Risk assets retreated further on Thursday and again overnight, giving the dollar a welcome boost. Of interest with respect to the stronger dollar was that it took place despite a weak jobless claims figure and a poor trade outcome. Not helping the risk avoidance impulse was the news overnight that Chinese inflation and industrial production data were both stronger than expected, suggesting that the PBOC has more work to do in terms of tightening monetary policy. Concern about rising inflation remains endemic right across Asia – South Korea, Thailand and Vietnam have all raised interest rates this week, and India may well hike when the central bank meets next Thursday. In February, inflation in China was unchanged at 4.9%, producer prices were up by 7.2% in the month, and industrial production rose by 14% annualised in the first two months of the year.
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The S&P closed on Thursday with a loss of 1.9%, while the FTSE 100 ended down 1.6%. Asian bourses have lost further ground overnight – the Nikkei is down 1.7%, the Hang Seng is 1.5% lower, and the ASX has lost another 1.2%. Fixed income benefited from the flight away from risk – the 10yr gilt yield is 12bp lower at 3.56%. Commodity prices continued to give back recent gains – Brent crude dropped back to $113 at one stage from near $116 earlier in the day, while copper prices continued to decline (down 7% since the start of the week). Against this more careful backdrop, the Aussie dipped once more, and in early London trading is below parity. Cable suffered more than most, now back to 1.6050. The sense is growing that the MPC may be on hold longer than previously envisaged.
Commentary
Expect the least from the EU Summit. As suggested by an unnamed German official yesterday, there is very unlikely to be any denouement on many of the proposals recently discussed at today’s summit of European leaders. German officials continue to reject the prospect of any decisions being made on the EFSF, the ESM or on lowering the interest rate on the bail-outs provided to Ireland and Greece. According to Bild, Angela Merkel may be prepared to accept an extension on Greece’s loan, from the current three years. From Germany’s perspective, it remains unwilling to discuss these measures unless it can get Europe’s fiscal miscreants shoe-horned into its competitiveness pact, which is, frankly, totally understandable given Germany’s role as Europe’s paymaster. Unfortunately, the gap between the rich and poor in Europe is just getting wider. As a result, the probability of agreement is actually getting slimmer.
ECB puts the boot into Europe’s governments. Some fairly pointed comments from the ECB in its latest Monthly Report, where it essentially chastises the fiscal consolidation efforts of some eurozone governments. Quite rightly, the ECB wants to see eurozone governments ‘specify ambitious and concrete policy measures in their multi-year adjustment programmes, so as to underpin the credibility of their fiscal consolidation targets’. ‘At the same time, it is crucial that substantial and far-reaching structural reforms be implemented in the euro area to strengthen its growth potential, competitiveness and flexibility’. This sounds like an implicit endorsement of Angela Merkel’s competitiveness pact, which attempts to bind Europe into exactly that. Although there will be extensive discussions on Merkel’s pact today, most of Europe is unfortunately just not ready to accept these demanding changes. In European affairs, it is always best to assume disappointment.
US trade deficit jumps 15% in January. January’s much larger-than-expected US trade deficit of $46.34bn reflected a 5.2% surge in imports which, interestingly, had virtually nothing to do with the higher oil price. Capital goods imports rose by 5.3% in the month, automobile imports were 14% higher and industrial supplies were up by 8%. Exports were not too shabby, up 2.7% in the month. What these figures do suggest is that domestic demand in the US started 2011 in good shape. These figures are another manifestation of the more durable nature of the US economic recovery.
Looking Ahead
Today: UK: NIESR PPI Output Prices, February (previous 1.0% MoM and 4.8% YoY); CAN: Net change in employment, February (previous 69.2K); US: Retail Sales, February (expect 0.6%, previous 0.3%); Business Inventories, January (expect 0.7%, previous 0.8%).
Monday: EC: Eurozone Industrial Production, January (previous -0.1% MoM and 8.0% YoY).
Tuesday: FR: CPI, February (previous -0.2% MoM and 1.8% YoY); UK: DCLG House Prices, January (previous 3.8%); EC/GER: ZEW Economic Sentiment, March (previous 29.5/15.7); US: Empire Manufacturing, March (expect 16.0, previous 15.43); Import Prices, February (expect 0.8% MoM, previous 1.5%); Net Long-term TIC flows, January (previous $65.9bn); NAHB Housing Index, March (expect 17, previous 16); FOMC Meeting (no change expected in Fed funds, currently 0.25%).
Wednesday: IT: CPI, February f (expect 0.2% MoM and 2.1% YoY); UK: Change in Jobless Claims, February (previous 2.4K); ILO Unemployment Rate, January (previous 7.9%); EC: Eurozone CPI, February (previous 2.4%); US: MBA Mortgage Applications; Housing Starts, February (expect 575K, previous 595K); PPI, February (expect 0.6% MoM, previous 0.8%); Current Account, Q4 (expect -$109bn, previous -$127bn).
Thursday: US: CPI, February (expect 0.4% MoM, previous 0.4%); Initial Jobless Claims; Industrial Production, February (expect 0.6%, previous -0.1%); Capacity Utilisation, February (expect 76.5%, previous 76.1%); Leading Indicators, February (expect 0.9%, previous 0.1%); Philly Fed, March (expect 29.0, previous 35.9).
Friday: GER: Producer Prices, February (previous 1.2% MoM and 5.7% YoY); EC: Trade balance, January (previous -€2.3bn); IT: Industrial Orders, January (previous 5.4% MoM); CAN: CPI, February (previous 0.3% MoM).
Source: Bloomberg
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