One Minute Macro Update

U.S.:  Markets in positive territory this morning. NY Fed President William Dudley said yesterday that unless inflation expectations are significantly surpassed, short-term interest rates will remain low, while also adding that no change in current monetary policy is likely. In contrast, St. Louis Fed President James Bullard said yesterday in an interview that the Fed will finish QE2 without full dispensation. The statements reflect the heating debate over the future of the current stimulus program.  Economic events today include ISM, which by all preliminary indicators should print ahead of the 61.0E.  Such a high print might well set the stage for a front end selloff, which we would use as an entry point as we do not believe the historical relationship between ISM and overall GDP growth will hold owing to the fact that ISM will be more bolstered by large sized exporters that are neither the trough of the economy, nor the path it will take back.  Additionally today features Fed Chairman Bernanke’s Humphrey Hawkins testimony.  Today’s Senate Banking Committee portion is usually calmer than tomorrow’s House Financial Services Committee schedule, but we expect the usual grandstanding from legislators and for Bernanke to be cautiously optimistic regarding the economy, but defensive about monetary policy.  The market has in the past interpreted commentary regarding potential exit strategies as being indicative that those strategies are about to be employed, therefore we think Bernanke will avoid that discussion as best he can.  If he does not, however, we believe that as with the ISM above, the front end should be bought up on a selloff. 
Europe:  Portuguese Finance Minister Teixeira said yesterday that the government may use additional measures to meet its deficit/GDP goal of 4.6% in 2011 and also indicated that financial markets do not want to see the country ask for aid. The statement coincides with market expectations for S&P to review its decision made last November to lower the country’s credit outlook to negative. Euro zone unemployment dropped to 9.9% versus market estimates matching January’s 10.0%. German employment rate was 7.3% v 7.4%E, the lowest level in 20 years. PMI manufacturing index for in at 55.7 v 55.3E for France, 59.0 v 57.3E for Italy, and 61.5 v 61.0E for the UK.  SOVXWE tightened back up to 175bp this AM with Spain leading the charge on its current account and the rest of Europe looking quite inflationary.  All this serves to pressure the ECB to hike later in the week.  Although we do not have the conviction to trade ahead of the meeting, we would fade the future subsequent hikes if they were to hike given the still-elevated debt problems and uncertainty in the Eurozone.  
The U.S. Treasury department reported yesterday that China’s holdings of U.S. treasuries totaled $1.16T, up 30% from the department’s original estimate two weeks ago. China’s PMI Index decreased to 52.2 from 52.9 in January, the third monthly fall, while input prices rose to their highest level since November 2010. The releases reflect China’s effort to control growing inflation. Meanwhile, New Zealand’s finance minister praised rising commodity prices this morning as a way to help the country recover from last week’s earthquake that caused NZ$15bn in damages. Exports make up approximately one third of New Zealand’s output.