A few clouds on the horizon which may dent the current trend


MAJOR HEADLINES – PREVIOUS SESSION

  • NZ RBNZ cuts Official cash rate to 2.5% from 3.0%

  • UK Apr. Gfk Consumer Confidence out at -27 vs. -28 expected and -30 prior

  • JP Nomura/JMMA Apr. Manufacturing PMI out at 41.4 vs. 33.8 prior

  • JP Mar. Industrial Production out at +1.6% m/m vs. +0.8% expected and -9.4% prior

  • JP Mar. Industrial Production out at -34.2% y/y vs. -34.7% expected and -38.4% prior

  • AU Feb. Conference Board Leading Index out at +0.2% vs. -0.6% prior

  • AU Mar. Private sector Credit out at +0.1% m/m, +4.9% y/y vs. flat, +5.4% prior

  • AU NAB Q1 Business Confidence out at -24 vs. -31 prior

  • JP Mar. Housing Starts out at -20.7% y/y vs. -22.5% expected and -24.9% prior

  • JP Mar. Construction Orders out at -37.8% y/y vs. -24.9% prior


THEMES TO WATCH – UPCOMING SESSION

  • UK Nationwide House Prices (0600)

  • GE Unemployment Rate (0755)

  • EU Flash CPI (0900)

  • EU Euro-zone Unemployment (0900)

  • EU ECB’s Weber speaks (0900)

  • CA Feb. GDP (1230)

  • CA Industrial Product/Raw Material Prices ((1230)

  • US Employment Cost Index (1230)

  • US Personal Consumption Index/PCE Deflator (1230)

  • US Personal Income (1230)

  • US Initial Jobless Claims (1230)

  • US Chicago PMI (1345)

  • US Milwaukee NAPM (1400)

Market Comment:

Markets were willing to look past the dismal headline number for US Q1 GDP and search for positives in the details. A pickup in consumer spending and a sharp rundown in inventories were enough to give risk appetite the edge and were seen as encouraging for a future stronger rebound. The positive mood post-data was accentuated by s slightly more upbeat economic assessment by the Fed in its FOMC statement. The Fed kept rates and its QE policy unchanged but added that rates would be kept at “exceptionally low levels” for some time. The more salient point grasped by the markets was reference to a slower pace of contraction and a view that the economic outlook has improved modestly since the March meeting. Former Fed Chairman Paul Volcker tended to agree, suggesting the US economy was leveling off at a low level and did not require an additional stimulus package. He repeated that it would require a “long slog” before any recovery takes hold from these low levels.

The RBNZ cut its official cash rate by 50bp to bring it down to a record low 2.5%. With the market evenly divided between a 25bp or 50bp cut, the choice of a deeper cut sent the NZD packing, wiping out most the gains made amid the surge in risk appetite. At the press conference, RBNZ Governor Bollard said that the committee had looked at unconventional policy easing measures but once again considered them unwarranted. Bollard also said that NZ interest rates need to stay internationally competitive to attract capital and thus zero rates were not an option. However, the RBNZ expects to keep rates at, or below, the current level through 2010 which suggests further rate cuts will be in the pipeline at coming meetings. In all, the tone of the statement appeared more dovish and cautious than the March one and markets reflected this. As mentioned earlier, the NZD tumbled, more notably against the AUD, and bonds surged with two-year yields sliding 30bp to 3.43% and bank bill futures also rallying strongly.

Economic data seen during the Asian session again lent a more positive slant to sentiment. First off, Japanese manufacturing activity posted a rise for the third straight month in April, with the Nomura/JMMA PMI rising to 41.4 from 33.8 in march and well off the record low of 29.6 posted in January. Second, Japanese industrial production in March gained for the first time in six months, rising a preliminary 1.6% m/m, bettering median forecasts of +0.8% and a strong rebound from the -9.4% seen in February. The slightly better data saw government comments turning more positive, with its assessment on the economy noting that output is now “stagnant” compared to an earlier “falling sharply”.

With the market clearly wanting to look on the bright side and embrace risk, the question still nags whether we are getting ahead of ourselves or will future events confirm this positive basing? There are certainly some clouds still on the horizon and it would pay to remain on “storm watch”.

One of the more prevalent, and closest, clouds concerns swine flu. After the WHO upgraded its pandemic alert to level 5 from 4 overnight, the first time such a level has been flagged in 4 decades, markets showed little reaction even though this could bring us closer to potential travel warnings and a natural dampener on economic growth. Note that international travel to Mexico has all but dried up and mass-crowd events suspended while economic activity in Mexico’s capital has fallen by 60%.

The second cloud concerns US automaker Chrysler. Headlines again featured a possible imminent bankruptcy, with US Pres. Obama’s deadline for Chrysler to come up with a viable restructuring plan expiring tonight. Sentiment suggests that Chrysler may survive and avoid liquidation but whether this will happen in or out of bankruptcy status remains uncertain. Note that during the Asian lunch, WSJ reported that talks had broken down and we saw a knee-jerk sell-off in risk.

Perhaps lees of an impact may the release of US bank stress test results on May 4.
Comments suggest that if there was anything serious in the results (Fed already has them to hand) then more would have been done at last night’s FOMC to build up confidence/sentiment ahead of it.

This evening may provide the first chink in current appetite for risk with the release of the weekly initial jobless claims numbers. After a brief dip a few weeks ago, the numbers are firmly entrenched above the 600k mark, with this week’s forecast at 640k, unchanged from last week. A number closer to 700k would force a rethink, we think.