The ISM non-manufacturing index increased to 55.4 in March, remaining in expansionary territory for the third consecutive month following readings of 53.0 and 50.5 in February. Market expectations going into today’s report were for a more modest rise to 53.6.

The ISM non-manufacturing index moved more firmly into expansionary territory in March, rising to 55.4 from 53.0 in February. The March level marks the highest reading for this index since May 2006. Business activity surged to 60.0 from 54.8 in February while new orders jumped up to 62.3 from 55.0 in the previous month. The employment index edged closer to expansionary territory, rising to 49.8 in March from 48.6 in February, its highest level since April 2008. With respect to inflationary pressures, prices paid climbed to 62.9 from 60.4 in February.

Today’s ISM non-manufacturing report follows suit of last Thursday’s ISM manufacturing report by placing the sector more solidly into expansionary territory in March. The strength in both reports is encouraging for the U.S. economy as a whole and provides some upside risk to our view that GDP growth moderated to a 2.5% annual rate in the first quarter of 2010 following the 5.6% inventory-driven surge in the final quarter of 2009. The improvement in today’s employment index follows the sizable jump in Friday’s payroll report and supports our view that labor markets continue to improve; however, the unemployment rate remains elevated and this economic slack will help keep inflationary pressures at bay in the near term, allowing monetary policy to remain highly accommodative until the economic recovery is more firmly established. We continue to expect the Fed Funds target to remain in its current stimulative 0% to 0.25% range into the fourth quarter of 2010.

RBC Financial Group
http://www.rbc.com

The statements and statistics contained herein have been prepared by the Economics Department of RBC Financial Group based on information from sources considered to be reliable. We make no representation or warranty, express or implied, as to its accuracy or completeness. This report is for the information of investors and business persons and does not constitute an offer to sell or a solicitation to buy securities.

U.S. Review

Economic Recovery Continues, but is it Enough?

• Economic indicators this week suggested continued economic growth. Factory orders, the Institute for Supply Management manufacturing index and employment all suggest continued progress.
• Yet the pace of the recovery still presents several fundamental challenges. First, construction spending is disappointing and for a society that has put so much emphasis on housing, there is a disconnect between aspirations and reality. Second, the pace of growth will not likely solve the budget shortfalls in many states or at the national level.

Economic Recovery Continues, but is it Enough?

Three important economic indicators this week suggested continued economic growth. Factory orders, the Institute for Supply Management Index and employment all suggested continued progress on the economic front. Factory orders increased 0.6 percent in February and the gain reported for January was revised higher. Factory orders have gained in 10 of the past 11 months and are now more than a third of the way back to where they were at their peak in July 2008. Specifically, new orders for non-defense capital goods ex-aircraft are up nine percent (annualized) over the last three months, consistent with our expectations for 8 percent or more gains in real equipment & software spending for this year.

Meanwhile, the Institute for Supply Management manufacturing index rose to 59.6 and is consistent with a continued recovery rather than a double-dip recession. Orders, employment and production all suggest a positive growth outlook. Finally, employment rose in March and private sector employment has risen for the past three months. The breadth of the employment gains was also positive in March. There were gains in manufacturing and services with improvement in such cyclical areas as retail trade, leisure & hospitality and temporary help. One downside for jobs is that the mean duration of unemployment remains very high and suggests persistent structural unemployment. With that come concerns about consumer and housing credit.

Yet, the pace of the recovery still represents several fundamental challenges. Moderate economic growth alone does not solve several secular imbalances in the economy. First, construction spending is disappointing and for a society that has put so much emphasis on housing, there is a disconnect between aspirations and reality. Our expectation is that housing purchases will not rebound at a pace that will make many speculative housing starts economically viable. Second, the pace of growth will not solve the budget shortfalls in many states or at the national level. Political promises have outpaced the ability of the economy to deliver. For several years entitlement spending has outpaced the tax base that supports it. Finally, the longer-term budget deficits and our dependence on foreign capital to support them creates a delicate balance of supply and demand that is currently being tested by questions raised about the U.S. commitment to long-term deficit control.

Cyclical Recovery Still Leaves Structural Imbalances

Both public and private decision-makers are left with the reality that a cyclical economic recovery still leaves us with longer-run structural imbalances—many of which have been growing since the 1960s. Economic growth appears insufficient to generate the income needed to meet all the entitlement promises. The latest Congressional Budget Office report on Social Security emphasizes this point. For the private sector, the ability to generate jobs and earnings are being challenged in an economy with slower top-line sales and greater consumer caution. We may be out of the woods but it is still a long journey to Mordor.

U.S. Outlook

ISM Non-Manufacturing • Monday

The ISM Non-Manufacturing Index remained in expansionary territory for the second consecutive month in February increasing by 2.5 points to 53.0. With the exception of employment, all components of the composite index (business activity, new orders and supplier deliveries) contributed to the increase. The recent strength in service sector business activity is consistent with our view that an economic recovery is underway. The forward looking new orders index has been in expansionary territory for seven consecutive months and suggests continued strength in the service sector in the near future. The employment index rose 4.0 points to 48.6, the highest level since April 2008. The employment index will likely push into expansionary territory in March, which is consistent with underlying strength in private sector jobs.

Previous: 53.0 Wells Fargo: 53.5
Consensus: 54.0

Pending Home Sales • Monday

Pending home sales have fallen two out of three months with declines likely due to the weather and a payback from the jump in sales that occurred before the initial expiration of the first-time homebuyer tax credit (initially scheduled to end November 30th). While the extension and modification of the tax credit has yet to spur sales, we expect to see a boost in the months leading up to the second expiration (extended to April 30th for contracts to be signed). All four regions of the country saw declines in January with the West seeing the largest decline. We expect the index to continue to wane in February. The decline in mortgage applications in February supports the notion that pending sales will likely remain weak.

Previous: -7.6%
Consensus: -1.0%

Initial Jobless Claims • Thursday

Initial jobless claims for the week ending March 27th fell by 6,000 to 439,000, the second consecutive weekly decline. On a trend basis, the four-week moving average edged lower to 447,250. Consistent with our view that labor market conditions are stabilizing, we expect claims to continue to decline in coming weeks (especially with improving weather conditions in most parts of the country). While claims are moving in the right direction, the level is still too high to be consistent with sustained underlying strength in payroll growth. We expect temporary census hiring will likely help boost payrolls through May. Thereafter, we should see a retracement in temporary and government employment from June through September. By the fourth quarter, the effects of the census should be behind us and payroll gains should reflect underlying strength in the private sector.

Previous: 439K
Consensus: 433K

Global Review

Signs of Continued Global Recovery in Q1

• The Tankan index of Japanese business sentiment, which is fairly correlated with GDP growth, rose further in the first quarter, and manufacturing PMIs across Asia were strong in March.
• Monthly GDP data suggest that the Canadian economy continued to expand at a strong pace in the first quarter.
• Manufacturing PMIs in Europe also rose further in March. However, strength in “soft” data has yet to translate into robust “hard” data in most European countries.

