The challenges to the Euro seem to be mounting from the sovereign debt and potential banking system contagion perspective, but the market continues to merrily snap up the Euro on the latest hawkish chatter from the ECB and a fresh high in the CPI today. Can the single currency continue to defy gravity?
The fence around the PIGs?
Euro traders have apparently built quite the PIG-wire fence around the situation in Portugal, Ireland and Greece. As the situation in these three countries sees little improvement in terms of moving toward a resolution of their sovereign debt issues and Portugal teeters toward a default, traders seem to be shrugging their shoulders and only focusing on the latest wrinkle in the ECB rate outlook and probably also today’s CPI estimate for March. We’ve had a number of ECB officials out yesterday and today talking up the higher course for ECB rates in coming months and next Thursday’s hike appears to be a done deal. The year-forward expectations are now pushing 126 bps, according to a Credit Suisse index of central bank expectations. By comparison, Fed expectations are at around 45 bps.
Euro traders have apparently built quite the PIG-wire fence around the situation in Portugal, Ireland and Greece. As the situation in these three countries sees little improvement in terms of moving toward a resolution of their sovereign debt issues and Portugal teeters toward a default, traders seem to be shrugging their shoulders and only focusing on the latest wrinkle in the ECB rate outlook and probably also today’s CPI estimate for March. We’ve had a number of ECB officials out yesterday and today talking up the higher course for ECB rates in coming months and next Thursday’s hike appears to be a done deal. The year-forward expectations are now pushing 126 bps, according to a Credit Suisse index of central bank expectations. By comparison, Fed expectations are at around 45 bps.
For those of us a bit more worried about the risk of contagion from the PIGs and into the European banking system, there is this Bloomberg article to consider on whether an Irish bond haircut could risk shutting funding for Italy and Spain. This risk is nowhere near being priced into the Euro, as the market still assumes that the situation will somehow resolve itself well – judging from the action in EURUSD, EURGBP and EURJPY.
Today, the Irish bank stress tests will see the release of the capital amounts needed to prop up the Irish banks (expectations running around EUR 20 billion). Some estimates of what the bailout for Ireland will cost taxpayers run into the EUR 65 billion range. On a per capita basis, that would be like the U.S. taxpayer being forced to bailout U.S. banks to the tune of about USD 5 trillion. It is a patent absurdity. Our question for the longer term: why, why, why does Ireland want to keep the Euro? The only way it will do so in the longer run is if it restructures this now national debt that stems from these banks’ bad loans from the bubble days. And the restructuring will need to be more than a haircut – more like a removal of the head and torso as well.
Fed talk
The market shrugged off follow-up comments from the St. Louis Fed’s Bullard late yesterday, who suggested again (after Saturday comments) that ending QE2 ahead of time should be considered, and might be viewed as an “important signal” rather than making any large impact in the market. The outgoing (in October, he is also a non-voter) KC Fed president Hoenig burnished his hawkish reputation by lambasting current Fed policy and partially blaming it on the world’s commodity price spike and the risk of aggravating new bubbles. He said the natural U.S. rate was two percent. It appears we need to see the Fed chairman himself talk the hawkish talk before we see the market tip its hat at the credibility of the Fed and the USD.
The market shrugged off follow-up comments from the St. Louis Fed’s Bullard late yesterday, who suggested again (after Saturday comments) that ending QE2 ahead of time should be considered, and might be viewed as an “important signal” rather than making any large impact in the market. The outgoing (in October, he is also a non-voter) KC Fed president Hoenig burnished his hawkish reputation by lambasting current Fed policy and partially blaming it on the world’s commodity price spike and the risk of aggravating new bubbles. He said the natural U.S. rate was two percent. It appears we need to see the Fed chairman himself talk the hawkish talk before we see the market tip its hat at the credibility of the Fed and the USD.
Odds and ends
U.K. GfK Consumer Confidence remained at last month’s level at -28 rather than seeing an expected further decline to new recent lows. The Nationwide survey showed March confidence at the lowest level since the beginning of the survey in 2004, while the older GfK survey saw its lowest reading in July of 2008 at -39.
