Asian Market Update: China Manufacturing Expands for Second Consecutive Month, at Highest Level in a Year; Downward Pricing Pressure in Japan Accelerates; Aussie Budget Expected to Reveal Substantial Tax Revenue Loss, Project More Employment Strain; USD, JPY Drift in Thin Holiday Trading

- With little directional bias evident in US indices, Asian equity markets in Tokyo and Sydney are trading within narrow ranges in the final session of the week, while most of the other bourses in the region as well as Europe are closed. The Nikkei opened to the upside initially but consolidated those gains on downbeat Japanese economic data, retracing to unchanged levels going into midday break. Japan's Index did trade higher late in the session, subsequently closing up 1.7%. S&P/ASX was modestly weaker, but since recovered some of those losses to enter the final hour of the day down 0.5%. In US, front-month S&Ps were off by 0.6% from the start before trading higher toward unchanged levels amid declining volatility for global financial markets.

- Evidence of the much-heralded "green shoots" sprung up in economic data from China, where April Purchasing Managers Index in Manufacturing registered a second consecutive monthly expansion and the highest level since April of 2008 at 53.5. This is a significant development not only because PMI data in itself is widely considered to be one of the leading economic indicators, but also in that it comes from the world's factory scrutinized for evidence of a generous government stimulus plan. In Japan, economic data still gleaming from the unexpected strength in industrial sector earlier this week, took a step back on today's inflation update that showed headline CPI falling for 2nd consecutive month and by the largest margin since November of 2005. March National CPI came in line with estimates of -0.3%, core continued to contract by 0.1%, while April Tokyo core prices leveled off at 0.0% v 0.2% expected. Meanwhile, jobless rate in Japan grew to 4.8% - above estimates of 4.6% - and cash earnings echoed downward consumer inflation trends with a 3.7% contraction.

- In other Asian economic data, South Korean trade data for April showed exports and imports declining at a slower pace at 19% and 35.6% on a y/y basis. On a monthly basis, export and import amounts also increased to respective levels of $30.67B v $28.95Be (prior $28.07B) and $24.65B v $24.45Be (prior $23.78B). Dodging recession late last week, South Korea's economy has demonstrated signs of improving fundamentals for much of this week. In Australia, delayed response to economic slowdown continued to be felt in weaker manufacturing data from AIG (Australian Industry Group) index that fell to 30.1 from 33.2. Besides this 2nd tier report however, statements from Treasurer Swan and PM Rudd ahead of the release of the budget were even more concerning however, as they forecasted a tax revenue loss of as much as A$115B to A$200B. On a related note, The Australian noted that the posted budget could reveal Aussie jobless rate rising above 8% from the current 5.7%.

- In share-specific highlights, Nikkei's Canon was off by 3.5% after cutting its FY09/10 net profit estimates to ¥11.0B v ¥98B prior and posting Q1 sales below ¥743.04B expected at ¥687.03B. Fujitsu traded sharply higher however, gaining over 15% on forecasted net profit of ¥20B in the current fiscal year that compares to prior year's net loss of ¥40.8B. Fujitsu's revenues for the prior year also topped estimates of ¥4.03Te at ¥4.07T. In Sydney, MacQuarie reported FY09 profit of A$871M v A$884.4Me, with Operating income A$5.53B (-33% y/y), and Tier 1 capital ratio rising to 11.4% from last month's 10%. Remaining cautious in outlook, company officials noted that conditions will remain challenging with lower earnings on capital, higher funding costs, and additional decline in commercial realestate. Shares remained halted on anticipated equity raise. In other Aussie share news, Rio Tinto traded off by as much as 2.5% on more vocal political aversion to Chinalco deal from prominent Parliamentary opposition leader Turnbull.

- In currencies, USD majors traded in thinning ranges on market holiday in much of Asia and Europe. USD and JPY drifted lower on late session risk appetite, with EUR/USD rising to 1.3270 and USD/CHF sliding to 1.1370's - a 50pip USD drop.
GBP was largely unchanged, underperforming other European majors on UK growth concerns. In commodity FX, AUD was marginally higher on rising caution ahead of next week's RBA decision and USD/CAD continued to consolidate losses just above 1.19. Japanese Yen was modestly weaker but did reach multi-session lows, with USD/JPY rising above 99.00 for the first time since Apr. 20th and EUR/JPY advancing to 131.50 for the first time since Apr. 16.

- Crude oil is lower on today's session, after gaining marginally during NY floor trading. In terms of oil demand, South Korea, world's 5th largest oil importer, disclosed that its April crude oil imports rose by 5% y/y. The rise in South Korea's oil imports comes amid an improvement in some of the country' recent export and manufacturing data. Spot Gold is declining in Asia, after falling more than $9 during the US session. Today's weakness in gold prices comes as the Nikkei 225 equities index is trading to the upside. Additionally, Japan's March inflation data, showed that national CPI is at the lowest level since late 2005. The Japan data has led to renewed deflation concerns, which are normally a negative for gold prices.