Week in Review-March 4th

The EUR continues to outperform the dollar as investors interpret the ECB’s view to oil price shocks as inflationary events requiring a tighter monetary policy, in contrast to the Fed and the BOE, who are focusing on the deflationary impact. Trichet has followed in the hawkish footsteps of his coworkers and plied the EUR with enough ammo to dominate the non-inflationary Bernanke effect. The ECB will take the fight to inflation, maybe as early as next month. With the Libyan situation showing little signs of improvement and with the sovereigns continuing to weigh on the dollar, safe heaven trading strategies are the only option in this current environment. Below, we have some of the highlights of the week.

EUROPE

• Fine Gael wins Irish election and is in coalition talks with Labour. Victory will give them a clear mandate to try to renegotiate its EU/IMF bailout package.

• Euro area January CPI was revised down to + 2.3%, y/y from flash estimate. Core-CPI was also a tenth below consensus. Market continues to see elevated risks of a hawkish shift from the ECB.

• Euro manufacturing PMI’s continued to surprise to the upside, with particular strength in Ireland and Italy, driven by the forward looking components. Greece remained the weak spot amongst the periphery. Euro area was left unchanged at 59.

• Swiss PMI and 4th Q GDP showed surprised strength. GDP grew +0.9%, q/q, while the PMI bounced to 63.5 (highest level in six-months). Strong external demand from Germany and Asia is pulling the economy along despite CHF overvaluation. No hawkish rhetoric is expected at this months SNB meeting.

• UK PMI was flat last month, 61.5. New orders moderated, but employment hit a fresh high of 61.7 from 59. The 2011 releases show a solid recovery in the UK manufacturing sector in 1st Q and supports the hawkish camp at the MPC. King continues to send distinctly dovish signals that ‘raising rates to make a gesture is self defeating’. Market is pricing a hike in May.

• UK services PMI fell to 52.6 from 54.5, m/m. Analysts view the softness as more of a technical reversion to trend after the weather-induced volatility in December and January.

• Euro-zone registered strong increases in services (56.8) and composite PMI’s (58.2) for February, but below the preliminary estimates. Strong services gains were driven by France and Italy. The peripheries saw substantial gains in Ireland and Spain. Services PMI’s coupled with the firm manufacturing PMI’s point to robust growth in the Euro region.

Americas

• US consumers are hoarding their stimulus. Consumer spending disappointed with a +0.2% gain. Offsetting this disappointment is income jumping +1%, more than double the expected pace.

• Strong proof for the US housing markets weakness was pending home sales falling for a second consecutive month in January (-2.8% to 88.9). Even the revisions went deeper, with December falling into negative territory (-3.2%) from its original positive print (+2%).

• February’s Chicago PMI print of 71.2 was the highest reading in 23-years, led by a surge in production to 78.2 from 73.7. This release is hot on the heels from the January ISM manufacturing index, and the Empire and Philly Fed surveys for February and providing more proof that manufacturing is picking up in the 1st Q, in part on a need to build inventories.

• Surprisingly strong Canadian 4th Q GDP of +3.3% vs. +3% expected and an upward revision to the 3rd Q print to +1.8% from +1% pushed the loonie to new three years high outright.

• US January ISM numbers expanded at its fastest pace in seven-years (61.4 vs. 60.8), as factories added workers and pumped up production, continuing the momentum for their expansion.

• US construction spending fell for a second-consecutive month in January (-0.7% vs. -1.6%). Builders have had trouble getting finance and even with the tighter credit conditions, demand for credit in some places remains weak.

• Bernanke will not be tightening monetary policy until he is more confident that US recovery can stand on its own. ‘Once we see the economy is in a self sustaining recovery and employment is beginning to improve and labor markets are improving and inflation is stable and approaching +2% or so….at that point we will begin withdrawing’. That being said, he is aware of the risk that the Fed will act too slowly and allow inflation to get controlled.

• The BoC held rates steady at +1%. Governor Carney expressed his concern about the strength of the loonie ‘the export sector continues to face considerable challenges from the effects of the persistent strength in the Canadian dollar and Canada’s poor relative productivity performance’. The new reality is a Canadian dollar at or close to parity as the economy adjusts to this paradigm.

• ADP Private Payrolls rose +217k last month, up from a revised +189k.

• Fed’s Beige Book suggests that overall ‘economic activity continued to expand at a modest to moderate pace in January and early February’ and that price pressures are increasing. All the districts recorded ‘solid’ growth in manufacturing and retail sales increased in all districts.

• US weekly claims fell by -20k to +368k, the lowest level in nearly two-years. The less volatile four-week-moving-average now stands at +388k.

• US ISM non-manufacturing was not much of a surprise, coming in at 59.7 last month, just above market expectations. However, it’s the strongest reading since August 2005. The headline print is proof that the service growth appears to be finally entering a ‘self-sustaining’ pattern.

• US job market rebounded last month, unemployment rate fell to 8.9%, lowest level in two-years. NFP rose +192k as private sector added +222k new jobs. The January number was revised to show an increase of +63k from a previous estimate of +36k. The Fed still expects unemployment to range from +7.5% to +8% at the end of 2012 as the economy only slowly regains the 8.75m jobs lost.

• US January factory orders reported a strong +3.1% increase. The mixed data (strong non-durables and weak durables) remains consistent with strength in the above manufacturing surveys.

• Canadian Ivey PMY continues to express extreme volatility rising to 69.3 last month from 41.4 in January. The correlation between PMI and total remains weak. Market perhaps should be looking at a six-month average.

ASIA

• NZD Confidence rose to 34.5 last month – a seven-month high – from 29.5 in January.

• Japan industrial output rose a weaker-than-expected +2.4%, m/m (+4% expected). Retail sales (seasonally adjusted) rose +4.1%, m/m, vs. +2.7%. Manufacturing PMI rose for the fourth-consecutive month to 52.9 in February, with the new orders and export orders again rising significantly. JPY remains very much a play on the US rate outlook and risk aversion trading strategies.

• Chinese PMI data provided little excitement and little new information. Headline was in line with expectations at 52.2 in January. Analysts are calling for growth moderation and do not expect a change in monetary policy from Beijing any time soon.

• Dovish comments from New Zealand’s PM Key this week. He said that a RBNZ rate cut priced in by markets for March was in line with his expectations given the economic impact of the recent Christchurch earthquake. Market is pricing a 25bp RBNZ cut on the 10th March.

• Australian 4th Q GDP was weaker than expected +2.7%, y/y vs. +2.8%. The data still point to higher policy rates and AUD appreciation medium term. Analysts continue to anticipate a strong positive uplift this quarter despite severe flooding and cyclones. The RBA noted that mildly restrictive rates are appropriate. Do not expect them to get too far ahead of the RBNZ.

• Australia reported a -15.9%, m/m, fall in building approvals in January. Market continues to look beyond January data severely impacted by the floods.

• China’s non-manufacturing PMI fell to 44.1 last month from 56.4 and inline with seasonal patterns. The PBoC hiking 1-year lending, deposit rates +25bp and reserve requirement +50bp in February has also weighed on consumer sentiment.

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