U.K. GfK Consumer Confidence remained at last month’s level at -28 rather than seeing an expected further decline to new recent lows. The Nationwide survey showed March confidence at the lowest level since the beginning of the survey in 2004, while the older GfK survey saw its lowest reading in July of 2008 at -39.
The Japanese manufacturing PMI out overnight is the first hard evidence of how the tsunami/earthquake has knocked the Japanese economy for a loop. The numbers for April are likely to be worse, unfortunately. And the impact of further evacuations on radiation concerns suggest that the disruption could still be spreading.
The data out of Australia overnight showed Retail Sales slightly stronger than expected and Building Approvals down sharply. Both can be contributed to the after-effects of devastating floods from earlier this year, as the areas of the floods saw the sharpest declines in approvals. Still, the data was far worse than expected and the drop in activity is a strong forward indicator that the Australian housing bubble is in danger of unwinding soon.
Please follow this “copper in China as loan collateral” story that ftalphaville has covered on a number of occasions recently, including in a piece today. This shows how unusual the Chinese banking system is and in particularly, how some key commodity prices are possibly being propped up by this “system”. The implications for Aussie volatility are rather clear if this system ever breaks down, so a long volatility card or two in the pocket might be reasonable.
U.S. Jobless Claims were out “at 6k lower than last week”, but that headline doesn’t show that the 388k number was worse than the 380k expected and that last week’s number was revised sharply up from an original 382k to a revised 394k – so it’s actually a relatively negative data release.
The spiking NZD looks like a result of capital flows from the earthquake rather than any recovery in fundamentals. Consider the drop in the Business Confidence survey in March from 34.5 to -8.7. NZDUSD is on a tear that it can hardly sustain for much longer, but a technical reversal is so far nowhere to be found. One on the way today or tomorrow?
Looking ahead
Our broken record warning for the day is that this is the end of the month/quarter/Japanese financial year and that anything can happen. Also watch out for the release of the stress tests for the Irish banks and the situation in Portugal – which is teetering rapidly toward its own bailout. Tomorrow we have the U.S. employment report and the G20 (likely only a Euro-debt/Japan focus there) this weekend.
Our broken record warning for the day is that this is the end of the month/quarter/Japanese financial year and that anything can happen. Also watch out for the release of the stress tests for the Irish banks and the situation in Portugal – which is teetering rapidly toward its own bailout. Tomorrow we have the U.S. employment report and the G20 (likely only a Euro-debt/Japan focus there) this weekend.
In the meantime, just as we are about to go to press, oil and gasoline prices are spiking higher out of the range of the last several days, possibly on news out of the Middle East. Is this really time to leverage up on the risk trades? We have to imagine that the risk bulls are a bit over-extended here now that we have come full circle in risk markets from the catastrophe in Japan.
Be careful out there.
Economic Data Highlights
UK Mar. GfK Consumer Confidence out at -28 vs. -30 expected and -28 in Feb.
UK Mar. Hometrack Housing Survey out at -0.1% MoM and -3.2% YoY vs. -2.7% YoY in Feb.
Japan Mar. Nomura/JMMA Manufacturing PMI out at 46.4 vs. 52.9 in Feb.
Australia Feb. RP Data-Rismakr House Price Index out at 0.0% MoM
Australia Feb. Retail Sales out at +0.5% MoM vs. +0.4% expected
Australia Feb. Building Approvals out at -7.4% MoM and -21.8% YoY vs. +4.0%
New Zealand Mar. Business Confidence fell to -8.7 from 34.5 in Feb.
Japan Feb. Housing Starts out at +10.1% YoY vs. +7.4% expected and +2.7% in Jan.
Germany Feb. Retail Sales out at -0.3% MoM and +1.1% YoY vs. +0.4%/+1.5% expected, respectively and vs. +2.6% YoY in Jan.
UK Mar. Nationwide House Prices out at +0.5% MoM and +0.1% YoY vs. 0.0%/-0.6% expected, respectively and vs. -0.1% YoY in Feb.
Germany Mar. Unemployment Change out at -55k vs. -25k expected
Germany Mar. Unemployment Rate out at 7.1% vs. 7.2% expected and 7.3% in Feb.
