Four Surprises Send Dollar and Yen Higher

The market has been hit by four surprises:  Japan unexpectedly reported a trade surplus.  HSBC's flash PMI for China's manufacturing was plays on fears of a harder landing.  The euro zone flash PMI, and especially the disappointing German numbers underscores recessionary conditions in the region.  The UK's February retail sales decline twice as much as the market consensus had anticipated. 

Individually they would have caused some market stir, collectively they are spurring near-term trend reversals, weighing on equities and lifting core bond prices. After flirting with the upper end of ranges, the euro and sterling have been sold off.  This reinforces the broader range of $1.30-$1.35 for the euro and $1.56-$1.5950 for sterling.   

The dollar appears to be confirming a topping pattern against the yen if the JPY83.20 area contains upticks.   The tactical bullish call on the Australian dollar has proved ill-timed as it has broken through the $1.04 area to record new 2-month lows. 

The Japanese trade surplus break the streak of deficit.  The JPY32.9 bln surplus compares with the consensus expectation of of JPY125 bln deficit.  The pace of export contraction slowed to -2.7% from -9.3% on a year-over-year basis. Exports in February actually increased by almost 3%.  Imports were stronger than expected rising 9.25% year-over-year from 8.4% pace in January. 

One striking detail of the report is that intra-Asian trade has slowed considerably and it accounts for over half of Japanese exports.  Exports to Asia fell over 6% year-over-year, about half the pace seen in January.  Exports to China were off almost 14% year-over-year vs -20% previously.  Exports to the US rose 11% from February 2011 after a 0.6% rise in January.  The data is skewed by the impact of the Lunar New Year and we'll need the March report to draw any hard and fast conclusions. 

China's HSBC flash manufacturing PMI fell to 48.1 from 49.6.  The official report is not released until April 1.  If the PBOC relaxes monetary policy before the official release, it would give more credence to the private sector assessment than Chinese officials may want.  Nevertheless, such speculation will rise ahead of the weekend. 

France and Germany reported disappointing flash PMIs and this produced a euro zone manufacturing PMI of 47.7 vs 49 and a service sector PMI of 48.7 from 49.4.  This renews fears that even the core in Europe are struggling, while the broader periphery (and the Netherlands) are contracting.    It is difficult to see how the data will help Sarkozy's re-election bid, which had appeared to be gaining some traction over the past week or so.  

German manufacturing PMI came in at a shocking 48.1 from 50.1 in February and market consensus of 51.0.  The service PMI held up a bit better at 51.8 vs 52.6 in February.  The consensus expected 53.0.  France's manufacturing PMI stands at 47.6 down from 50.2 and is a 4-month low.  The flash service PMI reading is 50.0 down from 50.3. 

The final surprise was the UK retail sales, which fell 0.8% in February compared with market consensus of a 0.4% decline.   Adding insult to injury, the January gain was revised to 0.3% from 0.9%.   The retail sales deflator rose 2.4% in February from 2.2% in January and is the first increase in half a year.  Excluding gasoline, the deflator rose 1.9% from 1.8%. 

U.S. reports weekly initial jobless claims for the week ending March 17.  The report may draw more than usual attention today as it covers the same week as the non-farm payroll survey.  Weekly claims are on their cyclical low, but improvement has slowed.  The four-week moving average has been essentially flat for almost a month, though at 356k compares with 389k a year ago.  Still, the improvement from the February survey week is small, warning of some moderation in US job creation after the strongest six months since 2006.    Such a report may reinforce the more constructive tone in US Treasuries and the profit-taking in equities.   
Four Surprises Send Dollar and Yen Higher Four Surprises Send Dollar and Yen Higher Reviewed by Marc Chandler on March 22, 2012 Rating: 5
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