One Minute Macro Summary - Overestimating Support

U.S.:  Markets down this morning after Japan's earthquake last Friday that sent shockwaves through the global economy.  Friday’s comments from the NY Fed President, William Dudley, indicated that QE2 will proceed as planned even though tomorrow’s FOMC meeting may show a more optimistic economic outlook.  The statement, along with PPI and CPI for February due out later in the week, will be closely watched.  We still believe that the Fed is unlikely to change its language to a more hawkish stance at this juncture.  Capitol Hill remains divided on the budget this week as Congress’s spending authority ends at the end of this week. A failure to reach a compromise on cuts or even another stopgap bill by then would close nonessential government services.

Europe:  Over the weekend, EU leaders drafted an update for the current sovereign rescue fund, creating a proposal two weeks ahead of schedule. The new package widely resembles German Chancellor Angela Merkel’s compromising proposal announced last Thursday. The revised bailout fund would maintain the originally intended size of €440B and would have the ability to buy government debt in the primary market, but to ECB President Trichet’s dismay, it still cannot purchase bonds in the secondary market.  Countries wishing to utilize the bond buying capabilities will have to agree to an austerity program.  It is not clear how the contribution levels might change, but for the EFSF to maintain its AAA rating, the contributions from the core AAA countries of Germany and France will likely have to increase.  The deal also lowered interest rates on the Greece’s current rescue loan as well as future bailout loans.  Despite the rally on the news, we are still negative on the situation and believe that further, more permanent measures will eventually have to be put in place.  Worth noting is that the debt maturities of the periphery – at the treasury level alone – total €488B for the rest of 2011.  Basel III moved a step forward last week, as reports revealed that the banking supervision committee agreed on creating an ever-changing list of banks essential to the world’s economy so that they face stiffer capital surcharges. Portugal announced additional budget cuts on Friday that did little to quell markets as spreads widened. The Portuguese Finance Minister told reporters that he intends to wait through March’s EU summits before deciding to accept an EU bailout saying “I don’t think it’s worth suffering in advance.”  ISDA lists a general interest inquiry to the Credit Derivatives Determinations Committee regarding a possible trigger event on Irish CDS with respect to the acceptance of IMF loans submitted Friday.

Asia:  The Nikkei 225 plummeted to its lowest point in two years as the damage due to Japan’s recent earthquake became realized. The Bank of Japan injected ¥15T ($183B) into money markets this morning to maintain financial stability within Japan’s economy, while boosting asset purchasing capability to ¥40T from ¥35T to head off a likely decline in business sentiment. Reports put Japan’s insured earthquake losses at $14.5-35B, excluding tsunami-related losses. As a leading global consumer, Japan’s weakened state will likely affect commodity prices and its main trade partners. Although Australia’s second largest export market is Japan, the Australian press reported that its companies are not exposed to Japan’s recent disaster. Japan’s industrial production grew 1.3% YoY v 2.4% prior in February, showing an already declining economy before the disaster. China’s M2 money supply grew 15.7% YoY v 17.0%E and new Yuan loans totaled 535.6B v 600.0BE, reflecting recent the PBOC’s monetary policy adjustments.

From Brian Yelvington of Knight Capital


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