Ten Things You Need to Know

The US dollar is mixed as the market continues to search for a new range post-FOMC.  The relentless rise of the dollar has been broken with the help of a softer US rate environment.  The seemingly relentless push of the euro toward parity has been stopped in it tracks.  The long overdue technical correction in the dollar may have more room to run.  

There are ten things that you should know today.  

1.  The HSBC flash China manufacturing PMI was disappointing and confirms the risk of a soft Q1 growth.  The 49.2 reading in March (down from 50.7 in February) is an 11-month low. The consensus expected a reading above the 50 boom/bust level.   New orders improved to 49.3 from 47.1 but remain in contraction mode.  Export orders also eased. 

2.  Japan's March flash manufacturing PMI also disappointed, falling to 50.4 from 51.6 in February.  The consensus had forecast improvement to 52.1.  New orders fell to 49.5 from 51.0 and export orders slipped to 52.2 from 53.7.    Recall that the BOJ had upgraded its assessment of exports and industrial output recently.  The aggressive monetary policy does not appear to be putting a solid floor under economic activity, and at the end of this week, it will be confirmed that deflationary forces have also not been defeated.   A recent Bloomberg poll found 2/3 of the 34 economists surveyed expect the BOJ to increase asset purchases at some point this year, with more than half expected an increase ETF and REIT purchases.    Initial support for the dollar is seen near JPY119.30 and a break could spur a move toward JPY118.80. 

3.  The general improving tone in the euro area continued before the ECB launched its more aggressive asset purchase program.   The composite March reading was at a new cyclical higher of 54.1.    After a soft patch last year, the German economy has accelerated.  The manufacturing PMI (flash) rose to 52.4 from 51.1.  The consensus was for 51.5.  Services rose to 55.3 from 54.7.  This was also a bit better than expected.   France showed a mixed picture.  The manufacturing PMI rose to 48.2 from 47.6but was slightly lower than expected.  The service sector slipped to 51.7 from 52.2.   In general, the decline in interest rates, oil, and the euro should see the regional economy gain better traction.   The euro has tested the $1.10 level.  The post-FOMC high was set near $1.1045.  Look for a break of this to signal the next leg up in what we continue to regard as corrective gains.  Initial support is seen ahead of the 20-day moving average which comes in near $1.0885 now. 

4.   While Merkel's meeting with Greece's Tsipras did not generate any major breakthrough, we expect that the improving tone is indeed a prelude to a break through.  Lost on many observers is what Greece needs to do to free up some funds.  It simply must provide a list of individual reforms.  Its first try was rejected as not complete.  A new list is expected by early next week.  The key point to keep in mind is that this has been an exercise in brinkmanship, and the brink (when Greece runs out of money) is approaching.  Greece has a roughly 2 bln debt payment/maturity at the end of this week and government salaries and pension payment due at the end of the month. 

5.  UK CPI was slightly softer than expected.  The year-over-year rate slipped to 0 from 0.3% in January.  The core rate eased to 1.2% from 1.4%.  Producers prices were also softer than expected.  Sterling has been trading heavily following dovish comments over the past two weeks by BOE's Carney and Haldane.   The uncertainty surrounding the outcome of the May election also appears to be taking a toll.  Sterling has encountered solid offers near $1.50.    Initial support is seen by yesterday's low $1.4835. 

6.  The US reports February CPI today.  The first sequential increase in gasoline prices should underpin the headline.  Note that excluding energy US, CPI is near 2%.  Excluding food and energy, leaves core CPI at 1.6% in January, and likely to tick up to 1.7% in February. 

7.  Fed officials continue to clarifiy the FOMC decision.  Yesterday, Vice Chairman Fischer noted that that the first rate hike (June-September) will mark a shift in policy from “ulta-expansionary” to “extremely expansionary”.  He echoed Yellen’s remarks, noting that impact on inflation from the drop in oil prices and the rise in the dollar is transitory.   He also noted that the rise in the dollar is partly a reflection of the relatively stronger US economic performance.  San Francisco President Williams also noted a mid-year discussion on raising rates is appropriate and did not think the dollar’s strength was an impediment to adjusting policy, in light of the strong growth backdrop. 

 

8.  Many observers seem to be misusing the Fed’s dot plots.  We make two points here.  First, Fed funds points are not forecasts.  They are policy recommendations based on individual assessments of economic conditions.  Second, the dots are not some sort of technocrat formulaic plot.  They reflect individual judgments of trade-offs and and views.  They are fundamentally a reflection of values.   The Federal Reserve continues to expect above trend growth and that tighter monetary policy than the market has discounted is still appropriate, even after the modifications. 

9.  Hungary’s central bank meets and is expected to cut rates.  Surveys indicate a 10-20 bp cut is anticipated by a majority.   This will be  the first cut since last June.

10.  S&P maintained Brazil’s BBB- rating and stable outlook.  This is the lowest investment grade rating.  It cited confidence that Rousseff will continue to tighten fiscal policy and shrink the record deficit.  The economy is projected to contract 1% this year and expand 2% next year.