MAJOR HEADLINES – PREVIOUS SESSION

HEADLINES:

  • US Dec Wholesale Inventories at -1.4% vs -0.7% expected

  • US Feb Consumer Confidence at 44.6 vs 45.4 prior

  • AU Feb Consumer Sentiment Index at -4.6% vs -2.2% prior

  • AU Dec House Finance Commitments +6.4% m/m vs +4.0% expected

  • AU Dec Total Value of House Finance at +5.9% m/m


THEMES TO WATCH – UPCOMING SESSION

Events Today:

  • German CPI (0700)

  • Swe Riksbank MPC meeting (0830)

  • UK Unemployment (0930)

  • UK Average earnings/manufacturing unit wage costs (0930)

  • CA Trade Data (1330)

  • US Trade data (1330)

Market Comment:

It is surprising that Obama’s first press conference yesterday was peppered with words suggesting the need for urgency, action and “NOW”, yet his Treasury Secretary failed to live up to this new theme at his first attempt with the delivery of his latest bank plan. With the markets expecting a different, “radical” and comprehensive program, Geithner disappointed big-time with his revamped TARP, now named the Financial Stability Plan. Investors were disappointed that the plan lacked concrete details, with the word “may” appearing all too frequently, and in essence failed to address the underlying problem of how to value the toxic assets at reasonable levels. In addition, the housing component of the plan was ambiguous as to how the USD50 bln earmarked from the program would be made available, with commentators suggesting it may be more slanted towards creating incentives for lenders to change the terms of troubled mortgages rather than direct help for homeowners.

The damage is now done, with risk aversion on the increase again and stock markets given a severe beating. Even if further details are revealed in coming days, the risk is that it will be seen a “piecemeal” and more an exercise in damage limitation and short-term fixes rather than a robust longer-term scheme to rid the banks’ balance sheets of toxic assets and get lending markets going again. It doesn’t seem like risk appetite will make a fresh appearance near-term. Certainly, data releases into the end of the week (retail sales, jobless claims and Michigan sentiment) are not expected to provide any ammunition for a turnaround.

There was an interesting article in the FT this morning suggesting that the ECB may be closer to zero interest rate levels than the policy rate suggests. The article highlighted that o/n deposit rates are usually set 100bp below policy rates at that, if the widely-expected 50bp rate cut materializes in March, policy rates would be down at 1.5%, o/n deposit rates at 0.5% and may act as a magnet for market rates. It notes that the rate differential between the US and EU is only 77bp for 3 months and, if inflation is taken into account, is less. The FT asks whether the ECB would be comfortable with overnight rates falling so low. Asian commentators attributed a drift in EUR during the Asian morning to this article, seemingly doubting further rate cuts and hence a prolonged recession in the Euro-zone. Note yield differentials no longer play a role in determining FX levels.

Further evidence of the global economic slowdown was evident in China’s trade data for January released today. Exports were down for the third straight month, falling 17.5% y/y, well below forecasts of a 10.8% drop and -2.8% in December while imports were down a lumpy 43.1% y/y, again well below the forecasted -28.5%. However, the trade surplus remained steady at 39.11 bln. If you wanted a headline surprise on the trade front, you could be excused for thinking the turning point had arrived when South Korea announced that exports in the first 10 days of February were up an estimated 17% from a year earlier! Either an anomaly or maybe a large ship-building order was completed. The weak China import data suggests that the AUD will be in for a tough ride in coming sessions.

There was however some more positive data from Australia, where demand for housing finance rose more than expected in December amid a spurt in lending to first-time buyers following the government’s handouts to this sector as part of its first stimulus package. Mortgage loan approvals rose 6.4% y/y, the third rise in a row, and the total value of owner-occupied loans rebounded by an impressive 5.9% after slipping 0.9% last time. It seems apparent that the government handouts and drastic rate cuts by the RBA are at least having some positive effect in that part of the world. However, it’s too early to get excited as the consumer confidence index for Feb slid 4.6% vs a 2.2% fall in Jan.

Asia had a quiet session, with Tokyo players absent due to a public holiday, and were content to rest a while until Europe enters the fray for direction and volumes. Early indications suggest GBP is going to be the whipping boy ahead of trade data and, more importantly, the BOE quarterly review although the risk is that a lot of the bad news may be already priced in….It’s likely to be volatile….