Signs That Global Growth Strengthened Further in Q1

Data released this week suggest that the global economic recovery, which has been in place over the past few quarters, strengthened further in the first quarter of this year. In Japan, the Tankan index of business sentiment, which is fairly correlated with real GDP growth, rose to its highest level since the near collapse of the global financial system in the autumn of 2008 (see graph on first page). Sentiment among large manufacturers, who tend to be exporters, was the strongest among different sectors. However, the increase in sentiment was broad-based among both manufacturers and non-manufacturers, suggesting that domestic demand also strengthened in the first quarter.

Speaking of Japanese exports, survey evidence indicates that growth in some of Japan’s major trading partners in Asia remained strong in the first quarter. The manufacturing PMI in China rebounded in March after a brief dip during the previous month, suggesting that growth in Chinese industrial production remained strong (top chart). In India and Taiwan, manufacturing PMIs remained well within expansion territory in March.

A marked upturn got underway in Canada in the second half of 2009, and real GDP data for January indicate that the economy is on pace to register another strong quarter of growth in the first quarter (middle chart). In January, real GDP rose 0.6 percent relative to the previous month, which follows the 0.5 percent increase that was chalked up in December. Even if the economy stagnated in February and March, which we do not expect, real GDP in the first quarter will have risen at an annualized rate of about 5 percent. Although exports clearly have played an important role in the Canadian recovery, indicators of domestic demand have been strong as well recently. For example, retail sales in January were up 0.7 percent relative to the previous month, and employment in February stood 0.4 percent above its year-ago level. (By way of comparison, U.S. employment in February was down 2.5 percent on a year-over-year basis.)

Among the major regions of the global economy, recovery thus far has been strongest in Asia and weakest in Europe. However, the manufacturing PMIs for the euro-zone and the United Kingdom strengthened further in March (bottom chart). The PMI in the former jumped to a 40-month high and the index in the latter rose to its highest level since 1994. Service sector PMIs for March will not print until next week, but European and British indices are expected to remain well within expansion territory where they have resided since last summer.

Unfortunately, the apparent strength in the PMIs has not translated into strong economic growth, at least not yet. Real GDP in the United Kingdom rose only 0.4 percent (not annualized) in the fourth quarter, and it was essentially flat in the euro-zone. Although British consumer spending has rebounded somewhat, continental European consumers have no pulse at present. And we fear that the fiscal consolidation that is underway in some of the euro-zone’s former high-flying economies (e.g., Greece, Ireland and Spain) will keep growth in the overall euro area weak for some time.

Global Outlook

German Industrial Production • Thursday

The year-over-year rate of decline in German industrial production (IP) has slowed significantly over recent months due, at least in part, to base effects. German IP has risen 8 percent from its low last April, but remains 17 percent below its peak in early 2008. However, recent increases in survey data (e.g., the Ifo index and the PMI) suggest that German IP rose further in February. Germany also releases data on February factory orders and French IP data will print next week as well.

The European Central Bank holds its monthly policy meeting next week, and there is very little chance of a change in rates at the meeting. Rather, investors will look to the press conference for clues about ECB policy going forward. Due to the sluggish nature of the euro-zone recovery to date (see page 4), we believe that the ECB will keep rates on hold throughout the rest of the year.

Previous: 0.6% (month-on-month change)
Consensus: 0.7%

British Industrial Production• Thursday

As in Germany, the year-over-year rate of decline in British IP has flattened out in recent months. Unlike Germany, however, there has been very little bounce in British industry thus far. British IP is up only 2 percent from its low, and it remains 14 percent below its peak in early 2008. As discussed on page 4, the manufacturing PMI has risen sharply in recent months, so “hard” data should, sooner or later, start to firm as well. Indeed, the consensus forecast looks for a modest rise in IP in February. In addition, a widely followed index of monthly GDP is also slated for release next week.

Like the ECB, there is very little chance that the Bank of England will change rates at its own policy meeting next week. In our view, the upturn in Britain is not quite as tepid as the euro-zone recovery, and we look for a BoE rate hike by the end of 2010.

Previous: -0.4% (month-on-month change)
Consensus: 0.5%

Canadian Employment Report • Friday

Despite the occasional month of contraction, Canadian payrolls have been growing on trend since midsummer 2009. The gain in payrolls reported for February was driven by an increase in manufacturing jobs. Consensus expectations for March payrolls look for an even larger increase. Still, the employment component of the forward-looking Ivey purchasing managers’ index recently slipped to its lowest level since February 2009, suggesting the pace of the recovery in the labor market might slow somewhat in coming months.

Speaking of the Ivey index, we get our next look at that survey on Wednesday of next week. The overall index has been above 50 for eight of the last nine months. However the employment series has been below 50, signaling contraction, for the last several months. An improvement here could lift expectations for future jobs reports.

Previous: 20.9 K
Consensus: 25.0 K

Point of View

Interest Rate Watch

Canary in the Coal Mine

As expressed by Alan Greenspan, rising Treasury interest rates are the canary in the coal mine suggesting danger in the outlook for interest rates. In our December annual outlook for 2010 we posited a pattern of rising interest rates on the benchmark 5- and 10-year Treasury notes. In rebalancing the U.S. economy, we anticipated that both fiscal and monetary policy would have a significant influence on the pattern of interest rates this year. In recent weeks the pattern of fiscal policy has turned negative. First, recent estimates of the future fiscal integrity of Social Security have suggested that the system’s revenues would fall short of spending this year—much sooner than many anticipated. Second, the budget estimates for the healthcare plan do not appear credible to the markets. Future Medicare cuts are unlikely. While mandates have been raised and entitlements broadened, there is likely no reasonable method to pay for these.

Meanwhile for monetary policy, questions have arisen about the ease and extent of the Fed’s exit strategy. Both the composition and the size of the Fed’s balance sheet represent significant issues to the marketplace. Also the Fed’s real commitment to reducing the balance sheet has been in question as several members of the Federal Open Market Committee suggested that the Fed could reenter the market for mortgage-backed securities if problems arose. With the recovery in the first quarter and expectations for further growth, the flight to safety trade that favored U.S. Treasury debt became less attractive. Bond issuance for both high grade and high yield has grown sharply over the last three months. Equity markets have improved. Therefore, the opportunity costs have risen for continued investing in Treasury debt. For the rest of this year our view is that interest rates will continue to rise. We see that investor demand will decline as more attractive alternatives become available. Our concern is that the interplay of policy risks and diminished domestic and foreign demand may create more upside risks to the interest rate outlook than earlier anticipated.

