Thursday's Seven

A nervous calm continues to cast a pall over the capital markets. The US dollar is narrowly mixed, but within the ranges seen yesterday. Asian markets were mixed, new that HSBC's flash Chinese manufacturing PMI rose to 51.7 in March from 50.4 in February failed to have much impact. European bourses opened softly and, encouraged by disappointing flash PMI figures, sold off further. Near midday in London, the Dow Jones Stoxx 600 is off about 0.5, led by tech and basic materials.

Peripheral European bond markets are firm. Italian bonds continue to outperform Spain, with the latter perhaps hindered by anticipation of today's supply. The 10-year spread has moved almost 15 bp in Italy's favor over the past five sessions. Greek bonds also are recovering for the second session after falling for the previous seven. A general exception to the pattern comes from emerging market stocks, where the MSCI benchmark has fallen to new lows for the year.


There are seven developments between yesterday and today that are shaping the investment climate.

1. The FOMC tweaked its macro-forecasts a bit and recognized that the Q4 slowdown was temporary. It will continue to purchases $85 bln a month in long term assets. The pace of purchases may vary as the economic conditions change. We think it will take the real Troika (Bernanke, Yellen and Dudley) a few more months to feel confident that the improvement that the Fed recognizes is not temporary, as it has proven in the recent past. While the Fed is continuing to evaluate the effectiveness of its purchases and discuss the exit strategy, the situation is still fluid. It will take several more months at least for this to be worked out. Bernanke did indicate a period between the end of the asset purchases and the beginning of the remove of accommodation is anticipated.

2. The UK budget projected GBP61 bln greater borrowing through 2017-2018 than anticipated three months ago. That means the peak in debt/GDP is not seen until 2015-2016 and at over 100%. This may spur more speculation of a credit downgrade by Fitch and S&P. There was a small adjustment to the BOE's remit, which seemed to largely affirm the flexible approach the MPC has shown regarding the fact that inflation has been above target for 3 years and counting. A further change is anticipated around shortly after Carney takes his post that will involve the BOE's forward guidance.

3.Separately, the UK reported much stronger than expected Feb retail sales and this lifted sterling back toward yesterday's highs and weighed further on UK gilts. Retail sales rose 2.1% in March, four times what the consensus expected. This is the largest rise in nearly a year and is more likely to reflect the rebound from the weather-induced weakness (-0.7%) in January. Key resistance in sterling is seen in  he $1.5200 area, a neckline of technical pattern that would project toward $1.56.

4. The flash PMI readings for Germany and France were disappointing. German manufacturing PMI slumped back below 50 to 48.9 and the services reading fell back to 51.6 from 54.1. While Q1 GDP may still be positive, it is clear that with headwinds from its neighbors, Germany is struggling. France saw a small uptick in its manufacturing PMI, but at 43.9 (from 43.6), it is hardly inspiring. And the flash service PMI was worse. It fell to 41.9 from 42.7. This produces a composite that is the lowest since March 20009.

5. The Cyprus crisis continues. It has become clear in recent days that the creditors are demanding 5.8 bln euros from Cyprus, but Cyprus officials continue to pursue particularly onerous and odorous ways of raises those funds. The new elected President had favored the tax on small depositors. When this was rejected, Plan B is yet another way to throw its people under the proverbial bus. It has reportedly floated the idea of capturing the state pension assets and in exchange providing government bonds backed by future revenue tied to the gas discoveries and then raising the remainder (~1.6 bln euros) with a tax on large deposits. The Troika will not be able to sanction this as it does not stabilize the country's debt/GDP ratio. Separately, the ECB which we understand had previously threaten to deny Cyprus banks to any more ELA funds as of today appears now to have given Cyprus the weekend to reach an agreement.

6. Australia's PM Gillard withstood a leadership challenge and is set to lead Labour into the Sept election. However, the fissures in the party have not closed and support for the party is flagging. Separately, New Zealand reported a stronger than expected Q4 GDP (1.5% vs 0.9% consensus)which gave the local currency boost. Although the RNBZ has indicated no rate hike this year, many in the market continue to see the risk of a year end move.

7.  At pixel time, the market is still awaiting BOJ Kuroda's first press conference.  He is expected to indicate willingness to buy more government bonds and with longer maturities (5 year instead of 3 years currently).  The open-ended nature of the operation, which was to being next year will likely begin sooner.  Separately, Japan reported a February trade deficit of JPY777.5 bln, which while a bit smaller than expected is still the eighth consecutive monthly deficit.  The details were disappointing as exports fell 2.9% after rising in Jan for the first time in eight months.  Imports rose 11.9%, a little less than expected, but well above the 7.3% pace seen in Jan.   While we recognize the data may be skewed by the lunar new year, we also see how the price of imports is rising faster than the yen's weakness is helping exports.