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  • ECB April tightening looking fairly assured
  • Aussie resilience to bad news
  • SNB comfortable with franc strength
  • Global food prices continue to surge higher

Guest post by  FxPro

There are decent reasons to believe that US jobs data today should come out on the firm side of expectations.   We were initially looking at a 250k rise, but this could easily be surpassed on the basis of subsequent data this week.   The January numbers disappointed, at least on the main headline payrolls (rising just 36k) as the impact of the bad weather took its toll.   In contrast, the fall in the unemployment rate over the past two months (from 9.8% to 9.0%) was the biggest two-month decline since 1958.   As such, whilst markets do react to the data, the numbers don’t actually give much in the way of a clear picture of what is going on in the labour market, not least given the substantial revisions that are evident. Last month, the dollar rallied on the back of the fall in the unemployment rate (calculated on the household survey), so a stronger than expected outcome on headline payrolls does not guarantee a dollar rally.


ECB April tightening looking fairly assured.
The message from Trichet yesterday was that rates are going up in April. Whilst what he actually said was that a rate increase was “possible” and “not certain”, the market took a very different view. This was based on him mentioning that “strong vigilance is warranted” in respect of “containing upside risks to price stability”.   Is it the right thing to do? This all depends on who you ask. For Germany, a modest tightening of rates can easily be accommodated. For the periphery, they need a rate rise like a hole in the head, not least given the ongoing fragility of their banking sectors. In terms of tackling the root cause of high prices, primarily commodity-price inflation from overseas, a small rate increase will have only marginal impact. In sum, the ECB is undertaking a strategy with modest potential for gain, but with large risks.

Aussie resilience to bad news. The Aussie has shown a remarkable ability to weather some minor storms this week. Consider that building approvals slumped 16% in January, PM Gillard has warned that the currency imposes burdens and that there is speculation that New Zealand’s close neighbour – Australia – may be contemplating a 50bp rate cut in coming months.   For the most part the Aussie is still taking its cue from commodity-price developments. Although the Aussie has not really reacted to bad news, at the same time the 1.02 level still seems difficult to penetrate, despite an indifferent display by the dollar. As we have been observing recently, it remains a fascinating tug-of-war involving the Aussie right now. Overnight comments from PM Gillard showed veiled concern for Aussie strength, referencing the burden on some industries from a stronger currency, but the comments weren’t sufficient enough to have a material impact.

SNB comfortable with franc strength. With the economy coping relatively well with currency strength, and higher energy and non-energy prices reducing concerns about deflation, it is little surprise that the Swiss National Bank is more relaxed about the level of the currency. SNB Vice-President Jordan confirmed as much in a speech Thursday morning when he suggested that there was no real need at present for the central bank to consider intervention, and that there was a need to counter inflation risks over the medium to long term.   Of interest over recent weeks is that many policy officials around the world, who had previously been complaining about the adverse effects of excessive currency strength, have gone almost mute. Little wonder: a strong exchange rate can be a great counterbalance to inflation.

Food prices continue to surge higher. The main global food price index (from the FAO) showed its 8th consecutive monthly increase yesterday, with prices surging beyond the peaks seen in 2008.   The impact of this is being seen globally, being a factor in some of the Middle East unrest, pushing headline inflation rates higher in both emerging markets (where food is a much higher proportion of CPI weights) and also in the developed world.

Looking Ahead

Friday: US: Non-farm payrolls, February (expect 195K, previous 36K); Unemployment Rate, February (expect 9.1%, previous 9.0%); Factory Goods Orders, January (expect 2.2%, previous 0.2%).

Monday: US: Consumer Credit, January (expect $4.7bn, previous $6.1bn).

Tuesday: UK: RICS house price survey, February (expect -33%, previous -31%); BRC Sales, February; FR: BOF Business Sentiment survey, February (previous 110); Trade balance, January (previous -€5.1bn); GER: Factory Orders, January (expect 2.5% MoM and 15.5% YoY, previous -3.4% and 19.7%); US: NFIB Small Business Optimism, February (previous 94.1); IBD/TIPP Economic Optimism, March (previous 94.1).

Wednesday: UK: Trade balance, January (previous – £4.83bn); GER: Industrial Production, January (expect 1.5% MoM and 11.1% YoY, previous -1.5% and 10.0%); US: MBA Mortgage Applications; Wholesale Inventories, January (expect 1.0% MoM, previous 1.0%).

Thursday: FR: Industrial Production, January (previous 0.3% MoM and 7.0% YoY); GER: Trade balance, January (previous €11.9bn); EC: ECB Monthly Report; IT: Industrial Production, January (previous 0.3% MoM and 5.4% YoY); UK: Industrial Production, January (previous 0.5% MoM and 3.6% YoY); MPC meeting (expect rates on hold at 0.5%); US: Initial Jobless Claims (previous 368K); Trade balance, January (expect -$41bn, previous -$40.6bn); Bloomberg Consumer Comfort; Monthly Budget Statement, February (expect -$235bn).

Friday: UK: NIESR GDP estimate, February (expect 0.5%); PPI Output Prices, February (previous 1.0% MoM and 4.8% YoY); GER: CPI, February f (expect 0.5% MoM and 2.2% 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%).

Source: Bloomberg