Consumer Credit Insights

Mortgage Rates Still Low… for Now

The Fed’s mortgage-backed securities (MBS) and agency debt purchase programs have helped to keep mortgage rates low for the past year. Even though 10-year Treasury yields have rebounded by about 180 basis points from the December 2008 lows, 30-year conventional fixed mortgage rates have actually declined slightly. The average spread between 30-year fixed mortgage rates and 10-year Treasury yields over the last 15 years has been about 160 basis points, about 40 basis points higher than the current spread, which is still near the lowest in decades. The Fed’s mortgage purchase program however, came to an end this week on schedule and we have already seen some response in the MBS markets where securities declined in value and yields rose on Thursday. Buyers are likely on the sidelines waiting to see how the Fed’s exit affects markets in the coming days. In addition, with signs that the housing market is continuing to struggle and unemployment remaining high, investors are still concerned about mortgage defaults. This will continue to exert upward pressure on rates. Higher mortgage rates will add another headwind, or at least takeaway a tailwind, from a housing market that continues to struggle. In the coming months the housing market is also likely to lose the other major stimulus it has received with the first-time homebuyer tax credit scheduled to expire. The combination will likely hold down sales activity through the summer months.

Topic of the Week

Does Another Debt Crisis Await Argentina?

Argentina has been in the news once again as investors are worried that Argentina may default on its external debt. This speculation is a repeat of what happened during 2008 and 2009, and it seems to be more related to internal political fights than to the current condition of government finances, though government finances have continued to deteriorate. Argentina is still negotiating with holdout bondholders from the 2005 restructuring of its defaulted external debt. Argentina’s access to international financing markets has been closed since the default in 2001, and some investors holding about $20 billion in defaulted debt did not accept the debt renegotiation in 2005.

While we do not expect Argentina to default during the next several years, the seeds of a potential default are being planted today. First, the administration is using stocks to pay for what it owes instead of relying on its cash flow. Second, the government is tampering with inflation numbers to pay less in interest on some part of its current debt. Third, government expenditures are growing too fast for fiscal sustainability, especially if the economy does not make a strong recovery.

The administration has been moving to make a final offer to the 2005 holdouts from the 2001 debt default. According to the Argentine minister of economics, Amado Boudou, the holdouts should expect no more than 35 cents on the dollar. If the holdouts accept this offer from the government, the country will be able to access the international capital markets once again, and will likely be able to find financing rates close to the single digits, much better than today’s rates of 15 to 20 percent. However, if the government runs into trouble obtaining financing in the short- to medium-run, then we should expect a higher inflation tax, devaluation and more confiscatory measures against different productive sectors of the economy. The outcome of these measures will determine how close or how far away another debt default may be.

Wachovia Corporation
http://www.wachovia.com

Disclaimer: The information and opinions herein are for general information use only. Wachovia Corporation and its affiliates, including Wachovia Bank, N.A., do not guarantee their accuracy or completeness, nor does Wachovia Corporation or any of its affiliates, including Wachovia Bank, N.A., assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice, are for general information only and are not intended as an offer or solicitation with respect to the purchase or sales of any security or any foreign exchange transaction, or as personalized investment advice. Securities and foreign exchange transactions are not FDIC-insured, are not bank-guaranteed, and may lose value.

US Bond Yields Highest Since Last June

US 10 year bond yields traded at the highest level since June 2009 reaching a yield of 3.94% last week. The credit crisis sent ten year bond yields to a record lows in December 2008 as investors sought safety in US treasuries and the Federal Reserve lowered the Fed funds rate to a record low. The worst of the credit crisis has passed and bond yields are rising. Are bond yields rising because of optimism about the US recovery or because of concern about rising US debt? The answer to this question may be crucial to the outlook for the USD.

The US government reported a record $221bln monthly budget deficit in February. February marked the 17th straight month that the US government has posted a deficit. The Obama administration is forecasting 1.56trln deficit for 2010. US government deficits are projected at 1trln or more through 2020. Last week the U.S. Congress passed a health reform bill. The estimated cost of the health reform bill is just under 1trln over the next 10 years with the CBO estimating that the reform bill could reduce US budget deficit by close to $200bln in the next decade. Many analysts are skeptical that the health reform bill will reduce the deficit and warn that the health care bill could cost more than the government estimate. This may partly explain why it might not have been a coincidence that US ten year yields hit their highest level since last June after the announcement of the passage of the health reform. Additional deficit concerns include report that the US Social Security administration will for the first time pay out more this year than it takes in and last week the Obama administration unveiled new measures to help the unemployed reduce their mortgage payments. The revamped mortgage plan will expand the administrations $75bln foreclosure relief effort but it’s not clear by how much.

US bond yields have been rising because of weak demand for US bond auctions sparked by increased bond supply and investor concern about the rising US deficit. Last week’s US bond auctions were poorly received with reduced demand from foreign central banks. Ten-year bond yields posted their biggest weekly jump last week since December. The Greek debt crisis, Dubai World debt restructuring and sovereign debt risks in the UK and Japan may have dampened demand for US bonds forcing investors to shine a light on US fiscal troubles. According to the CBO, US debt will rise to 90% of GDP and that the 2011 fiscal budget would generate $10trln cumulative budget deficits over the next 10 years. The rise in GDP debt ratio could weaken US long-term growth outlook and force investors to demand higher yields to buy US debt.

Over the past few months China has been reducing its holding of US treasuries. China and Japan are the two largest holders of US debt. Indirect bidders at last weeks US seven year note auction declined to 41.9% compared to 49.7% in the last four auctions. Indirect bidders include foreign central banks. Diminished demand for US treasuries by foreign central banks could lead to higher interest rates and higher cost for the US funding of its deficits. The function of the market is to discipline governments. The spike in US yields may be the first sign that the US government is spending too much and that the Fed has maintained low yields for too long. At the same time that the US federal government is posting record monthly deficits many US state governments are falling deeper into the red. State governments will be competing with the federal government to raise capital and this could add additional upward pressure to yields and eventually crowd out investors. The US may find it more difficult to fund its debt.

Bond yields may also be rising because of optimism about the US recovery. Although recent US economic data has been mixed, the Federal Reserve Board raised its economic outlook for the US economy and begun laying the foundation for an eventual exit from accommodative monetary policy. Optimism about the US recovery is fueled by report of strong US Q4 GDP. US Q4 GDP grew by 5.6%.Most of the Q4 GDP growth was due to rebuilding of inventories.Q4 consumer spending was weak. The rebound in GDP may not be sustainable without increased consumer spending. US GDP is expected to grow by an average of 3% in 2010. This would be respectable growth but not strong enough to send yields surging because US inflation is subdued. In addition, US equities are trading at an 18 month high. The strength of the equity market rally is seen as further evidence of optimism about the US recovery. This Friday’s release of US March unemployment will be key to investor optimism about the US recovery. The March nonfarm payrolls report is expected to show significant improvement. Fed policy has been closely tied to the US employment outlook. Once jobs growth becomes self-sustaining the Fed is likely to hike interest rates.

