Fed wants to keep yields subdued

Outlook

Europe is closed for the Monday-after-Easter holiday and at least some of the US is distracted by the Boston marathon. The only US releases today are the Chicago Fed activity index and Conference Board March leading indicators, expected to show a 0.7% gain over Feb. This week we get new and existing home sales, the Markit flash PMI’s, durables and the University of Michigan sentiment report. The PMI’s are likely to be the focus.

The most closely watch data this week is the official and HSBC manufacturing PMI for China on Wednesday. Wednes-day is also the date for eurozone PMI and the BoE minutes of the April meeting (plus the UK public sector finances for the year just ended March 31). Thursday we get the RBNZ rate decision (another hike or not?) and French business con-fidence and IFO. Friday brings UK retail sales and Japanese CPI, forecast at 1.4% in March from 1.3% in Feb. More interesting will be Tokyo April core CPI, forecast to jump to 2.9% from 1% in March because of the sales tax increase. Excluding the tax effect, Tokyo CPI would likely still be up to 1.2%. But analysts are skeptical any more inflation can be goosed out an economy just hit with a tax increase.

At a guess, the Fed wants to keep yields subdued. The idea of substituting a re-opening of the 7-year if they don’t like the 5-year auction reveals a more activist Fed that we are used to. This is deeds, not words. And we didn’t get any words or deeds from the ECB over the long holiday weekend, and the silence may continue for quite some time. With US rates being managed to conform to “lower for longer,” we can expect no dollar-buying unless a safe-haven is suddenly need-ed. But the Ukraine is not likely to provide it, since Europe prefers gas to arms and the US is washing its hands of the affair. That pretty much leaves Chinese PMI to drive things this week. We don’t like the dollar and we don’t much like the euro, either, but we do like the pound.