Sandra Pianalto of the Cleveland Federal Reserve has said that though the economy is gaining momentum, it is doing so in an uneven fashion. Pianalto will be a voting member on the Fed’s policy setting committee in the coming year. She said that the economy (particularly the labor market) would need to increase faster to repair the damage done by the recent recession. Pianalto is seen as a moderate inflation dove, and thus sympathetic to policy actions geared toward increasing employment rather than maintaining price stability.
The next Fed meeting is in late April and no new policy is expected. The current low interest rates are expected to be maintained, but new asset purchases or qualitative easing is not expected by most analysts soon, though many think such policy will be implemented at some point. Even though the unemployment rate slipped last month, so did the rate of job growth.
Spain’s 10-year bond yield rose to 6.02 percent today, the highest level since December. That compares with the 7 percent level that pushed Greece, Ireland and Portugal to seek bailouts.
Spain’s 10-year borrowing costs have jumped more than one percentage point since March 2nd, when Spain’s Prime Minister announced that the country will miss the 2012 budget-deficit goal, approved by the European Union.
The regions failure to cut spending, particularly on health care and education, resulted in all the states apart from Madrid missing their deficit target last year. That pushed the national budget-deficit shortfall to 8.5 percent, instead of the 6 percent goal.
To address the surging bond yields, Prime Minister Mariano Rajoy will speak later today in Madrid to explain the necessity of the deepest budget cuts in three decades.
Rajoy increased his efforts since the past week as he seeks to persuade Spaniards to accept spending reductions and tax increases as a less painful alternative to a bailout. His three-month-old government is struggling to convince investors it can reduce the deficit by a third this year and cut down on overspending by regional administrations.
The Bank of England has held back from injecting more emergency cash into the economy. The Bank has decided to keep UK interest rates at 0.5 percent and announced no change to its quantitative easing (QE) programme. The interest rates have been at 0.5 percent since March 2009.
The Bank’s Monetary Policy Committee kept its QE stock at 325 billion pounds, after injecting 50 billion pounds in February
Despite widening debates among policy makers over the need for more stimulus, many economists had anticipated such a decision, as most expect the economy to have improved sufficiently in the first quarter, prior to the next BOE’s QE meeting that was postponed until May.
While The UK’s recovery has shown tentative signs of gathering pace, the central bank has said that the UK is unlikely to enter recession this year, forecasting growth of about 1 percent.
The focus still remains on whether further asset purchases will be announced next month.
It was too good to be true. Until now, the lure of “almost free” liquidity has been too hard to turn down. To constantly have upbeat expectations for global growth, given the slew of data pointing to further slowing, including China, has been an expensive position to hold ever since the FOMC and Spain added their weight to global concerns earlier this week. For the EUR, Spain remains the immediate outlier. The single currency has little potential to rally considering the rising concerns over the country. The lack of demand for that country’s bonds, coupled with last weeks Euro M3 money supply report is leaving the market with the impression that the ECB may have to deliver liquidity again to keep periphery debt yields from spiraling higher.
This morning, the EUR is currently knocking on strong psychological support levels (1.3050-60) and is attempting to suggest that the market is about to embark on a more important move lower. This despite many juggling with their positions ahead of tomorrows NFP and the long holiday weekend. Expect North American investors to continue to limit their exposure in the run up to payrolls. There is probably a risk for a surprise either way in the announcement. Even liquidity will be a concern due to the holiday. However, its remains unclear if market wants to add to their dollar hoard on a weak number or if the impact on sentiment is enough to revers some of the dollar gain this week.
Yesterday’s ECB meeting was overall a non-event, however, Draghi was able to counter punch the hawkish comments over the past three weeks from the Bundesbank by first, repeating the traditional statements from most Cbankers that all unconventional measures are, by “nature, temporary and that price stability remains the anchor of the monetary policy decision.” Second, after this sleight of hand, the rest of his tone from the ECB’s prepared monetary statement was very much biased on the dovish side. Why? Inflation which is “the key” for the ECB and currently running above their +2% target, was explained away by an unchanged statement, repeating that it will remain above their desired target this year with upside risk prevailing.
However, he also reaffirmed that over the medium term inflation risks are seen as “broadly balanced and in line with price stability.” Interestingly, he indicated in the press conference that there has not been any step up in the rhetoric on inflation over the past month. There is a risk to price stability by “gauging” so its necessary to look to the core-inflation (+1.5%) and its that that remains within the policy line. Third, clearly the ECB is taking some liberties with inflation in dealing with the debt crisis and its affect on growth. It has too; “downside risks” prevail as indicated by Draghi referring to the impact of the EU high unemployment rate. The president’s comments that the discussions on an “exit strategy” were premature certainly go against a hawkish Bundesbank.
On one seems to be anticipating any surprises from the BoE this morning. They are expected to toe the recent party line. However, that cannot be said for the country’s currency. Sterling trawls the currency lows outright after official figures showed that in February, UK manufacturing output posted its sharpest drop in two-years. However, expect the “Pound” debate to be trumped by the CHF move this morning. Against the EUR, the currency has briefly breached that 1.20 floor set by SNB. Central banks, specifically the BoJ and SNB will be expected to be out in full force if the market continues its recent developments.