A number of analysts expect the recent rebound in the US economy to slow in the second half of the year as consumer spending remains weak, fiscal and monetary stimulus is withdrawn and unemployment remains elevated. If bond yields continue to rise it could add additional risk to the strength of the recovery. The USD is trading at its best level versus Europe in ten months and a two month high versus the JPY. The USD is benefiting from the rise in US bond yields. If yields continue to rise solely because of investor concern about US fiscal outlook and growth slows the USD may experience fresh selling pressure. Note in the graph below that US ten year yields are approaching the high end of the recent range at 4.20%. A break above this level could set off alarm bells about the US deficit. Rising bond yields could become a negative for the USD if yields are rising because the US is borrowing more than it can repay.

Michael J. Malpede,
Easy Forex
http://www.easy-forex.com

Easy-Forex makes no recommendations as to the merits of any financial product referred to in this website, emails or its related websites and the information contained does not take into account your personal objectives, financial situation and needs. Therefore you should consider whether these products are appropriate in view of your objectives, financial situation and needs as well as considering the risks associated in dealing with those products

Greek Bond Sale Successful

Despite ripping higher on the Asian open, EURUSD has spent the rest of the day consolidating between 1.3409 and 1.3508, with the DXY in slightly negative territory overall (DXY -0.35%). German regional and composite CPI data released in the morning was higher than expected with the EU harmonized HICP +0.6% MoM, +1.3% YoY (+0.3% MoM, +0.9% YoY expected). The effect on the currency space has been limited, with the key inflation measure for the Eurozone as a whole due on Wednesday. The only other significant release of the morning was Swedish Retail Sales which was extremely disappointing at -1.0% MoM, +2.3% YoY compared to median forecasts looking for +0.3% MoM, 4.2% YoY. The unexpected plunge in retail activity has understandably caused EURSEK to rally from 9.7400 levels prior to the release all the way up to 9.8000 levels shortly after.

The afternoon has been somewhat subdued with US PCE and Personal Income data coming out broadly in line with forecasts, and US equity markets modestly higher. The Greek sale of 7 year debt has proceeded without incident, with the head of the Public Debt Management Agency quoted as saying that they have now successfully “pre-funded the whole of April”.

Tomorrow’s main releases will be Norway’s Retail Sales, the final estimate of UK Q4 GDP, and US Consumer Confidence.

AC Markets
http://www.ac-markets.com

Disclaimer: This report has been prepared by AC Markets (thereof ACM) and is solely been published for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any currency or any other financial instrument. Views expressed in this report may be subject to change without prior notice and may differ or be contrary to opinions expressed by Salesperson or Traders of ACM at any given time. ACM is under no obligation to update or keep current the information herein, the report should not be regarded by recipients as a substitute for the exercise of their own judgment.

Weekly Economic and Financial Commentary

U.S. Review

Public Policy Grabs Center Stage

• Public policy dominated this week, with the passage of healthcare reform and confirmation the social security system would run into deficit this year contributing to disappointing Treasury auctions and higher bond yields.
• Advance orders for durable goods rose in line with expectations, but a large downward revision to January’s nondefense capital goods orders raises a red flag as to how strong capital spending will be in the first quarter.
• Sales of new and existing homes both declined in February, raising fears the incipient recovery in housing has faltered.

Strange Days in the Credit Markets

The bond market is the ultimate truth detector and its verdict on healthcare reform is the new law will be more costly than the Congressional Budget Office (CBO) estimated and budget deficits will be larger. The bond market was already on edge from the ongoing Greek debt saga and reports that Berkshire Hathaway and a handful of other businesses can now borrow more cheaply than the U.S. Treasury. The CBO confirmed the Social Security system would pay out more in benefits this year than it receives in taxes, something that was not supposed to occur until 2016. The Social Security shortfall means the Treasury will need to redeem the “special issue notes” issued to the Social Security trust fund, which will require the Treasury to sell real bonds, which has become more challenging in recent weeks.

The last few years have seen Treasury yields rise during the spring, triggering a whole new set of challenges. History looks like it will repeat itself this year, with the end of the Fed’s mortgage-backed securities purchases next week adding to the upward drift in yields. The supply of bonds coming to market will remain a challenge, with additional money needed to pay Social Security benefits and recapitalize Fannie Mae and Freddie Mac. Sovereign credit risk and worries about growing supply also extend to municipalities, which saw yields climb sharply recently.

Rising interest rates will make it hard for the housing recovery to gain momentum. The latest numbers are clearly troubling, although anecdotal reports from builders and Realtors are not nearly as pessimistic as February’s home sales were. New home sales fell to a new all-time low in February, falling 2.2 percent to 308,000. Builder sentiment also remains near all-time lows but builders are reporting some improvement in sales and buyer interest. On a net basis, housing is likely modestly stronger this year than last year. Supply remains a big issue, with a 9.2-month supply of new homes currently available for sale.

The harsh weather had less of an impact on existing home sales, which fell 0.6 percent in February. Single-family sales fell 1.4 percent, while condominium prices posted a slight increase. Maybe all that cold weather up North boosted the attractiveness of all those vacant condos in South Florida. The inventory of homes available for sale rose to an 8.6-month supply, as more homes are put up for sale in anticipation of the key spring home buying season and the expiration of the tax incentives.

The unusually prolonged drawdown in inventories has set off a strong cyclical recovery in parts of the factory sector. Advance orders for durable goods posted a 0.5 percent gain in February with January’s numbers being revised higher. Big gains in orders for machinery appear to be driving the overall increase. New orders for nondefense capital goods, excluding aircraft, rose 1.1 percent in February, but the previous month’s decline was a percentage point worse than first reported and now shows a 3.9 percent drop. The downward revision should cause forecasters to pull back their estimates for first quarter economic growth and may also signal a weaker trend for capital spending in general for 2010.

U.S. Outlook

Personal Income and Spending • Monday

Personal income is expected to advance at a moderate 0.2 percent pace in February. Aggregate income data from the February employment report proved disappointing, falling 0.2 percent on the month. This should continue to weigh on the wage and salary growth component of income. Personal consumption expenditures are expected to rise a more tepid 0.2 percent in February, after strong gains of 0.5 percent in January. Unit vehicle sales dropped 2.0 percent in February, which will be an important factor behind the somewhat slower trend in overall consumption spending. The chain PCE price index should continue to point toward slowing consumer inflation. Headline PCE is expected to be unchanged in February, reducing the year-0n-year growth rate to 1.8 percent. Fears of inflation forcing the Fed’s hand on interest rates appear overplayed at the moment.

