One Minute Macro Update: Downgrade Bonanza
Overview: Markets mostly positive this morning ahead of the ADP Employment numbers and despite sovereign ratings downgrades for Greece and Portugal yesterday.
U.S.: Housing figures continue to disappoint as MBA Mortgage Applications today showed a decrease of -7.5% for the week v 2.7% prior. Challenger Job Cut figures for March came in at -38.6% YoY v +20.0% prior. ADP payroll figures estimated at 208K additional jobs will also preview this month’s labor market as the anticipation for Friday builds. This estimate is compared to February’s 217K that exceeded market expectations and put the market into frenzy over the Friday release. All indications point to today’s release showing some traction and we tend to take the over on the 208K consensus. Yesterday’s consumer confidence of 63.4 v 65E disappointed the Street, but as we noted yesterday, this was not a total surprise given recent commodity price spikes and a still downtrodden housing sector. In an interview last night, President Obama showed confidence yesterday in the effectiveness of sanctions and U.N. military action against the nearly defeated Libyan leader Qaddafi. The President also noted that the U.S. may support Libyan rebels through the provision of arms. Luckily the speech did not interfere with “Dancing with the Stars”…
Europe: Yesterday S&P cut Portugal’s sovereign debt rating for the second time this week to BBB- from BBB and Greece’s rating from BB+ to BB-, with Portugal left on negative outlook and Greece left on watch negative. The decision centered on both countries’ unsustainable debt levels and inevitable draw on the EFSF as well as the agency’s rather dim view of the future ESM. We agree with the less-than-rosy-view of what one client has wittingly termed “the new new new new final comprehensive liquidity solution to the solvency problem.” The IMF appeared peeved by the announcements as a report published yesterday highlighted that ratings news adds to the region’s instability. Portugal will also have to revise their deficit figures to Eurostat after an accounting irregularity. With bank stress test coming up in April and the bad news continuing, we feel the agencies will have no choice but to continue their downgrade trend and that spreads remain too tight relative to risks. Fitch noted this morning that the summit results are unlikely to ease new term financing conditions for the periphery. Euro Zone consumer confidence in March continued to be hit by the region’s sovereign debt troubles and held steady at -10.6 v -10.6E. Ireland’s unemployment rate reached 14.7% in March v last month’s 14.7% revised up from 13.5%. German inflation remained at its two-year high in March, with preliminary HICP at 0.5% MoM v 0.6% prior and 2.2% YoY v 2.2% prior. Spanish inflation also remained elevated high in March, with HICP increasing 3.3% YoY v 2.4%E. These levels provide further support for Trichet’s proposed ECB rate hike. Retail sales in Spain fell again to -4.8% YoY v -4.7% prior on a real basis. The Bank of Spain also revised up its 2011 jobless rate to 20.7% for 2011 and 20.4% in 2012. Portuguese retail sales dropped 4.6% YoY v -7.1% prior revised down from -5.3%. Portuguese industrial production figures were more optimistic at +0.9% YoY v -0.7% prior and +1.5% MoM v -3.7% prior, although levels remain low.
Asia: Asian stocks on the rise after Japanese manufacturers resumed production for the first time since the earthquake earlier this month. The Chinese press is reporting that the PBoC may raise RRR 6 more times this year to add onto the 3 adjustments made already in 2011. The Chinese leading index pushed up slightly to 101.05 v 101.04 prior. New Zealand building permits fell 9.7% MoM v -1.0%E and erased last month’s +9.1%. South Korean real GDP in 4Q10 grew 0.5% MoM v 0.5% prior and 4.7% YoY v 4.8% prior. Preliminary figures for Japanese industrial production showed +0.4% MoM v -0.1%E, though these figures are pre-earthquake. Radiation concerns continue to grow in Japan as Iodine levels in seawater close to the nuclear power plant show abnormally high iodine levels. Japanese farmland will tested for radiation and will be complete in the next few weeks.
From Brian Yelvington of Knight Capital
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