Improved U.S. manufacturing data buoyed the 'Janet Yellen Industrial Average'

United States

The ISM index increased from 53.2 to 53.7 a month earlier. Stocks rose and the Standard & Poor’s 500 Index to an all-time high. The S&P 500 advanced 0.7% to 1,885.52 at the close. Dow closed at 16,532.61.

Current U.S. 10-year yield is still below the level when the Fed conducted its 1st tapering at 18 Dec 2013. It indicated that market continues to believe that the Fed will continue to discourage premature tightening expectations. We should not focus merely on the size of monthly purchases, as the entire Fed’s balance sheet has a much larger impact to the entire financial system which has been accelerated since Oct 2012 and crossed above USD 4 trillion a few months ago.

Corporate lending has a sudden increase since the beginning of the year, a leading indicator that the Capex in U.S. tends to increase in 2014. To encourage the continuous increase, the Fed is expected to influence yield curve flattening and push long term borrowing cost lower.

Australia & Reserve Bank of Australia

The Reserve Bank of Australia (RBA) easing cycle is yet to be over at this stage. Inflation picked up 2.7% in the 4th quarter last year, near the upper band of the RBA’s inflation target. YoY bank loans increase surged to the second highest level since 2009. It makes sense for the RBA not to dovish further, and it is also a good time for them to give credibility to themselves as the previous easing has been working.

However, a few risks remain well to put future rate cuts possible towards the end of the year. Australia’s growth model is shifting from mining to non-mining sectors and resources carry huge uncertainties. Furthermore, Australia needs a lower exchange rate in order to support that. Also, China has been slowing down with its reduced infrastructure activities the commodity exports from Australia such as iron ores, it is premature at this point to call the current easing cycle over.

Hence, downside risk well existed in Aussie dollar. Australia’s current account deficit is still much larger than New Zealand’s, indicating its currency will stay at the low side for some time. We think the market might move ahead of policy maker’s intentions due to the facts that:

Increasing bets emerged that rate hike could be RBA’s next move. However, if its economic conditions deteriorated again, Glen Stevens will do whatever it takes to jawbone the exchange rate lower and he is the master in this area for the past few years.

We also do not think that the Chinese government will launch a stimulus package in near term, since March manufacturing PMI’s stabilization may buy more time for the Chinese policy makers to “hold”, and Premier Li Keqing mentioned that any stimulus will be “mini-size” and “target” based