emerge.  With the European auctions behind us for the session, and a light North American calendar, a consolidative tone may characterize the remainder of today's 24 hour session.

The US dollar is mostly softer.  The euro has found support ahead of the $1.3130 area with the help of non-disruptive auctions from Spain, Italy, and the Netherlands.  Higher yields were generally demanded, but no blow outs and the secondary markets took it in stride. Narrow trading ranges have dominated.  Recovery upticks into the $1.3200-20 may be sold in anticipation of more negative political and economic news.

Australia completed a its series of data that began with a collapse of the terms of trade reported last week, followed by a much softer than expected producer price report yesterday and concluded with today's release of Q1 consumer prices.

Consumer prices rose 0.1% on a quarter-over-quarter basis.  The consensus expected a 0.6% increase. The year-over-year pace was essentially cut in half to 1.6% from 3.1%.  The central bank prefers the trimmed mean calculation and it rose a modest 0.3%, again half of what was expected.

The market is now pricing in more than 25 bp cut next week and there does seem to be increasing talk of the possibility of a 50 bp move, though it seems a bit over the top, the proverbial rubber band might not be overstretched yet.  The Australian dollar found support just below $1.0250.  Resistance is seen in the $1.0300-20 area.

Helped by revisions, the UK reported it met its public sector borrowing requirement target and although sterling extended its gains against the dollar on this and the auction results, the market does not appear to be aggressive ahead of tomorrow's first look at Q1 GDP.  A 0.1-0.2% quarter-over-quarter gain is likely, still leaving the UK economy essentially flat over the past 18 months or so.  The $1.6160-80 area is thought to contain profit-taking offers. 

Japan reported somewhat firmer than expected corporate sector service prices.  The 0.7% increase in March follows a 0.1% rise in February, but deflationary forces are still evident in consumer prices.  The BOJ meeting later this week is expected to result in an extension of the asset purchase program by JPY5 trillion and there has been some hint that it may lengthen the maturities it buys to three years from two. 

It may be difficult for the BOJ to get ahead of market expectations now, especially with the political pressure being so public.  In addition, while understanding the economic logic that see QE as currency negative, we are struck by the fact that in practive this has not always or even very often been the case. 

The mid-Feb QE by the BOJ did catch the market by surprise, but it also took place as the market was rushing back into the risk-on trades, with the LTROs helping lift peripheral bonds, equities and some of the funds that left emerging markets in Q4 '11 returned.  The climate is different now and the market's response is likely to be different.