Previous: 0.1 percent Wells Fargo: 0.2 percent
Consensus: 0.2 percent

ISM Manufacturing • Thursday

Regional manufacturing surveys for March suggest that manufacturing expansion remains firmly in place as we close out the first quarter. The rapid recovery in global trade, combined with the end of aggressive inventory cutting in the United States, is helping to boost manufacturing production at a healthy pace despite still-sluggish final demand growth from consumers and businesses. The March ISM index is expected at 56.7. This is a slight improvement from February’s 56.5 reading, but still below January’s 58.4, which marked the highest level since August 2004. The Chicago Business Barometer and Philadelphia Fed index both improved in March, though the Empire index moderated, suggesting a somewhat mixed picture on production gains in March. These ISM manufacturing levels are consistent with 6 to 7 percent industrial production growth on an annualized basis.

Previous: 56.5 Wells Fargo: 56.7
Consensus: 56.5

Employment • Friday

For March, we are finally expecting to see a positive net non-farm payroll print. The payroll report for February was encouraging in this regard: it revealed only a modest 36,000 net job loss in a month plagued by winter storms, suggesting the U.S. economy is on the verge of positive employment growth. A strong monthly boost from Census Bureau hiring should be the catalyst that finally pushes the payroll change into positive territory. The unemployment rate is expected to hold steady at 9.7 percent, though re-entering job seekers could still push the unemployment rate slightly higher in the months to come. Look for additional gains in working hours and hourly earnings to confirm the firmer labor market tone. Jobless claims remain stubbornly high, pointing to a weak underlying trend in private employment growth, and consumer confidence stumbled in light of labor market uncertainty.

Previous: -36 K Wells Fargo: 177 K
Consensus: 150 K

Global Review

The Argentine Economy Surprises on the Upside

• The Argentine economy grew by 2.6 percent during the last quarter of 2009 compared to the same period a year earlier, and by 0.9 percent for the whole year.
• The most important contributor to last year’s GDP performance for the Argentine economy was the collapse of imports.
• Government consumption increased by 7.7 percent during the last quarter of 2009 compared to the same period a year earlier, and rose 7.2 percent for the year as a whole.

The Argentine Economy Surprises on the Upside

According to the INDEC, Argentina’s statistical institute, the country’s economy grew by 2.6 percent during the last quarter of 2009 compared to the same period a year earlier. This result followed two consecutive negative quarters when the economy dropped by 0.8 percent and 0.3 percent in the second and third quarters, respectively. The fourth quarter growth helped the economy to avoid a negative performance during the whole of 2009 by posting an annual growth rate of 0.9 percent. Interestingly enough, the economy’s performance during the last quarter of the year was boosted by very strong personal consumption expenditures, which increased by 2.9 percent after dropping by 1.8 percent and 0.7 percent during the second and third quarters, respectively. However, personal consumption expenditures increased by only 0.5 percent during the whole of 2009.

The most important contributor to last year’s Argentine GDP performance was the collapse of imports. Imports of goods and services plunged by 19.0 percent in real terms during the year, while exports of goods and services dropped by only 6.4 percent. Thus, the strong drop in imports helped the economy prevent a deeper recession during the year as imports are a subtraction to GDP. On the other hand, the second most affected sector during 2009 was gross fixed investment, which dropped by 10.2 percent during 2009, the worst performance since the 2001-2002 financial crisis when gross fixed investment collapsed by a cumulative 52.1 percent in real terms.

Another contributor to growth during the year was strong government consumption. Government consumption increased by 7.7 percent during the last quarter of 2009 compared to the same period a year earlier, and rose 7.2 percent for the year as a whole. Thus, the Fernández-Kirchner administration continued to support economic growth through very strong fiscal policy at a time when fiscal revenues continued to dwindle due to the effects of the worldwide recession. Government consumption during 2009 was stronger than during the previous year even though the Argentine economy grew by 6.8 percent during 2008.

This is one of the reasons why many analysts are wondering if this policy is sustainable, considering that the Argentine government has been an international “pariah” and has not had access to international capital markets since the country’s default back in 2001. Many are wondering how long will it take for the country to default on its debt again if it cannot continue to finance its increased expenditures.

So far the administration has been able to “find” domestic financing through several measures that have captured increased revenues, but the situation is getting tougher, fundamentally because the government has lost the majority in the Argentine Congress and it is becoming more difficult to bypass the institution to continue the spending spree.

Global Outlook

German Unemployment • Wednesday

Despite the deep German recession – real GDP contracted nearly 7 percent between early 2008 and early 2009 – the unemployment rate in Germany has barely risen. However, the unemployment rate understates the weakness of the German labor market because many workers have been put on “short shifts” (i.e., hours worked have been reduced). The consensus forecast anticipates a small increase in the number of unemployed workers in March when the data print on Wednesday. Preliminary CPI data for March are expected to show few inflationary pressures in Germany at present.

Other data will offer further insights into the current state of the Euro-zone economy. Italy releases unemployment and CPI data as well next week. In addition, the sizeable increases in the Euro-zone PMIs that were reported in March are expected to be confirmed by final data next week.

Previous: 8.2%
Consensus: 8.2%

Canadian GDP • Wednesday

Like its large neighbor on its southern border, the Canadian economy has grown for the past two quarters after enduring a painful recession. Canada is alone among major countries that provide GDP data on a monthly basis, and data that are slated for release on Wednesday are expected to show the economy continued to expand at a strong pace in January. If the consensus forecast is realized, then the Canadian economy would be on pace to register an annualized growth rate in excess of 4 percent in the first quarter of 2010.

Data on raw material and industrial prices are also on the docket next week. Although prices of raw materials have risen significantly over the past year, the Bank of Canada is not likely to raise rates anytime soon because the core rate of CPI inflation remains very benign (i.e., only 1.3 percent in January).

Previous: 0.6% (month-on-month change)
Consensus: 0.5%

Japanese Tankan Index • Thursday

The quarterly Tankan survey that is conducted by the Bank of Japan is widely watched by investors. Not only does it contain a treasure trove of data on the Japanese economy, but the “headline” index, which measures sentiment among large manufacturers, is fairly correlated with real GDP growth. If, as expected, the “headline” index rises further, then investors will infer that the year-over-year growth rate in GDP in the first quarter rose into positive territory for the first time in two years.

Monthly data for February will offer further details about the present state of the Japanese economy. The consensus forecast looks for a small drop in industrial production last month, which, if realized, would be the first decline in IP in a year. Data on retail spending, the labor market and housing starts are also on the docket next week.

Previous: -24
Consensus: -14

Point of View

Interest Rate Watch

Cyclical Rise in Rates Reinforced by Structural Deficits.

Over the last few weeks the typical cyclical pattern of rising interest rates has become more obvious. Improved economic activity tends to be associated with rising credit demand. With each economic recovery, the demand for credit tends to increase as firms raise their expectations for stronger final sales. Meanwhile, on the credit supply side, the opposite pattern starts to emerge as the Federal Reserve begins to withdraw liquidity. For now, many investors appear to anticipate that the Federal Reserve will maintain its accommodative policy for the rest of this year. This may be true for the politically sensitive federal funds rate but behind the scenes the risk is that the cost of funds is likely to rise while longer rates will also rise as the Fed reduces its role in the Treasury and mortgage backed security markets.

