Week in Review-Feb 25th

Despite the dramatic global events unfolding, Capital Markets are exuding remarkable calm. Will investors focus on the negative global sentiment or be guided by strong hawkish comments from the ECB next week? The EUR has outperformed the dollar for most of this week as investors interpret the ECB’s view to oil price shocks as inflationary events requiring tighter monetary policy, in contrast to the Fed and the BOE who focus on the deflationary impact. The EUR’s ability to outperform is likely to be limited by re-emerging peripheral stress in March. With the Saudis opening their oil tap, Putin capping gas prices and month-end dollar requirements, are trying to push the EUR towards the low-end of its weekly range. Next week will be dominated by Cbank rhetoric. Below, we have some of the highlights of the week.

EUROPE

• German preliminary February manufacturing PMI (62.6) registered a new all time high since inception five years ago. The German Ifo Business climate also managed to post another all-time high (111.2), again further proof why Germany is the backbone of the Euro-region.

• German local elections administered a thumping to Merkel’s party, perhaps an expression of extreme dissatisfaction with her governments’ support of a PIIGS rescue.

• ECB’s Mersch stated that the ECB might revise its language on inflation to a more hawkish stance in next week’s meeting.

• UK public finances showed a strong improvement in January with public sector net borrowing at -£5.3bn, well below the -£0.3bn expected and the -£0.4bn reported in January last year. It was driven by very strong tax receipts.

• It was a 6-3 home win at the MPC minutes meeting. As expected, Spencer Dale joined Sentance and Weale in asking for a hike in rates amid the growing inflationary environment in the UK. The away team is gathering support for GBP as many now expect the committee to begin a tightening bias as early as May.

• In the UK, the CBI distributive sales dropped to 6 in February from 37 in January vs. the consensus forecast for 28. The weak result may reflect the negative impact from the VAT rise in January.

• In the quarterly CBI survey expected prices rose from 42 in November to 74 in February (the highest level since March 1991). A similar trend is also evident in the price expectations of the manufacturing and household sectors from the CBI industrial trends survey and the European Commission consumer price expectations survey.

• In Germany, GDP grew 4%, y/y in the 4th Q. Consumer spending rose +0.2%, q/q, bringing the y/y growth to +1.4% (highest in two-years).

• UK 4th Q GDP reading was revised lower to -0.6%, q/q from the advance estimate of -0.5%. It’s believed that cold weather in December reduced growth by -0.5%. The implied GDP contraction of -0.1% is a poor result and may convince the hawks at the MPC to wait for firmer evidence that the economy is growing again before hiking.

• Swiss KOF reported a strong 2.18 read this month (2.06). This may suggest that the Swiss economy might be starting to adjust to a stronger CHF or that the benefit of very strong performance in other European economies is beginning to outweigh FX effects.

• General elections take place today in Ireland and markets are widely anticipating a change of government. Fine Gael is expected to lead a coalition government with the opposition Labour Party. A bullish response for the EUR would be a standalone Fine Gael government, with support from independent MPs.

Americas

• The US S&P/Case-Shiller 20-city price index fell -2.4% last year. Analysts note that prices had been rising in the earlier part of last year until the end of the federal tax credit incentive.

• The CB said its index of consumer confidence jumped to 70.4 this month from a revised 64.8 in January. The CB revised all its indexes back to November to reflect a new methodology.

• Canadian headline sales fell -0.2% in December. The only positives that are lining up for the month are coming through net trade and wholesale trade. All other influences upon December GDP growth over the prior month are negative and that include real manufacturing shipments, housing starts, and hours worked.

• US home sales rose last month (+5.36m vs. +5.22m), though a drop in the median price, close to a nine year low, is strong proof that the market continues to search for a bottom. The share of sales represented by foreclosures and other distressed properties climbed to a 12-month high. Considering the weak macroeconomic conditions, shadow inventories and tight mortgage availability, one can only be cautious in the expectations of the US housing sector.

• Aircraft orders gave US durable goods a huge lift in January (+2.7%), adding 4% to the headline. Digging deeper, the durable goods details were mixed with a sharp upward revision to December (+2.1%). The erratic swings reflect the difficulty of capturing seasonal movements around quarter-ends.

• US ‘new’ houses fell more than expected last month, declining -13% to a +284k annual pace. To date, there has been no recovery in housing starts, permits or new-home sales. Having a 9% unemployment rate and tight credit standards will have the construction industry firmly on the back foot for most of this year.

• US Initial claims filed last week fell (-22k), more than expected to +391k, below the psychological +400k benchmark. This is the third time in the past two-months. The total number of claimants in all programs, not seasonally adjusted, fell -90k to +9.1m (-19.6%, y/y).

• US grew +2.8% in the 4th Q, slower than previously calculated and less than forecast as state and local governments made deeper cuts in spending.

ASIA

• Kiwi fell foul to a devastating 6.3 magnitude earthquake in Christchurch. The rates market has slashed the pricing for RBNZ rate hikes over the next 12 months. Market is beginning to price in costs through fiscal channels rather than monetary as the situation is localized in Christchurch, similar to the flooding in Queensland.

• Moody’s changed Japan’s credit rating outlook from stable to negative

• Governor Stevens delivered a speech on the mining boom. ‘At the risk of sounding like a broken record, the rise in Australia’s terms of trade over the past five years is the biggest such event in a very long time’.

• Australian wage growth accelerated in 4th Q (+1%), adding to the risk of future inflation.

• Australia’s CAPEX (Capital/Expenditure) survey was line with RBA Stevens’ comments this week, which is supportive of higher yields and structurally higher AUD currency. Private capital expenditure was up +1.3%, q/q in 4th Q. There was a significant upward shift in expectations, with firms expecting to spend an additional AUD$50b over the next year (+38%, y/y).

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