News and views
Equities weaken into close. US reporting season continued and the likes of Macdonalds and Wells Fargo beat expectations though guidance from Wells was less upbeat and Morgan Stanley posted a bigger than expected loss. Wall street did register gains in the region of 1% through mid day though this eroded into the close and we are closing with losses in the region of 1%. The UK budget was handed down last night and was generally given the thumbs down by economists. Growth forecasts for 2011 were not seen as credible: +3.5% growth was only seen at the peak of the housing bubble earlier this decade. If that is what we are heading for given all the liquidity that Central Banks are pumping, then it is indeed a worrying sign! The UK budget deficit is set to peak at close to 13% in 2009-10 and then ease gradually from 2010-11 onwards and the top marginal tax rate was increased from 40% to 50% on incomes over £150k, starting next April. Commodities lost further ground with Copper down another 2% and NYMEX crude slightly softer after EIA and product builds.
Risk currencies gave back gains through the tail end of the NY session as stocks faded. The NZD was much more subdued registering highs in NY of only 0.5597 while the AUD hit a high of 0.7118 in NY but is currently trading round the 0.70550/60 level while. AUD/NZD had a strong session pushing to a high of 1.2738.
US FHFA house prices up 0.7% in Feb. This lesser watched government house price measure is less impacted by the sale of foreclosed properties, and gives a higher weight to non-urban house prices (which boomed less and hence are now not falling as steeply). Still, the two monthly gains so far this year (though Jan was revised down from 1.7% to 1.0%) add to the modest collection of evidence that suggests the housing market might be finding some kind of base. There will be further house price updates from the National Association of Realtors tonight and S&P Case-Shiller next week.
Japan trade balance surprises with a small surplus or much smaller than expected deficit in adjusted terms. Coming in at ¥97.1bn, the March adjusted trade deficit was much smaller than expected. Exports did edge up 2.8%mth and while there was a firming in imports, it was not enough to prevent an improvement in the overall trade position.
The UK 2009 Budget was handed down by Chancellor Darling. It makes grim reading. The 2009 economic growth forecast of –3.5% is credible (Westpac is on –3.4%) but his forecast of 1.25% next year (Westpac 0.4%) implies a fairly rapid recovery in private sector spending that we suspect is unrealistic. Then in 2011 he is forecasting 3.5%! That pace of growth was only seen at the peak of the housing bubble earlier this decade when banks were lending like crazy and mortgage equity withdrawal was boosting spending power by nearly 2% of GDP. We don’t publish a 2011 forecast but it looks excessively optimistic given the deleveraging that is going, and that financial services which make up nearly a third of the economy is not likely to bounce back that quickly. Meagre stimulus this year of about 0.5% of GDP gives way to gradual fiscal tightening from next year onwards. There simply is no money available to do much more. Even so that sees the public sector net borrowing (budget deficit) rise from £90bn (6.4% of GDP) in 2008-09 to a peak of £175bn (12.7% of GDP) in 2009-10!
The Bank of England minutes to the April policy meeting showed a unanimous 9:0 vote to keep the bank rate unchanged at 0.50% and continue the quantitative easing program begun in March: “the initial effects of the Committee’s asset purchase programme had been encouraging”. On the data front, unemployment rose 74k in March and earnings growth slumped from 3.0% yr at end 2008 to just 0.1% yr in February, the weakest on record.
Canadian leading index down 1.3% in March, continuing to fall away sharply, consistent with the Bank of Canada’s forecast that the economy will shrink 3% this year.
Outlook
The market is clearly looking forward/positioning for the RBNZ next week. We would expect to see this theme continue into next week, with the OIS market pricing in 40bps for the RBNZ, the NZD is set to trade heavily ahead of the policy meeting a week today.