Structural Deficits Reinforce the Cycle

In the last two weeks the long-run outlook for U.S. fiscal deficits has deteriorated for two reasons: Social Security and healthcare. Recent estimates suggest that the Social Security fund will experience spending outflows in excess of revenue inflows this year – much earlier than prior estimates. This suggests the entitlement problems that were anticipated with the retirement of the baby boom generation are coming earlier than many expected.

Meanwhile, the budget implications of healthcare have become more visible. First, there is lots of skepticism on the ability of future Congresses to really enforce cuts in Medicare. Second, there are very few elements in the healthcare bill to control costs.
Research done at the Federal Reserve suggests that it is expected future federal deficits that influence interest rates today. Financial markets are forward-looking and the outlook is not good. This outlook is reinforced by the understanding that much of the Federal deficit in the last year has been purchased by the Fed and Asian buyers – two buyers that the markets are less confident about going forward.

Consumer Credit Insights

ABS Slowdown May Hinder Spending

During the credit boom, issuance of asset-backed securities (ABS) soared, peaking at $1.2 trillion in 2006. Since then, ABS issuance has fallen off a cliff, with a mere $177.4 billion being issued in 2009, a whopping 86 percent decline from the peak. While the year-to-date total through March 2010 of $27.9 billion is 42 percent above the same period in 2009, issuance through the rest of the year will have to largely match the last nine months of 2009 in order for 2010 totals to surpass 2009.

Unfortunately, that may not happen. After rebounding from a scant $600 million in October 2008 to $26.4 billion in September 2009 as investors’ risk appetite returned, ABS issuance has slowed to just $9.2 billion in March 2010 as investors have turned cautious again. Following the cash-for-clunkers surge in fall 2009, auto ABS issuance has been cut in half. Credit card issuance has fared even worse as no securities have been issued in two of the last three months, leaving the three-month moving average at just $370 million versus about $8.0 billion last summer. Furthermore, the Fed’s assistance is waning as ABS holdings via the TALF have actually declined since December.

Over the last couple years, consumer spending growth has been closely linked to ABS issuance, lagging it by about six to nine months. Thus, the recent slowing of ABS issuance suggests consumer spending growth could remain sluggish as we head into the summer.

Topic of the Week

A Few Brief Comments on Healthcare Reform

The financial markets appeared to have already priced in passage of the healthcare bill before last weekend. Our early assessment is that, while there is a great deal of cost shifting taking place, the bill that passed was less onerous than many had feared. Unfortunately, the history of massive social spending programs is that they tend to grow larger and larger over time. Moreover, the scoring by the Congressional Budget Office (CBO), which shows the program costing $940 billion and reducing the deficit $138 billion over the 2010 to 2019 period, was based on a strict interpretation of the bill as it was written. The costs will likely be higher than the CBO estimate and the budget deficit will also likely be larger. Savings from Medicare cutbacks will likely be harder to achieve. Moreover, the extended phase-in of the program will likely lead to incessant political pressure to expand benefits and scale back the tax hikes. The healthcare bill will have relatively little impact on economic conditions over the near term as most of the provisions will not take effect for a couple of years.

There is little evidence the new healthcare law will hold down the price of healthcare. Healthcare costs have been rising faster than the overall inflation rate for about as long as can be remembered. The driving force for this increase has been the aging population, which has resulted in increased demand of healthcare services and a lack of market discipline in the healthcare marketplace. Most costs are paid indirectly either by insurance companies or the government. This leads to over-consumption and little to no price sensitivity.

The higher tax rates on investment earnings will draw more investment dollars into tax avoidance projects and lead to modestly lower investment throughout the economy. Likewise, the new tax on medical devices and pharmaceutical companies could lead to reduced profitability and thus less innovation and product development.

Please visit our website for the full report.

Wachovia Corporation
http://www.wachovia.com

Disclaimer: The information and opinions herein are for general information use only. Wachovia Corporation and its affiliates, including Wachovia Bank, N.A., do not guarantee their accuracy or completeness, nor does Wachovia Corporation or any of its affiliates, including Wachovia Bank, N.A., assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice, are for general information only and are not intended as an offer or solicitation with respect to the purchase or sales of any security or any foreign exchange transaction, or as personalized investment advice. Securities and foreign exchange transactions are not FDIC-insured, are not bank-guaranteed, and may lose value.

Consumer Prices in United Kingdom Unexpectedly Decline

Today, we have full support that inflation is indeed inline with the Bank of England expectations as Governor of the central bank, Mervyn King stated before that the rise in inflation rates is temporarily and a result of APF program, higher energy prices and the reversal of the VAT.

CPI for the year ending in February today we saw ease from the 14-month high of 3.5% to 3.0% which is lower than the projected 3.1% while on the month rose to 0.4% from the prior decline of 0.2%, which is worse than the expected 0.5%.

The decline in prices was mostly led from gas bills and toys, prices in the nation are still pressured from the economic downswing while unemployment rates remain high, therefore weighing on consumer spending.

Core CPI yearly, which excludes food and energy prices slipped to 2.9% from 3.1% which is also lower than the forecasted reading of 3.1%.

As inflation had spiked to a 14-month high had forced Mervyn King to write an open letter to the Treasury stating why inflation was above the upper limit of 3% set by government, in which he stated it was temporarily, while the central bank projections the effects of the recession will surely weigh on prices and cause inflation to fall below 2%.

The quarterly report released by the central bank, showed that prices are presumed to continue climbing in the upcoming months, which is why the bank continued to pause the APF program worth 200 billion pounds for the second month.

Also released today was RPI for February at 0.6% higher than the prior flat reading and lower than the predicted 0.7% while on the year stood unchanged at 3.7%, worse than the predicted 3.8%. RPI excluding mortgage installment payments, on the year fell to 4.2% from 4.6%, which is lower than the expected 4.3%.

The rise in prices lately was not a sufficient reading as it was led from reversal of the VAT cut to 17.5% from 15%, while also the weak pound pushed inflation higher in the nation, and of course as mentioned the higher energy prices.

The biggest business lobby in the UK, the Confederation of British Industry (CBI) yesterday said that a recovery in the nation will be "slow and sluggish" as a result of lower spending occurring in the nation, while the nation to expand 0.3% in the first quarter and 0.4% in the second quarter. GDP to rise 1% this year and 2.5% next year.

The attention in the UK is on tomorrow’s annual budget report, as the government is going to try to cut spending while increasing income, as a way to narrow the swelling budget deficit, which is undermining growth prospects.

Prime minister Gordon Brown, has to do a lot as a way to gain popularity among Britons ahead of upcoming elections, which is why this budget report will show if he is doing all he can to shore economic growth in the nation while at the same time lower government spending.

