ECB Maintains Its Hawkish Stance

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Includes: EWU, FXB, FXE, IEV
by: John Phillips

In the newspapers, the Financial Times wrote overnight that Energias de Portugal  [EDP.PO] plans to pursue an IPO for up to 25% its renewable energy unit. According to the Financial Times Deutschland Deutsche Bahn [DBHN.GE] plans to sell its 18% stake in Arcor to Vodafone (NASDAQ:VOD) for about €330M.  The Financial Times wrote overnight that Blackstone Group (NYSE:BX) may seek to invest in distressed commercial properties.

In energy news overnight, Venezuelan President Chavez says that oil markets are well supplied, noting that the country does not have plans to nationalize any more companies. Chavez added that Venezuela would like to continue selling oil to the US. The Wall Street Journal overnight looked at a plan that would give federal regulators oversight of energy markets. The measure is part of the farm bill that the Senate passed on Thursday. Traders cited the move to close the so-called Enron Loophole as a factor behind today's trading in energy markets. Under the government’s plan, the CFTC will consider trading volumes and whether contracts are being used to establish a price reference for other contracts; The plan also requires traders to maintain audit trails by supplying reports on any large trades to the CFTC, imposes record-keeping requirements and forces electronic exchanges to monitor trading behavior and prevent manipulation. Lawmakers are also mulling proposals to increase margins on energy futures. The Enron Loophole bill does not give authority to regulators for oversight of foreign trading on US terminals The Wall Street Journal wrote overnight that oil refiners are starting to focus on diesel fuel production over gasoline.  Goldman Sachs raised its 2H WTI oil price forecast to $141/barrel from $107/barrel

In fixed income related news overnight, the German DIW research institute raised Q2 GDP growth forecast to 0.5% from 0.4%, noting that growth of 2.0% in 2008 is not unrealistic. According to the Berliner Zeitung Germany's IWH think-tank plans to raise its economic growth forecast for 2008 to about 2%. Recall that on 3/18 the think-tank cut its 2008 German GDP growth forecast to 1.5% from 1.7%. The Wall Street Journal noted overnight that central bankers in the US and UK are paying increasing attention to the way Libor is calculated. According to the article, in recent days officials at the Fed have been in contact with London traders who play a role in setting Libor. The Danish Central Bank raised their key interest rate by 10bps to 4.35%, leaving the discount rate unchanged at 4.00%. The central bank cited the recent weakening of the Danish Krone for the unscheduled policy decision. In a different move, but with similar motives, the Icelandic central bank announced a €500M swap facility with the Norwegian and Swedish central banks overnight. Both moves come as the respective currencies are under pressure amid general market uncertainty.

In currencies the USD continued to consolidate among the majors with EUR/USD holding in a 1.5430 to 1.5530 consolidation range. Dealers continued to note the relationship of the US-German 2-year notes for general sentiment of the USD. The yield spread widened a bit and kept the USD from extending its three-week winning streak against the Euro. The CHF was firmer in the session, thanks to greater than expected Swiss retail sales data. The USD/CHF was lower by 50 pips to 1.0520 and EUR/CHF cross dipping back towards the 1.63 area.  The JPY was off its best levels following the better GDP data for Japan release during the Asian session. The USD/JPY probed the 104.00 areas, before consolidating. The EUR/JPY was at its best levels as ECB members continued with their hawkish speak on inflation and was aided by firmer equity markets. The commodity related currencies are also firmer with USD/CAD retesting below parity at 0.9980.

In central bank speak overnight, the Fed's Mishkin said that it is too early to draw conclusions on housing prices, noting that monetary policy should not prick bubbles. The EU's Almunia said that we need to be prudent as difficulties lie ahead, adding that EMU economy is more resilient than previously expected. Almunia said that April inflation in line with commission forecast, and reiterated that he sees upside risks on inflation.  The ECB's Trichet reiterated the typical block of comments that he and other ECB members have made over the past few months noting that medium term price stability has to be permanently insured. Trichet added that credibility is not a given, asserting that ECB has to be credible at all times. Trichet noted that CPI may deviate from the ECB’s goal due to shocks, and said that inflation expectations must remain anchored.  The ECB's Constancio said overnight that there is no risk of a recession in Europe. The ECB's Mersch said inflation risks are to the upside, adding that current rates will help to curb inflation. Mersch said that he sees economic growth slowing "slightly" in Q2.

On the data front, preliminary first-quarter wages in France rose to their highest level since records began with a reading of 1.1%. Records for the second-tier data reading began in Q2 of 2001. In Switzerland, adjusted real retail sales for the month of March rose to their highest y/y level since April of 2006 at 9.7%. The Danish Central Bank raised their key interest rate by 10bps to 4.35%, leaving the discount rate unchanged at 4.00%. The central bank cited the recent weakening of the Danish Krone for the unscheduled policy decision.

Looking ahead, the April housing starts and building permits are due out in the US ahead of the equity market open, and will be followed shortly thereafter by the release of the preliminary May University of Michigan confidence indicator. On the earnings front it will be a slow day, with Abercrombie & Fitch as the only notable due out this morning.

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