All eyes on the procession of central bank decisions today; no change in rates seen, but focus on QE headlines


MAJOR HEADLINES – PREVIOUS SESSION

  • EU May Services PMI out at 44.8 vs. 44.7 expected and 44.7 prior

  • EU May Composite PMI out at 44.0 vs. 43.9 expected and 43.9 prior

  • UK May Services PMI out at 51.7 vs. 49.5 expected and 48.7 prior

  • EU Q1 Euro-zone GDP revised lower to -4.8% y/y from -4.6% prior; q/q unchanged at -2.5%

  • EU Apr. Euro-zone PPI out at -1.0%m/m, -4.6% y/y vs. -0.8%, -4.5% expected and -0.7%, -2.9% prior

  • US May ADP Employment Change out at -532k vs. -525k expected and revised -545k prior

  • US May ISM Non-manufacturing Index out at 44.0 vs. 45.0 expected and 43.7 prior

  • US Apr. Factory Orders out at +0.7% vs. +0.9% expected and revised -1.9% prior

  • JP Q1 Capital Spending out at -25.3% vs. -30.0% expected and -17.3% prior

  • AU Apr. Trade Balance out at –A$91 mln vs. +A$1.7 bln expected and revised +A$2.3 bln prior


THEMES TO WATCH – UPCOMING SESSION

  • UK Halifax House Prices (0800)

  • EU Euro-zone retail sales (0900)

  • UK BOE Rate Announcement (1100)

  • EU ECB Rate Announcement (1145)

  • US Fed’s Pianalto speaks (1150)

  • US Fed’s Dudley speaks (1225)

  • CA Building Permits (1230)

  • US Initial/Continuing Jobless Claims (1230)

  • US Non-farm Productivity (1230)

  • US Unit labour Costs (1230)

  • US Fed’s Bernanke speaks at Fed conference (1245)

  • CA Bank of Canada Rate Announcement (1300)

  • CA Ivey PMI (1400)

  •  EU ECB’s Gonzalez-Paramo speaks (1450)

Market Comment:

Fed Chairman Ben Bernanke’s testimony before the House Budget Committee erred on the side of caution, stating that although the pace of economic contraction appears to be slowing and latest data suggesting the US consumer is gradually becoming more optimistic, there were still obstacles in the way of an economic rebound. These included a weak labour market, “still tight” credit conditions and the psychological impact of equity and housing losses sustained by households over the last two years. He saw businesses still remaining “very cautious” and still looking to trim staff and capital expenditure budgets.

On fiscal issues he said that the federal budget would widen substantially this year, with the debt-to-GDP ratio set to reach 70% in 2011 from around 40% before the crisis began. He warned that there was a need to demonstrate a strong commitment to fiscal sustainability in the longer term, otherwise the US would have neither financial stability nor healthy economic growth.

He attributed the recent rise in longer-term Treasury yields to growing concerns about large deficits, though some of the rise could be seen as reflecting a greater optimism about the economic outlook or related to technical factors (ie the hedging of mortgage portfolios). In the Q&A session, he outlined that the Fed had an exit strategy for its recent easing policy and reduce its balance sheet when appropriate. When asked if the Fed plans to “monetize the debt”, he assured that the Fed had no intention of doing so and when the Fed had completed its current Treasury-buying program it would reduce its holdings of Treasuries. Towards the end of his testimony he commented that the dollar does not face any risk of losing its reserve status in the foreseeable future.

This theme had been a market-mover earlier in the session when officials from India, Japan and South Korea said there were no alternatives to the USD as a reserve currency. This gave the greenback a boost in early trade and set the tone for a dollar recovery for the rest of the session. Mornings reports in Asia that Malaysia and China were considering shifting bilateral trade settlement to their own respective currencies rather than the dollar were ignored to a large extent, and the dollar preserved its higher levels.

Central bank meetings are all the rage today, with rate announcements from the BOE, ECB and ,later, the Bank of Canada. None of the meetings are expected to result in any rate cuts, though the ECB meeting is the one that has most potential to surprise.
The BOE announcement will likely concentrate on its quantitative easing measures (recall last month the BOE upped the scale of its planned asset purchases to GBP125 bln from GBP75 bln). The downbeat inflation report for May could hint that the BOE will reveal another increase in its quantitative easing policy. This should be seen as another negative for GBP, piling on the pressure from the heavy sell-off yesterday.
Watch also for news from the ECB as to whether they have been able to iron out a non-conventional program of measures to stimulate the economy.

With eyes switching to Friday’s non-farm payroll release, yesterday’s ADP private hiring report has given us the first input for the data. While the headline number for May was not too far from expectations (-532k vs. -525k expected), there was a hefty downward revision to Aprils data to -545k from -491k initially. Initial jobless claims are next on the agenda this evening and consensus is for a barely changed number of 620k to May 31 compared to 623k the previous week.