More Mid-Week Color

Real new developments among the major industrialized countries remain thin on the ground. And this is largely conducive of the consolidative tone that has emerged since the initial reaction to the news over the past weekend that European officials were putting some details of the backstop mechanism that had apparently been agreed upon at the March 26th summit. There still has not been closure on the issue.

Given the maturity schedule, the April-May period has been the obvious hurdle. Fitch, which cut Greece’s credit rating two notches prior to last weekend, warns today that Greece may tap the facility within the next two weeks. Greek 10-year bond yields are back above 7% today. Some European officials had defended the strategic ambiguity, but that seems to put the proverbial lipstick on the pig. The so-called strategic ambiguity was not the result of conscious planning, but the reflection of the profound disagreements among the euro zone members. Not only has the Greece issue not been resolved, but the issue of contagion remains as well. The EU’s report today on Portugal highlighting that the economic assumptions may be optimistic and more measures to address the deficit may be required has seen a further widening of the spreads. Spanish and Italian spreads are wider too.

One clear gap between many Asian developing countries (and Brazil) and the major industrialized countries(with some exceptions like Australia) is in terms of the strength of the recovery and price pressures leading to earlier tightening. Singapore joined the ranks today. It adjusts monetary policy through its currency and it did precisely that today in reaction to strong economic data. Q1 GDP rose at a 32.1% annualized pace in Q1 and 13.4% year-over-year. Officials increased the GDP forecast for the second time this year. It now stands at 9% compared with 6.5% previously. . The US dollar fell a little more than 1% against the Singapore dollar. Officials indicated this would be a one-off adjustment coupled with gradual appreciation. While some observers may argue ideas that China will soon let the yuan appreciate helped encouraged these decisions, we would not draw such a tight relationship. Singapore officials are responding primarily to their own macro-economic situation. We note how the NY Times, which had previously claimed a Chinese currency adjustment would take place in days, now explains why it was wrong: nationalism. Really? In any event, Singapore is neither the first nor the last in Asia to tighten policy.

The dollar lost about 1% against the Korean won today on the back of continued strong foreign inflows and encouraged by the strong employment report and the Moody’s upgrade.

Recent comments from Brazil’s central bank chief Meirelles seemed relatively hawkish and encouraging expectatinos of a possible a 75 bp rate hike when the COPOM meets next on April 28. Elsewhere, after leaving rate on hold yesterday the Turkish central bank provided important details of how it intends to unwind liquidity provisions. Most importantly it indicated that among the tools it will use is adopting the 1-week repo rate as its key benchmark for policy rather than the overnight rate as is currently the case. This implies a 50 bp rate hike, but officials declined to say when it would be implemented. Nevertheless the market appeared to take short-term Turkish rates higher in response. South Africa reported an unexpected decline in Feb retail sales. The 1.5% decline matched the Jan decline, but the consensus had expected around a 0.5% increase. The rand weakened by almost 0.5% on the news, but demand for the rand on pullbacks is likely to reemerge. Meanwhile talk that Israel’s central bank may have recently stepped up its intervention operations has seen the shekel extend its losing streak into a third session.

The calendar is busy for the US today. Another soft CPI report is will be a timely reminder why Bernanke in his testimony later today before the Joint Economic Committee of Congress explain why the Fed envisions economic conditions to warrant exceptionally low interest rates for an extended period of time. Retail sales are expected to post a healthy rise (consensus 1%+ on the headline). Business inventories likely rose around 0.4% after a flat Jan and should help underpin expectations for a Q1 GDP above 3% (to be reported April 30). Fed’s Beige Book is also out today, but it is not a market mover.
More Mid-Week Color More Mid-Week Color Reviewed by Marc Chandler on April 14, 2010 Rating: 5
Powered by Blogger.