Ecpulse

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The Week Ahead

Highlights

• Greek denouement looms
• RBI hikes, more coming from others
• SNB pulls the rug out from under EUR/CHF
• March 24 UK budget will be critical in pre-election positioning
• CAD–To parity and beyond
• Key data and events to watch next week

Greek denouement looms

FX markets continue to fluctuate broadly in recent ranges, turning with every twist in the ongoing Greek drama. Risk saw higher in the beginning of the past week as EU leaders appeared to be in agreement on a plan to provide an aid package to Greece. Then the German government indicated it could not legally support such a plan and that Greece should seek aid from the IMF, sending EUR/USD and most other risk assets lower into the end of the week. Then on Friday, EU Commission President Barroso confused matters further by advocating a standby financial aid mechanism of coordinated bilateral loans from Euro-area countries. The immediate Greek drama may be entering the final act, though, as next week’s EU summit is likely to see a definitive resolution one way or the other. If European leaders fail to reach an agreement, it will look very bad for Euro-area cohesion, exposing the fiscal vulnerabilities of other members now seen to be on their own, and likely see the Euro suffer as a result.

In the end, Greece will be bailed out, whether by the EU, the IMF, or some combination of the two, and we think the risk of a Greek debt default remains remote. Even though its last bond auction was well oversubscribed, Greece is facing unsustainably high borrowing rates and a package is needed to lower Greece’s borrowing costs and give the austerity plan time to work, otherwise a high cost debt-spiral would ensue. Once an aid package is resolved, we would expect some of the tempest to subside and for the EUR to stabilize and potentially recover. Given that EUR/USD has moved back to the lower end of the recent range, we would prefer to be buyers of EUR/USD while its holds above the key 1.3430/50 level. A daily close below that level, however, would suggest that the market was not in agreement with us and we would have to reckon with weakness down to 1.3200/50 initially.

From the charts, this past week’s price action mostly highlights downside potential ahead. Attempts to rally in EUR/USD, GBP/USD, XAU/USD and AUD/USD, all look to have been rejected, and the US dollar index has posted a weekly bullish engulfing line. But until the ranges break, fading the ranges (buying dips/selling rallies) still seems the most viable trading strategy.

RBI hikes, more coming from others

The Reserve Bank of India caught markets flat-footed on Friday with an inter-meeting rate hike of 1/4%, its first rate hike since July 2008, and the RBI indicated it would need to do more. The move itself was not unexpected, just the timing. But it should serve as a reminder that central banks globally are in the process of monetary tightening for those doing well (emerging markets mostly, maybe Canada–see below) or removal of extraordinary liquidity measures for those limping along (the G7). The PBOC, China’s central bank is widely expected to raise again its required reserve ratio, further restricting credit in China and potentially undercutting the global recovery. The Fed is also expected to further normalize (raise) the discount rate again before its next meeting. In most cases, such moves should only lead to short-term setbacks for risk appetites, and these may be sharp at times. However, we generally prefer to use such dips as a buying opportunity on risk assets.

SNB pulls the rug out from under EUR/CHF

SNB board member Jean-Pierre Danthine shocked markets by suggesting that the Swiss need to be prepared for higher rates and an eventual exit from accommodative policies. The CHF strengthened sharply on indications that the SNB was stepping back from its efforts to rein in CHF strength, and EUR/CHF plunged to essentially the all time low around 1.4315/20. Danthine later tried to put the cork back in the bottle, saying that the SNB will continue to counter excessive FX gains, but the markets were too busy unloading EUR/CHF to hear. We think the risk of intervention remains and we would not be surprised to see the SNB in the market sometime early next week. The fundamental flows, however, favor the CHF, especially if there is an EU impasse on Greek aid, so we would prefer to be sellers on the approach to 1.4500 should the SNB step in. SNB Chairman Hildebrand will be speaking on Tuesday morning in St. Gallen and he may stir things up. For those who anticipate a positive resolution to the Greek situation or believe the SNB is not done yet, it may be worth trying small longs in EUR/CHF, but with a highly disciplined stop loss below at around 1.4270.
March 24 UK budget will be critical in pre-election positioning

The March 24 budget will provide the incumbent UK government with a make or break opportunity to lay out its stall ahead of the general election. The release of better than expected public finances data for February will have put a small spring back in the step of Chancellor Darling. With just one month to go until fiscal year end the February data suggest that Darling will be able to announce that public sector borrowing this year is likely to be between GBP5 bln and GBP 10 bln less than forecast.

In essence this appears to be good news, but it requires qualification. Firstly, the February numbers may be better than expected but they are a far cry from good data. In the fiscal year to February net borrowing stands at GBP 131.9 bln. At this stage last year the borrowing requirement was around half the size at GBP66.5 bln; meaning that public finances are very much still in a shockingly poor condition. Not only that but there is risk that Chancellor Darling will use the news that the borrowing requirement is set to come in under his (very high) GBP 177.6 bln target to announce some pre-election sweeteners on March 24. The huge UK budget deficit (around 12.9% of GDP) is already a nasty thorn in the side of sterling, additional spending would not be welcomed by investors.

The recent falls in the value of the pound vs the US dollar are correlated with the fear that the general election (expected on May 6) will provide a hung parliament. The optimal outcome from the election as far as the markets are concerned would be a clear majority for the Conservative party insofar as this is more likely to bring a quicker resolution to the worries surrounding the huge UK budget deficit. Recently, there were signs that the Conservative party’s lead in the poll could again be increasing (albeit by probably not enough to win a clear majority) and this brought some support for the pound. Sterling also posted gains on the news that the February borrowing requirement data were better than expected. However, these gains proved to be short-lived. Further losses for the pound would be likely if the Labour party picks up more votes as the result of a pre-election giveaway at the March 24 budget. In the absence of clear evidence on March 24 that the incumbent government is committed to tackling the budget deficit cable could also see lower. The risks surrounding the pound suggest potential for a deeper decline. Below the GBP/USD1.4960/00 level may see towards USD1.4870.

CAD–To parity and beyond

Despite what has been a massive run-up of late, we maintain that the Canadian dollar still has considerable upside in the short/medium term. Rate hike expectations for the Bank of Canada (BOC) continue to increase, economic data in Canada remains robust and market positioning has yet to reach an extreme. These factors should help drive USD/CAD though parity and beyond.

Bank of Canada rate hike expectations continue to be nudged higher and the latest inflation report north of the border only increases the probability of a rate hike occurring sooner rather than later. Core consumer prices (excludes food and energy) jumped to an annual rate of 2.1% in February and this was well above the 1.7% run-rate expected. Remember that in their March statement, the Bank of Canada noted that core inflation had been "slightly firmer than projected" and the fact that it is now above their 2.0% target puts some pressure on the bank to potentially raise interest rates before their "end of 2Q 2010" line in the sand. We will have to see just how much of this pricing power at the retail level was due to the winter Olympics, but regardless, the trend in inflation remains decidedly higher and could force the bank’s hand. We may get an update from BOC Gov. Mark Carney next Wednesday (Mar. 24) when he delivers a speech and holds a press conference.

