Recap 3-8-12

Main Items:

  • US Initial Jobless Claims increased to 362k last week vs 352k exp and 351k prev.
  • ECB kept policy unchanged as expected. Draghi noted upside risks to inflation, as the ECB staff’s midpoint projection for inflation increased from 2.0% to 2.4% for 2012.
  • MPC kept policy unchanged as expected
  • BoC kept policy unchanged as expected
  • Brazil cut the SELIC rate by 75bps to 9.75% vs 50bps exp in a 5-2 vote. There is market speculation that the BCB acted mainly to stem the BRL appreciation
  • RBNZ kept rates on hold as expected
  • Greek results will be announced tomorrow at 6am GMT. The market expects them to have the minimum to at least enact the CACs. BBG reported that ~85% of bonds have been submitted for tender.
  • The Fed’s Flow of Funds report for 4Q showed the first increase in household debt since the great recession, driven by student loans. Nonfinancial business borrowing continued to increase quickly.

Overseas:

  • Australian Employment declined -15.4k in Feb, driven by part time employment, vs 5k exp and +46.3k prev. This increased the Unemployment rate to 5.2% as exp vs 5.1% prev
  • Japan Eco Watchers Outlook survey improved to 50.1 in Feb vs 47.1 prev
  • Swiss CPI declined to -0.9% in Feb vs -1.0% exp and -0.8% prev

Upcoming Data:

  • Fri: PSI results announced, US Payrolls (210k is expected)
  • Tues, 3/13: FOMC, BoJ

Commentary:

Over the past couple of years, Initial jobless claims have had a seasonal tendency to flat line around this time of the year. Looks like we are getting that again:

Regarding the various central bank statements today,
1) It looks like the ECB is done easing for now, versus expectations of another cut. Given the amount of liquidity out there, however, that doesn’t mean Euribor futures are mispriced, although the upside here is limited barring another substantial growth scare.
2) The BoC statement remained fairly non committal, but the price action in BA futures was telling. What was more surprising to me was that the BoC continued to NOT acknowledge the minimal slack in the economy. As the following chart of Canadian capacity utilization shows, as of 3Q11, the Canadian economy was operating just below the 15 year average level. The number for 4Q next week is likely to show a number at or just below that level.

This, along with the continued references to the strong exchange rate suggests that the BoC’s ‘neutral’ rate is probably mobile and tied to the US Fed funds rate. Now that further cuts have been priced out of the BA curve, along with the pricing in of some amount of term premium, current BA levels are probably much closer ‘fair’ than they were a couple months ago.
3) The surprise Brazil cut helped weaken the BRL some, but the ultimate effect may actually be further strength, as growth and asset prices responds to the low real rate. The Bovespa is up 18% YTD and 24% in USD terms, but still only trades at a forward P/E of 10.9x. And the global grab for yield will probably continue until the Fed starts talking about hiking. Thus, the BRL move looks like a fade once momentum tops out OR we get a growth scare.
4) Brazil is likely not going to be the only EM to use CB policy to manage its currency. As a result, the best way to play global reflation may be via EM equities & bonds, rather than currencies.
5) Though the MPC decision didn’t surprise, there may be juice left in long end gilts. The rationale is that the EU continues to face difficult fiscal headwinds, but the ECB’s inflation-only mandate will make it less sensitive to them. As a result, Gilts may be a better way to play further EU weakness going forward.

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