According to the latest Chambers of Commerce’s economic survey of nearly 8,000 businesses, the UK’s economy grew 0.3 percent in the first quarter of 2012. The growth rate was slightly above the forecast level. In the last three months of 2011, the country’s economy contracted by 0.3 percent.
The Purchasing Managers’ Index (PMI) for the construction sector rose in March to a 21-month high, as orders rose and firms became more optimistic about the outlook.
Most of the key measures in this quarterly survey were at their highest level in nine months in the manufacturing and service sector, though they still were below the levels seen before the 2008 financial crisis.
Export growth is outpacing that of domestic demand, and that could facilitate rebalancing Britain’s economy away from its past reliance on public spending and internal consumer demand.
Hiring intentions for both manufacturers and services companies are also the strongest in nine months, which may help to curtail rising unemployment, currently at 8.4 percent. Investment in plant and machinery for manufacturers is at the highest since the fourth quarter of 2010.
As per the forecast by the government’s Office of Budget Responsibility, the UK’s economy is expected to grow 0.8 percent in 2012. The economic growth of the first quarter reflects a modest improvement in the UK’s economic situation and the fact that the country will likely avoid a recession. However, according to some economists, the growth is likely to remain low for some time, and a return to a more normal pace is unlikely until 2013.
The difference in a word here and there by the Fed has again dragged many EUR bear position back on side. Yesterday’s minutes of the FOMC March meeting were viewed as generally hawkish. The replacing of ‘a few’ by ‘a couple’ of members does not show widespread enthusiasm for doing anything any time soon. If the FOMC ever had that, “Itchy trigger finger,” then Bernanke and company have done a good job in hiding the fact in the minutes. If anything, the minutes at times seemed defensive about the very accommodative posture the Fed has already being adopting.
There was plenty of language downplaying some of the strength in recent US data. The basic message was that the underlying situation appeared to have improved and that additional easing measures were unlikely absent renewed deterioration. Taken at face value, that implies that labor market conditions would have to weaken to justify the Fed’s current policy guidance. It would seem that the bar for more easing in the very short run is quite high. The minutes also showed a new debate emerging amongst officials on whether there is still much slack in the US economy that will keep inflation subdued.
Overall, the well documented minutes seem to be a more hawkish message than that delivered by Bernanke in his speech last week. Was it not a new mandate of theirs to be more transparent in their communication? Talk about trying to scare the EUR bears off the scent. Even though the 2014 policy guidance of keeping short term interest rates at very low levels remained appropriate now, that date could be revised if there were significant changes in the economic outlook. Ever since yesterday afternoon, investors have expressed their disappointment that the fed is unlikely to launch another round of QE by buying back the dollar and offloading risk by liquidating equities and shying away from debt products. Perhaps this is only the beginning for the dollar, the minutes certainly now set the markets up for a more significant “big dollar” reaction if NFP were to surprise us all on the topside this Friday.
The EUR, technically is well supported at current levels (1.3184). There have been some feeble attempts by the single currency to recover from these depths, if working on an hourly oversold bias. However, this morning’s latest Spanish auction should ‘put to rest any lingering doubts whether the LTRO related rally on peripheral debt is over.’ It was a bad auction, bad for debt markets and bad for the EUR. Spain happened to end up selling at the lower end of their range (EUR2.5b-3.5b), delivered product at higher average yields and a low bid-to-cover ratio point to investors “repricing periphery risk.” This is doing nothing for regional financial health perception. If anything, its making the ECB’s task even harder. The ECB meets later this morning and the markets expect no news and no innovations from the meeting. If anything, on what is transpiring peripherally, expect markets to rebuild ECB easing expectations as their economies struggle. The game change has the markets looking to use upticks as fresh EUR selling opportunities as the underlying bias remains with the bears.
Federal Reserve policy meeting minutes indicated that the central bank will not be increasing monetary stimulus soon. This decrease in prospective liquidity was followed by a dollar rally and a rise in the treasury yield. The Fed indicated that slower price growth or faltering economic expansion might prompt reassessment.
This is contrasted with continuing uncertainty regarding the European economy. Attention has been particularly focused on Spain, which just recorded the eighth month in a row of increasing unemployment. This has been accompanied by deep austerity measures. The ECB meets tomorrow to decide interest rates for the shared currency and Bloomberg-surveyed economists expect no change.
Sandra Pianalto, president of the Federal Reserve Bank of Cleveland, expects the U.S. economy to gradually improve from 2.5% growth this year to 3.0% growth next year. She cited positive information from the labor markets. She observed that it would take four or five years fo such growth for the unemployment rate to return to the pre-crisis level of around 6%.
On the negative side, she observed that uncertainty remains, that the housing market is still not strong, and the price of gas may continue to rise, acting as a brake on growth. Consumer confidence was at a four year high last month, however, and inflation remains below the Fed’s 2% target.
U.S. treasuries rose after a recent auction $35 billion of two-year notes required less yield than expected. Later in the week, auctions are planned for $64 billion worth of five- and seven-year notes. This indicates a general risk-off attitude, and comes at the same time as consumer confidence and home prices have declined. U.S. treasuries continue to enjoy haven demand.
Volume was slightly higher than expected, and indirect bidders (which includes foreign central banks) made up a higher percentage of purchases (34.3 versus 32.1 percent for the past 10 sales). If conditions in Europe were to worsen, demand for U.S. exports is expected to drop, according to The New York Fed’s Dudley.
