Today's events feature the BOC Monetary Policy Report and data


MAJOR HEADLINES – PREVIOUS SESSION

  • CA Mar. Leading Indicators out at -1.3% m/m vs. -0.8% expected and revised -1.4% prior

  • US Feb. House Price Index out at +0.7% m/m vs. -0.7% expected and revised +1.0% prior

  • AU Mar. New Vehicle Sales out at -3.2% m/m, -22.6% y/y vs. revised -4.0% m/m, -18.8% prior

  • NZ Mar. Credit Card Spending out at -5.0% y/y vs. revised -2.0% prior


THEMES TO WATCH – UPCOMING SESSION

  • GE PMI manufacturing/Services (0700)

  • Sweden Unemployment (0730)

  • EU Euro-zone Current Account Balance (0800)

  • EU Euro-zone PMI manufacturing/Services (0800)

  • HK CPI (0830)

  • EU Industrial New Orders (0900)

  • UK CBI Quarterly Industrial Trends Total orders (1000)

  • CA Retail sales (1230)

  • US Initial Jobless Claims (1230)

  • US Existing Home Sales (1400)

  • CA BOC Monetary Policy Report (1430)

  • CA BOC Press Conference (1515)

Market Comment:

As expected, the UK budget provided most of the fireworks for FX markets. The nuts and bolts of the budget did not indicate any good news at all, growth forecasts for 2009 slashed to -3.5% with a modest rebound to +1.25% in 2010 and reverting to above-trend growth of 3.5% in 2011. Note that Chancellor Darling’s forecasts are slightly more optimistic for 2009 than the CBI at -3.9% and the IMF at -3.9%. UK government borrowing is expected to hit GBP175 bln in 2009/10, broadly in line with consensus estimates, but rising to GBP173 bln next year and GBP140 bln the following year. This puts borrowing at 12.4% of GDP this fiscal year, higher than the 8% originally predicted last November in the pre-budget statement, but is expected to fall to 5.5% of GDP by 2013/14.

In order to finance the record deficit, Chancellor Darling announced that a total of GBP220 bln of gilts would be sold in 2009/10, way above the worst market expectations of GBP200 bln, while a new income tax bracket of 50% for high earners will start from next April and pension tax relief would be tapered to a 20% rate. There was also the usual increase in indirect taxes fuel, alcohol and tobacco from duties and additional savings were targeted from the public sector.

To help rebuild confidence in the economy, he announced spending of GBP1.7bln on job creation, targeted at those unemployed for 12 months or more and below 25 years of age while mortgage support was extended to those who lose their jobs. The car industry was given some help with cash incentives for scrapping old cars while the housing sector could gain some comfort from an extension of the stamp duty holiday on lower-priced homes until the end of the year.

The net market reaction to the budget was a one-way street in the gilt market, with prices battered aggressively lower, but FX markets saw a bit more two-way reaction. After an early sell-off, GBPUSD rebound in a short-squeeze as EUR climbed back to 1.3000 but the ensuing sell-off was deeper and more aggressive, hitting its lowest level this month, just below 1.44. Asia has held the pair in a ranging, consolidation phase this morning but it is clear that the downside will remain vulnerable in the near-term.

The IMF released new global growth projections, updating forecasts made back in January. Needless to say the revisions were all to the downside, with the US now seen contracting 2.8% in 2009 and going flat in 2010. This compared with a -1.2% forecast for 2009 and -1.6% in 2010. Note the upward revision to 2010 growth, which may come as a surprise to some. In Euro-land, economic contraction is seen at 4.2% in 2009 and 0.4% in 2010 with Germany seeing a hefty reduction to -5.6% from -3.1% in 2009 and France -3.0% from -1.1%. Hopes that China would be a major contributor to the economic turnaround were kept alive with the IMF only trimming its growth rate from 6.7% to 6.5%.

Canada returns to the spotlight today with the release of the BOC Monetary Policy Report following the 0.25% rate cut on Tuesday. The report will likely outline a series of measures to boost growth, including a framework for any quantitative easing measures although its actual implementation will likely be delayed until “absolutely necessary”. There was more evidence that the Canadian economy is deteriorating faster than expected in the release of March leading indicators yesterday. They came in at -1.3% vs. -0.8% expected and included a downward revision to February’s data to -1.4% and posted the seventh consecutive monthly decline. Today, ahead of the MPR report, we will see retail sales numbers for February and these are expected to show a 0.4% decline m/m after a 1.9% jump in January.

Be mindful of a possible resurgence in geopolitical events and headlines in coming days. Following North Korea’s defiant stance on its nuclear programme last week, newswires were reporting that the Taliban are inching closer to the Pakistani capital of Islamabad, after seizing control of another district after consolidating their hold following a peace deal with the government. The developments caught the attention of US Secretary of State Hillary Clinton who said the Pakistan situation was “a mortal threat to the security and safety of our country and the world”. Remember, Pakistan is a nuclear-armed and capable country.