JPY data continues its depressing streak, but better news on the Citigroup front


MAJOR HEADLINES – PREVIOUS SESSION

  • US Jan Durable Goods Orders at -5.2% vs. -2.5% expected

  • US Weekly Initial Jobless Claims at 667k vs. 625k expected, 631k prior

  • US Jan New Home Sales at -10.2% vs. -2.1% expected

  • NZ Jan Building Permits at -13.1% m/m vs. revised -7.1% prior

  • JP Jan Jobless rate at 4.1% vs. 4.6% expected and revised 4.3% prior

  • JP Jan Household Spending at -5.9% y/y vs. -5.5% expected and -4.6% prior

  • JP Jan CPI at flat, as expected, vs. +0.4% prior

  • JP Jan Industrial Production at -10.0% m/m, -30.8% y/y vs. -10.0%, -30.7% expected resp.

  • JP Jan Retail sales at -2.4% y/y vs. -3.0% expected and -2.7% prior

  • UK Gfk Consumer Confidence at -35 vs. -39 expected and -37 prior

  • AU Jan Private Sector Credit at +0.6% m/m, +6.1% y/y vs. +0.3%, +6.0% expected resp.

  • JP Jan Housing Starts at -18.7% y/y vs. -15.2% expected


THEMES TO WATCH – UPCOMING SESSION

  • EU ECB’s Nowotny speaks (0800)

  • EU CPI (1000)

  • EU Unemployment (1000)

  • Canada Current account Balance (1330)

  • Canada IPPI/RMPI (1330)

  • US GDP/GDP Price Index (1330)

  • US Chicago PMI (1445)

  • US Michigan Sentiment (1455)

Market Comment:

Japanese data continued to paint a gloomy picture for the world’s second-largest economy, with January industrial production registering double digit contraction. While it was bang in line with consensus, and impacted by the timing of Lunar New Year holidays, it’s still a grim headline. CPI showed a small positive surprise at the core level, but still indicating deflationary tendencies. The consumer still remains under threat with household spending falling 5.9% y/y but there was a definite surprise in the headline unemployment numbers. While it showed a below forecast 4.1% rate, and a fall from December’s revised 4.3% rate, but evidence suggests that the improvement was linked to a reduction in the total available for work than an improvement on the jobs front. The offer/applicant ratio slid to 0.67 from a revised 0.73 last.

The data from Australia, albeit second-tier stuff, was slightly more promising. Private sector credit rose a better-than-expected 0.6% m/m amid robust demand for loans from businesses and home buyers after the recent spate of RBA rate cuts. With the next RBA meeting scheduled for next week, today’s data may argue the case for a pause in the recent cutting cycle. Markets are currently pricing in a 25bp cut with a slight chance of 50bp, markedly different from the outlook just last week.

The roll-out of UK’s Asset Protection Scheme yesterday appeared to be greeted favourably by the markets. RBS and Lloyds will reportedly put GBP325 bln and GBP200 bln of toxic assets into the scheme which should help ease balance sheets pressures. In exchange, RBS has committed to increase lending relative to its existing budget by around GBP25 bln this year and an additional GBP25 bln next. The program of government guarantees and capital injections, but avoiding full nationalization per se, (although BoE Gov Mervyn King, in his testimony before the Treasury Select Committee, admitted that RBS and Lloyds were nationalized in all but name) gives shareholders a bit more of a lifeline and comfort.

In related news, there were further developments in the US/Citigroup negotiations. The WSJ reported that a deal had been struck whereby the US govt. would convert its current holdings of preferred shares to common stock but only to the extent that Citi can persuade private investors to do likewise. The Treasury would match the private conversions dollar-for-dollar up to $25 bln. While the size of the government’s final stake would depend on the private involvement, estimates suggest that it would be in the region of 30-40%, much in line with percentages suggested early in the week. This deal has been closely monitored by markets as a possible blueprint for future such conversions of holdings in other major banks.

Global financial institutions including the World Bank, EBRD and European Investment Bank launched a coordinated 2-year plan to lend up to EUR25 bln to banks and businesses caught up in the unfolding Eastern and Central Europe turmoil. The plan aims to provide quick, large-scale financing and would be in the form of equity and debt finance, credit lines and political risk guarantees. While not an enormous amount in the grand scheme of things, at least it’s a step in the right direction and may provide some near-term support for the EUR.

Asia bucked the trend of recent FX direction, with JPY-related pairs suffering from profit-taking with week- and month-end factors attributed as the cause. Stops were hunted and triggered with abandon, but the view is still that this is only a (much needed) correction and retracement before we continue along the road of JPY weakness. The road ahead still looks treacherous for the JPY on the broader economic considerations and outlook. Other currencies were stable and predominantly range-bound.