GBP pressured as well ahead of the budget on Wednesday


MAJOR HEADLINES – PREVIOUS SESSION

  • US Apr. Prelim Michigan Sentiment out at 61.9 vs. 58.5 expected and 57.3 prior

  • UK Apr. Rightmove House Prices out at +1.8% m/m, -7.3% y/y vs. +0.9%, -9.0% prior

  • AU Q1 PPI out at -0.4% q/q vs. +0.6% expected and +1.3% prior

  • AU Q1 PPI out at +4.0% y/y vs. +4.0% expected and +6.4% prior

  • JP Feb. Final Leading Index out at 75.0 vs. 75.2 expected and 75.2 prior

  • JP Feb. Final Coincident Index out at 86.0, as expected vs. 86.8 prior


THEMES TO WATCH – UPCOMING SESSION

  • CA International Security Transactions (1230)

  • CA International Travel Account (1230)

  • US Mar. Chicago National Activity Index (1230)

  • US Mar. Leading Indicators (1400)

Market Comment:

Despite recent comments from Fed Chairman Greenspan about “green shoots” and comments from US President Obama about “glimmers of hope”, Larry Summers, Chairman of the National Economic Council remains less upbeat. While he commented that there may be signs that the worst may be over, he warned that there were downside contingencies that the US had to prepare for, including issues in the commercial real estate sector, and that the road to recovery will be long and take time. Former Fed chief Paul Volcker also focused on the “long slog” out of “a Great Recession” towards recovery in comments reported in the WSJ.

The EUR received a (very) brief fleeting lift at the start of business this week following weekend press reports that China’s China Investment Corp (CIC) would actively consider investment opportunities in Europe and has already identified many potential targets. CIC Chairman Lou Jiwei, in what could be interpreted as a snide comment, was “grateful to those financial protectionists in Europe for not allowing China to invest a single penny in Europe last year, which would have cost terrible losses.” He noted things had changed this year with Europe now showing a more welcoming attitude. Meanwhile China’s national pension fund is reportedly prepared to embark on a multi-billion dollar spending spree, taking advantage of low asset prices to secure even larger stakes in Western companies, according to The Australian.

However, the EUR’s gains were short-lived and it was soon business as usual as the EUR continued its slide from a week ago. The 1.30 level was breached for the first time in a month as the market eyed potential division and conflict within the ECB as it approaches the next policy review. At the weekend, ECB’s Trichet attempted to downplay talk of a rift within the ECB governing council. He added that he wouldn’t exclude another “very measured” cut following the 25bp easing last time, though reiterated that a zero interest rate policy would be inappropriate for the bank. He made no effort to ease concerns about possible quantitative easing measures at the May 7 meeting, leaving markets to reflect on division among council members of how to tackle Europe’s worst recession since WWII. Recall, Germany’s Weber has ruled out cutting official rates below 1% and is against buying debt securities. On the other hand, Greece’s Provopoulos and Cyprus’ Orphanides are open to the idea of deeper cuts and asset purchases to fight the risk of deflation. On this topic, ECB’s Bini Smaghi warned about overstating fears about inflation and lowering interest rates too far.
While this uncertainty persists, expect the EUR to remain under pressure.

UK Chancellor Alistair Darling takes centre stage on Wednesday to present his annual budget, and weekend press was alive with talk of what to expect. Many expect Darling to attempt to balance possibly the worst economic performance since the Second World War with a confident outlook for the future. The Sunday Times expects him to say that the recession should end this year with a worse-than-expected contraction in the economy in 2009 replaced by growth next year. Measures intended to help businesses cope with the downturn are expected, together with other programs such as a GBP50 bln package of government guarantees to kick-start the housing market and a GBP2 bln package to help the jobless. A dominant theme was the extent of the budget deficit, with the FT reporting that the UK Chancellor is likely to admit for the first time that the government may not recoup the full costs of its banking interventions. A Treasury spokesman has reportedly confirmed that a provision for losses under the recapitalization program and numerous state guarantees of banks’ deposits and guarantees would be included in the budget, a first, and could be in the region of GBP60 bln. The FT estimates that the budget deficit is expected to peak at GBP170-180 bln over the next couple of years, around 12% of national income, and this may cause the Treasury to revise sharply upwards its projected GBP147.9 bln gilt issuance published a month ago. The only positives Darling may try to encourage would be to demand additional public sector savings on top of the GBP5 bln already found. The UK Times suggests he may demand up to an additional GBP10 bln worth.

Should Chancellor Darling seek some support for his “positive spin” on the outlook for the economy, the latest CBI forecasts suggest the bulk of the recession may be over, but recovery was not expected to show any signs until the spring of 2010. It reported that signs of recovery were already evident among manufacturers, with many reporting a stabilization of the recent hefty sell-off in inventories. In addition there was anecdotal evidence that credit conditions for businesses had improved since January. Meanwhile, economic think tank Ernst & Young Item Club also suggested that the economy is no longer in freefall and a recovery next spring is likely. Nevertheless, it appears unlikely that these forecasts will be influential enough to prevent GBP from further weakness ahead of the budget.