- Signs of a weakening manufacturing sector in Japan: (JP Q1 BUSINESS SENTIMENT INDEX LARGE MANUFACTURING QOQ: 0.1 V 7.1 PRIOR; LARGE ALL INDUSTRY: 6.2 V 6.5 expected). The index showed that Japanese firms see 07/08 capital expenditure -5.3% y/y, and the soft reading was widely expected after the Reuters Tankan survey. Even though the BSI showed more evidence of a slowdown in Japanese manufacturing, there are some signs that domestic consumption is picking up. The Q1 Reuters Tankan survey, released a few days ago, showed that non-manufacturers (eg. retailers) are now more optimistic, hinting that domestic consumption is holding firm in the first quarter of 2007.

- Japanese exports remain firm as trade balance data comes in better than expected: (JP FEB MERCHANDISE TRADE BALANCE: ¥979.6B V ¥700B expected; ADJUSTED TRADE BALANCE: ¥655.1B V ¥425.6B expected). February exports climbed 9.7% y/y, the 39th straight monthly rise. February imports gained 10.1%, climbing for 36 straight months. The trade balance data showed that Japanese export volumes fell from a year earlier during February, but most of the drop is likely the effect of the Chinese New Year coming in February this year. When looking at the average growth in January-February, Japanese exports are expanding around the same pace as that of October-December.

- Asian stocks rallied after the Fed dropped its tightening bias. The Nikkei 225 is higher by more than 1.65%, but holding below its overnight Chicago close of 17475. Gains on the Nikkei are being led by exporters and banks. In South Korea, the Kospi is higher by more than 0.60% on gains in shares of Samsung and Posco. The KOSPI index is currently testing resistance at 1,450, and analysts see limited upside from here. The ASX 200 index is up 1.25%, with gains being led by mining shares and Coles Group. Shares of James Hardie, a construction company that receives a significant portion of its sales from the U.S., are also gaining sharply. In China, both the Shanghai composite index and the Shenzen index opened at record highs on the Fed statement. Gains in China are being paced by shares of Citic Securities. Despite weaker than expected results from China Mobile, the Hang Seng index is higher by more than 1.0%. Gains on the Hang Seng are being led by China Netcom and property related shares.

- Forex: The consensus is that a global equity markets recovery, seen as the most likely scenario after the Fed's bias change, could encourage further accumulation of yen carry trades due to higher risk appetite. Both the JPY and CHF held their ground during the Asian session, with the NZD/USD unable to sustain a rally above $0.7100. The AUD/USD rally above $0.8000 is expected to continue, as traders favored calls on AUD/USD over puts this week for only the second time since 2004 (option traders reduced bets that the AUD/USD will drop below $0.8000). The CNY was set at a new post revaluation high against USD at 7.7310. After the PBoC said that it would not further accumulate foreign exchange reserves, analysts think that the U.S. will find it harder to target China as a currency manipulator because the PBoC's reserves will be stable rather than rising.

- Commodities: Crude oil is currently higher in Asian trading on weaker than expected weekly gasoline inventories in the US. Today's data showed gasoline inventories dropped for the sixth straight week. Spot gold is higher by more than 0.60% and above $664 on broad USD weakness and higher oil prices. Shanghai copper is higher by more than 1.0%, tracking gains in the LME contract and strong Chinese copper import data for February.

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