No real market reaction after the stress results, if anything a tad positive


MAJOR HEADLINES – PREVIOUS SESSION

  • US Q1 Non-farm Productivity out at +0.8% vs. +0.6% expected and revised -0.6% prior

  • US Q1 Unit Labour Costs out at +3.3% vs. 2.7% expected and 5.7% prior

  • US Weekly Initial Jobless Claims out at 601k vs. 635k expected and 635k prior

  • US Apr. ICSC Chain Store Sales out at +0.7% y/y vs. -1.0% expected and -2.1% prior

  • US Mar. Consumer Credit out at -$11.1b vs. -$4.0b expected and revised -$8.1b prior


THEMES TO WATCH – UPCOMING SESSION

  • GE Trade Data (not specified)

  • UK PPI Input/Output (0830)

  • GE Industrial Production (1000)

  • CA Unemployment Rate (1100)

  • CA Housing Starts (1215)

  • US Non-farm payrolls (1230)

  • US Unemployment Rate (1230)

  • US Avg. Hourly Earnings (1230)

  • US Wholesale Inventories (1400)

Market Comment:

The fireworks in FX-land were mostly restricted to the early part of yesterday’s session with the BOE and ECB providing the ammunition yet differing results. GBP weakened after the BOE announced additional quantitative easing measures yet the EUR responded positively after the ECB announced a widely-expected 25bp rate cut and a move to extend liquidity operations with banks to 12 months from the current 6 months.

The US bank stress tests proved to be a damp squib. The numbers were broadly in line with previously leaked/discussed information, with 10 of the US’ top 19 banks needing additional capital, cumulatively a $74.6 bln hole in balance sheets. Two of the banks – Wells Fargo and Morgan Stanley have already announced plans to raise capital while BoA reiterating that no further government money would be needed.
There was very little fallout in markets. After Wall St had closed 1.3% lower, US stock futures were marginally in the black during Asian hours. Asian bourses were mainly steady after the strong run-up this week and saw only marginal profit-taking pressuring.

There were some more positives to be gleaned from the ICSC Chain Stores data which showed a strong rebound in April, rising 0.7% y/y after March’s 1% contraction. But before we get too carried away, it is worth noting that March data on consumer credit showed a record decline in outstanding balances, falling $11.1 bln in the month. Revolving credit fell by $5.4 bln after a $9.7 bln fall in February.

In the aftermath of the ECB’s announcement that it was to start buying EUR60 bln in covered bonds, ECB’s Mersch commented in European press that the central bank would be able to exit from its program quickly if the inflation environment turned unfavourable. Earlier, ECB’s Weber had assured that the central bank would exit non-standard measures when bank lending and the economy show signs of improvement. Markets are still treating the ECB developments with indifference, partly because of the relative size of the program (about 0.7% of European GDP compared with 2% in Japan and 5% in UK).

With the recent data releases around the globe mostly beating forecasts and prompting a constant barrage of comments on “green shoots” and “breaks in the cloud”, one could have been forgiven for expecting the RBA to give a more positive slant to its quarterly Monetary Policy Statement issued today. However this was not to be, with the RBA slashing its near-term growth forecasts and acknowledging that Australia had slipped into a technical recession. It forecast a 1.25% contraction in the year to June and 1% for the full year 2009 with a gradual recovery from late 2009.
Core CPI was revised higher to 3.75% in June (from 3.5%) and 3.25% for 2009 (from 3.0%), probably the first time in a while that anyone has referred to rising inflation! The AUD slid after the release of the statement, but was contained while bond yields edged marginally lower.

Today’s major event will be the release of US non-farm payroll and unemployment numbers. Market consensus is for a loss of 600k jobs in April, but note these surveys were taken before the surprise drop in the ADP private hiring report on Wednesday and the better-than-expected initial jobless claims yesterday. The unemployment rate is expected to tick up to 8.9% from 8.5% last month.