Canada also continues to outperform compared to the majority of the G-10 when it comes to economic growth. Not only have gross domestic product, international capital flows and housing starts come in better than expectations, but the all-important retail sales report (released just this week) blew away the consensus. Retail sales jumped 1.8% month/month in January and this was significantly better than the 0.5% market projection. The number in February is likely to be even stronger given the aforementioned impact from the winter games. This will continue to put Canada on better relative footing than most of the developed world and should continue to help attract capital to its shores.

Finally, while there has been much talk about the so-called overextended long position in the Canadian dollar, we must keep in mind that it is still well below the recent record. The non-commercial net position currently sits long 62,123 contracts and while this is quite elevated by historical standards, it remains nearly 30% below the 2007 highs when USD/CAD was making its 0.9058 low. In other words, there is plenty of room left to run here. Traders are now watching the 1.0050 level, where ostensibly a major option barrier lurks. Below there should see parity in no time.

While the Canadian dollar has the ability to rally on its own due to exceptional fundamentals, moves in other markets could help drive the move through the 1.00 level and beyond. In terms of what the CAD has been best correlated with since the beginning of the year, oil and stocks jump out. Loonie has moved in tandem with US equities 92% of the time in 2010 thus far and 85% of the time with oil. The relationships suggest that 1180 on the S&P 500 and/or $86 oil would translate to USD/CAD at parity.

Positive top-line 4Q earnings in the US coupled with massive amounts of flows out of money market funds suggests the upside in stocks remains in place. In terms of oil, the commodity is in what we would call a seasonal sweet spot. Looking back at the last 20 years, oil prices have rallied more than 10% on average from March through June – just in time for a Bank of Canada rate hike!

Key data and events to watch next week

The calendar lightens up in the United States in the week ahead. The under-the-radar Chicago Fed National Activity index kicks off the action on Monday. Existing home sales are due Tuesday while durable goods and new home sales are up on Wednesday. Initial jobless claims highlight Thursday while the final cut of 4Q gross domestic product and the University of Michigan sentiment index round out the week on Friday. Look out for a Bernanke testimony on Wednesday as well – these always have the potential to move markets.

It is also not very busy in the Eurozone. Consumer confidence starts off the week on Monday while French business confidence is due Tuesday. PMI indices, industrial new orders and the German IFO surveys are due Wednesday. French consumer spending is up Thursday while Friday has German consumer confidence due up. It will be a busy week in Brussels ahead of the EU summit on Thursday and Friday; expect a lot of headlines.

It is extremely light in the UK. Consumer prices are up on Tuesday, UK budget release on Wednesday, retail sales are due Thursday and business investment is scheduled for Friday.

Ditto for Japan. The BOJ meeting minutes kick things off on Monday, international trade is up on Tuesday while consumer prices are expected Thursday.

Canada is ultra-light, with leading indicators on Tuesday the only noteworthy release.

Don’t look down under for much excitement either. Australia has leading indicators on Thursday while New Zealand sees gross domestic product on Wednesday and trade numbers on Thursday.

Forex.com
http://www.forex.com

DISCLAIMER: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase of sale of any currency. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

Discount Rate Discussions Keeping Floor Under Bonds

Once again bond markets are having a hard time maintaining a rally after the Fed’s earlier stand on its policy of maintaining low interest rates. Dealers continue to mull the potential for a second nudge higher in the Fed’s discount rate, which is overhanging market sentiment. As much as investors want to see a continuation of near-zero interest rates the threat of increases at the Fed’s symbolic rate serves to remind fixed income investors that benchmark interest rates may not be going up today, but that’s the general direction at some unspecified point. The relief rally in the Eurozone that’s helped push yields towards record lows also appears to be running tired of the story that Greek woes will splinter the Eurozone.

Eurodollar futures – There is nothing on the U.S. data calendar today and the dominant theme seems to be coming from north of the border where Canadian inflation data threw down the gauntlet to the Bank of Canada. Although U.S. prices remain contained, rising Canadian price pressures serve to remind fixed income investors of exactly what happens when growth resumes and resource slack is gradually taken back. Bond futures fell following the report with the June contract sliding to an intraday low of 116-245 before rallying to 116-30. The 10-year yield stands at 3.69%.

European short futures – Euribor futures are unchanged once again and remain unfazed by the growing schism in the Eurozone over whether or not the member states should finance Greek problems or whether they should simply refer the government of Greece to work out a package with the IMF. June German bunds are marginally lower on the day at 123.08, where the yield reads 3.12%.

Australian rate futures – Aussie bills prices shed six basis points overnight possibly in response to the firmer tone to regional stock markets. While economies are buzzing in the region and confidence has resumed, investors remain conscious at least of what the Chinese central bank and government might yet do to stem growth. The yield at the 10-year Aussie government bond added two basis points to stand at 5.66%.

Canada’s 90-day BA’s – The Canadian yield curve took an earlier pounding after the release of February data for consumer prices, which showed an unexpected 2.1% year-over-year reading in the core rate inflation. Investors’ nerves were frayed and bets were stepped up that the Bank of Canada might need to abandon a frozen policy promised through mid-year. The February reading was supposed to decline from 2% to 1.7% yet now stands above the central bank’s target level. The sensitive two-year bond yield surged eight basis points to 1.63% and the five year yield jumped by five basis points to 2.85%. The June 10-year bond future slumped 18 ticks to 118.33 sending the yield one basis point higher to 3.47%. Bond prices are rebounding somewhat as analysts ponder whether the recent Olympic games may have temporarily boosted certain seasonal prices.

A surging Canadian dollar now looks set to test parity ahead of the next policy-setting meeting, while three-month bill prices slid following today’s report. And while the bond curve may have flattened, calendar spreads widened out watching bill prices as futures contracts lost more ground at later expirations. The December bill contract sliced through support at 98.47 and put in a low at 98.37, while the June 2011 contract shed 10 basis points to imply a yield of 2.36%. Current short term rates in Canada stand at 0.25%. The calendar spread spanning the year starting in June widened by five basis points to 170 basis points.

British interest rate futures – Short sterling futures are lower and running contrary to the action in the pound today, which fell after comments from Bank of England policymaker Andrew Sentance, who discussed the prospects for a double-dip recession. Gilt prices are higher with the yield dropping just one basis point to 3.96%. June gilts are up by five ticks on the day at 115.01 but are currently the only major rising bond market at this hour.

Japan – Bond yields at the 10-year area of the curve pared earlier in the week losses to close at a yield of 1.35%.

Andrew Wilkinson
Senior Market Analyst

Interactive Brokers

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