U.S.: Markets mostly negative this morning but showing some improvement over yesterday’s drop. In its FOMC meeting yesterday, the Fed reported that the economic recovery is on a “firmer footing” while it made no mention of the current turmoil in Japan. The Fed acknowledged an increase in commodity prices, but qualified them as temporary. In our opinion, the Fed appeared more hawkish than in the last meeting in January, especially given the circumstances. The usage of the stronger language, however, does not foretell any significant change in our opinion, but rather should serve to shift the market focus even more towards jobs data. Mortgage applications for last week dropped 0.7% v +15.5% the week prior. Housing start figures later this morning, estimated at 566KE v 596K prior, will provide an additional perspective on the country’s “depressed” housing sector as the Fed referred to it yesterday. PPI is expected to grow 0.7%E MoM v 0.8% MoM prior, following the rise in core goods prices in recent CPI figures. Consensus estimates for the current account deficit for 4Q10 are at $110.0BE v $127.2B prior.
Europe: Moody’s cut Portugal’s long-term government bond rating two notches to A1 from A3 and maintained a Negative outlook. The move is not a surprise given the country’s rising borrowing costs. Portugal today sold €1.0B in 12M bills at 4.331% v 4.057% prior with b/c at 2.2x v 3.1x prior. Germany’s three month moratorium on nuclear facility expansion and operational suspension of the country’s seven oldest power plants sent prices for EU carbon permits soaring. Euro-zone CPI grew 2.4% YoY and 0.4% MoM in February, putting pressure on the ECB to take action on rates although the economic effects of Japan’s earthquake will complicate the decision. Additionally, Italian headline inflation in February grew in line with consensus estimates at 2.1% YoY and 0.2%E MoM. Spanish labor costs fell -0.3% YoY in 4Q10 v -0.3% YoY prior. UK employment figures for February showed improvement with jobless claims were -10.2K v +1.3KE and 2.4K prior, with ILO Unemployment reaching 8.0% v 7.9%E and 7.9% prior, and unemployment claimant count similarly up to 4.5% v 4.5%E and 4.5%prior. G8 foreign ministers were unable to create a no-fly zone over Libya yesterday and were torn on the utility of military involvement. The French foreign minister chalked up the failure to Russia, China, and America’s indecisive position. Meanwhile, as anti-government protests continued, Bahrain declared a three month state of emergency yesterday. Along with the declaration came a second unit of military support from neighboring Gulf nations and a Fitch ratings downgrade from A- to BBB on the country’s long-term sovereign debt. Bahrain closed its stock market today and CDS spreads widened significantly.
Asia: The Nikkei 225 finally saw a rebound yesterday, moving up 5.7% after its biggest two day fall in over twenty years. Nevertheless, the threat of nuclear disaster lingers and investors are demanding higher premiums on the country’s debt. Japan sold ¥1.1T in 20Y JGBs today at 2.13%, steeping the curve. S&P sees Chinese expansion slowing in 2011, forecasting GDP 9.1-9.6% with CPI in the 4.3-4.8% range. PBOC household inflation expectations weakening. February data indicate that money supply and lending activity have slowed, with lending down almost 50% from January’s flows.
From Brian Yelvington at Knight Capital