Is this the relative calm before a storm? As we descend on this mid-week, event risk should begin to heighten while investors ponder over the outcomes of the BoJ, ECB and BoE in the next couple of trading sessions. If that is not enough for them, there is always U.S. job numbers this Friday to test one's current market conviction. As expected, yesterday’s gains in U.S. factory orders eased some worries about U.S. growth, keeping U.S. Treasury prices down for most of the day and allowing the yield curve to shift a tad higher. Since then, investors have maintained caution ahead of other key U.S. data.
There is growing market expectations of some reaction from the ECB given the weak PMI's, rising fragmentation risks on the back of developments in Cyprus and slowing money supply growth. The market seems split on Draghi's potential reaction to how the eurozone economy is actually performing. He is expected to acknowledge banking sector risks and perhaps appear more confident on the economy than investors expect. The market is leaning to no rate cut – the bar is currently set to high at the moment – there should be some latitude for discontent on this front.
So far this morning, the single currency has tried to spark into life during the mid-European trading session, especially so after the eurozone March CPI print came in at +1.7%, its lowest in nearly two-years and after a run of Cyprus headlines hit the wires. The headline slowdown was in line with expectations and most likely reflects the slacking of energy prices year-over-year. This ease in inflation should aid euro policy makers in their decision making without fear of stoking higher prices near-term.
Just as we head to the open of the North American session, Cyprus and the IMF have agreed a +EUR1b lifeline that will supplement the +EUR9b in aid that it will get from its euro partners. Yesterday, the Cypriot government agreed terms of the bailout with troika and replaced its finance minister. The island nation is expecting to receive its first bailout tranche in early May. The country will be charged an interest rate of +2.5% for its loans but will receive a 10-year grace period on repayments.
There is a saying for nearly everything and the fixed income trader lives in fear of a “Spring Swoon”- a historical demand for U.S. Treasuries this time of year. They are concerned that short-term data has been somewhat inflated and if so, then there is a necessary demand for some product. However, this market will be expected to keep their powder dry until NFP - allowing interest rates or yields to “just flutter” ahead of Friday’s payroll release. Be weary, U.S. Treasuries have a few central banks decisions and rhetoric to contend with before the payroll release.
Yesterday, the loonie was off to the races, appreciating to a new 5-week high, until gold prices decided to take an ugly trip south, tumbling in excess of $20, triggering multi-stop losses on its way down to a new weekly-low ($1,570). The yellow metal's failed attempt at reaching the markets 50-day expected moving average in the latter-half of last month ($1,620+) has convinced the masses that the advance for the commodity from the February/March base to have been a temporary countertrend move.
Although not widely followed amongst analysts, the RBC Canadian manufacturing PMI (49.3) for last month fell under 50, proof of contraction for the Canadian economy for first time in two years. The reason for the drop was attributed to uncertainties about the impact of the U.S. sequestration that would have weighed on demand for Canadian exports. However, this should prove only temporary, especially so if one buys into the new U.S. growth scenario and North American job situation. The dollar with the loonie is again been seen, from various sectors of the globe, as a good Tier II reserve currency. If the U.S growth scenario rings true, association for North American demand could drag the CAD higher.
Soon we will get to see if the “right” people were chosen for their respective jobs at the Bank of Japan. This yen market has been living on Abenomic hype for six-months and now it is time for policy makers to deliver. For most of this week, the market has seen short yen position profit taking, with a percentage of the marketplace somewhat nervous that new BoJ Governor Kuroda will not be bold enough. He needs to convince the public that he has the tools and “outside the box imagination” to take Japanese inflation back to the +2% target that they have set for themselves. With the Nikkei and USD/JPY off their highs this week goes some way to highlight the market's nervousness that no “big-bang” is coming from the BoJ officials. At the very least, officials will have to expand bond buying (JGB’s longer than 3-years) and an open-ended commitment to expanding their balance sheet. Will officials be able to do enough to counter the +$85b QE a month from the Fed?
What about the 17-member single currency that was woken from its early slumber? Surprisingly, profit-taking demand appeared sub-1.2800 in spite of the event risks already highlighted. Russian and Asian Central Bank top picking has met with strong U.S. and German bank bids, however, option expiries are seen to contain the trading near term – large 1.2850, 1.2825 and 1.2800 strikes should keep most things rather tight short term.
In the U.S, the ISM Non-Manufacturing Index is expected to hold steady in March, matching February’s 12-month high of 56.0 (historically consistent with real GDP growth between +2.5% and +3.0%). The market expectation for the ADP employment change is +200K, a slight uptick from last month’s +198K. Any divergence and we can expect a NFP estimate readjustment.