One Minute Macro Update - A Notch Down for Spain

U.S.: Markets in negative territory this morning on the combination of Spain’s credit rating downgrade and an increase in oil prices linked to Libyan President Qaddafi’s airstrike against his country’s own oil export centers yesterday. The U.S. budget remains in limbo as the Senate rejected both a Republican and a Democratic plan yesterday, showing that some compromise is necessary for the budget to move forward. Note that the government’s spending authority ends on March 18. Trade balance figures to be released this morning are expected to show a larger deficit for January at -$41.5BE v -$40.6 prior, owing to the increase in the price of oil imports. Treasuries rallied yesterday as European risk became more apparent. Today’s initial jobless claims are estimated to increase slightly to 376KE from last week’s 368K, the lowest level in nearly three years.
Europe: Spain’s credit rating was lowered one notch to Aa2 by Moody’s earlier this morning due to the country’s high interest expense of approximately €50B that has exceeded government projections of €20B. Despite Spain’s significant fiscal reforms, the rating agency also put Spain’s outlook to negative. China’s largest rating agency, Dagong, lowered Portugal’s credit rating one notch on the basis of weak economic growth and uncertain fiscal reforms, putting its rating below that of S&P. The downgrade comes after Portugal’s 2Y debt auction posted likely unsustainable yields. Greece spreads jumped on the ratings news and Italy sold €3.5B in 3M bills at 1.034% v 0.683% prior with b/c at 2.42x v 2.63x prior and €7.5B in 12M bills at 2.098% v 1.862%. Despite the growing debt situation, the ECB said this morning that governments have yet to show a commitment to fiscal reforms – adding fuel to the fire and pushing SOVXWE out to 188bp. With tomorrow bringing the EU summit on the ongoing debt crisis, the statement provides a reminder that a rescue plan is not the only piece of the puzzle of sovereign financial reform.  Tomorrow’s summit is likely to bring another band-aid, but not a sustainable end to the issues.  Markets seem weary of the roller coaster and we expect wider wides and wider tights as the year progresses.  Today the Danish Economy Minister will meet with the EU’s financial services head to discuss the Basel Committee on Banking Supervision’s definition of covered bonds. The BOE kept interest rates at the same record low, hoping that the prospect of economic growth outweighs inflation pressures.  Irish CPI rose 2.2% YoY v 1.9%E while Danish CPI inflation ticked up 2.7% YoY v 2.8%E. In manufacturing production, the UK beat expectations with an increase of 4.4% YoY v 4.2% E.
Asia: New Zealand’s central bank lowered its cash rate 50bp to 2.5% yesterday to accommodate struggling GDP growth and earthquake disaster recovery. The country’s high level of commodity based exports allows it to cut rates despite rising inflation, a sharp contrast to other countries in the press recently. China’s trade balance released yesterday, moved to -$7.3B v $4.9BE. However, given the Chinese holiday calendar, February’s balance figures are typically not as strong.

From Brian Yelvington of Knight Capital


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