Norway Feb. Retail Sales out at +0.7% MoM and +2.7% YoY vs. +0.5%/+1.3% expected, respectively and vs. +0.4% YoY in Jan.
EuroZone Mar. CPI estimate out at +2.6% YoY vs. +2.4% expected and vs. +2.4% in Feb.
Canada Jan. GDP out at +0.5% MoM and +3.3% YoY vs. +0.5%/+3.1% expected, respectively and vs. +3.3% YoY in Dec.
US Weekly Initial Jobless Claims out at 388k vs. 380k expected and vs. 394k last week
US Weekly Continuing Claims out at 3714k vs. 3705k expected and 3765k last week
Upcoming Economic Calendar Highlights (all times GMT)
US Mar. Chicago PMI (1345)
US Weekly Bloomberg Consumer Comfort Index (1345)
US Mar. NAPM-Milwaukee (1400)
US Feb. Factory Orders (1400)
US Fed’s Lacker to Speak (1430)
US Fed’s Tarullo to Speak (1645)
US Fed’s Pianalto to Speak (1805)
New Zealand Q4 Manufacturing Activity (2145)
Australia Mar. AiG Perfomance of Manufacturing (2230)
Japan Q1 Tankan Large Manufacturer’s Index (2350)
China Mar. PMI Manufacturing (0100)
China Mar. HSBC PMI Manufacturing (0230)
Economic Data Highlights
UK Mar. GfK Consumer Confidence out at -28 vs. -30 expected and -28 in Feb.
UK Mar. Hometrack Housing Survey out at -0.1% MoM and -3.2% YoY vs. -2.7% YoY in Feb.
Japan Mar. Nomura/JMMA Manufacturing PMI out at 46.4 vs. 52.9 in Feb.
Australia Feb. RP Data-Rismakr House Price Index out at 0.0% MoM
Australia Feb. Retail Sales out at +0.5% MoM vs. +0.4% expected
Australia Feb. Building Approvals out at -7.4% MoM and -21.8% YoY vs. +4.0%
New Zealand Mar. Business Confidence fell to -8.7 from 34.5 in Feb.
Japan Feb. Housing Starts out at +10.1% YoY vs. +7.4% expected and +2.7% in Jan.
Germany Feb. Retail Sales out at -0.3% MoM and +1.1% YoY vs. +0.4%/+1.5% expected, respectively and vs. +2.6% YoY in Jan.
UK Mar. Nationwide House Prices out at +0.5% MoM and +0.1% YoY vs. 0.0%/-0.6% expected, respectively and vs. -0.1% YoY in Feb.
Germany Mar. Unemployment Change out at -55k vs. -25k expected
Germany Mar. Unemployment Rate out at 7.1% vs. 7.2% expected and 7.3% in Feb.
Norway Feb. Retail Sales out at +0.7% MoM and +2.7% YoY vs. +0.5%/+1.3% expected, respectively and vs. +0.4% YoY in Jan.
EuroZone Mar. CPI estimate out at +2.6% YoY vs. +2.4% expected and vs. +2.4% in Feb.
Canada Jan. GDP out at +0.5% MoM and +3.3% YoY vs. +0.5%/+3.1% expected, respectively and vs. +3.3% YoY in Dec.
US Weekly Initial Jobless Claims out at 388k vs. 380k expected and vs. 394k last week
US Weekly Continuing Claims out at 3714k vs. 3705k expected and 3765k last week
Upcoming Economic Calendar Highlights (all times GMT)
US Mar. Chicago PMI (1345)
US Weekly Bloomberg Consumer Comfort Index (1345)
US Mar. NAPM-Milwaukee (1400)
US Feb. Factory Orders (1400)
US Fed’s Lacker to Speak (1430)
US Fed’s Tarullo to Speak (1645)
US Fed’s Pianalto to Speak (1805)
New Zealand Q4 Manufacturing Activity (2145)
Australia Mar. AiG Perfomance of Manufacturing (2230)
Japan Q1 Tankan Large Manufacturer’s Index (2350)
China Mar. PMI Manufacturing (0100)
China Mar. HSBC PMI Manufacturing (0230)
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