Weekly Market Commentary

Overview

Stock indices rallied, Helsinki, Sweden and Switzerland to new highs for this year, as US Fed governors reiterated that low interest rates would probably be with us for a very long time; China's Premier Wen Jiabao in his annual ‘work report' to the National People's Congress said financial conditions would remain accommodative. G7 yields are mainly unchanged to very fractionally lower, benchmark ten-year JGB's and Swiss Conf doing best to 1.295% and 1.837% respectively, German Schatz and UK IL 2016 new record lows at 0.820% and 0.350%. The FX market was mixed, some currencies gaining against the US dollar (leading the ZAR at 7.4325 closely followed by CAD 1.0270) while Cable ($1.4781) and Kiwi ($0.6850) lost ground. Commodities were also mixed, Base and Precious Metals generally gaining (Palladium $464.50 per ounce) though Softs eased (Raw Sugar quite spectacularly slumped to just 21.12 cents per pound from a record 30.40 early February) while FCOJ rallied to 152.50 cents per pound, its highest since October 2007.

Political and Economic Developments

February US Non-Farm Payrolls, which White House Economic Advisor Larry Summers had warned would be impacted by blizzards, shrank a less-than-feared 36K keeping Unemployment unchanged at 9.7%. Average Hourly Earnings are growing by just +1.9% Y/Y, explaining in part why US final Q4 Unit Labour Costs shrank by a bigger than expected 5.9%, so that Non-Farm Productivity grew by a whopping 6.9%, one of the highest on record. Note that April's employment report will also be distorted by the decennial census where 1.2 million people will be trained and employed at $20 per hour to collect data for use by state and federal government planners. Also released this week were Japanese Unemployment at 4.9%, Italian 8.6%, EZ16 9.9% and Turkish at 14.00%. Japan's Cash Earnings are running at +0.1% Y/Y having increased annually by close to zero for the last twenty years. Shrinking disposable incomes probably explain Germany's –3.4% Y/Y Retail Sales and the Eurozone's –1.3%.
The Reserve Bank of Australia surprised quite a few by upping their target Cash rate by 25 basis points to 4.00%.

Underlying Themes

Naturally one worries that all the government money being thrown at global economies to prop things up will lead to inflation. This explains in part why yields on index-linked Treasuries are at historical lows. The other reason these are so low is that absolute yields on conventional treasury paper are also at historical or record lows. Short dates because central bank target rates are close to zero, and though yield curves are about their steepest ever, long-dated paper rates are some of the lowest in decades. Demand for sovereign debt, where spreads over benchmarks are the norm not the exception, comes from nervous private investors and the lucky firms who are hoarding cash. Money Supply growth is shrinking, UK January M4 to +4.9% Y/Y, lowest since 2000's downturn, and the velocity of circulation slowing. US Core PCE is running at +1.4% Y/Y, well below the +2.00-2.50% of the previous ten years, while Eurozone CPI at 0.9% Y/Y is well below the ECB's ‘at or close to 2.00%' target, and PPI a minus -1.0%. Strange but true, excess capacity and labour's lack of pricing power explaining the gap.

What to watch for next week

Saturday Iceland holds a referendum on Icesave; Sunday central bank governors meet at the BIS in Basel as Greek Prime Minister Papandreou travels to Paris to meet President Sarkozy, on to the US the following day. Monday early Japan January Trade Balance, February Money Supply, Bankruptcies and Economy Watchers' Survey, German Wholesale Price Index, January Industrial Production, and EZ16 March Sentix Investor Confidence. Tuesday UK February BRC Retail Sales Monitor, RICS House Price Balance and Trade Balance, Japan Machine Tool Orders and January Leading Index. Wednesday Japan February CGPI, January Machine Orders, German Trade Balance, UK Industrial Production, US Wholesale Inventories and late in the day the Reserve Bank of New Zealand decides on rates (expected unchanged at 2.50%). Thursday UK February NIESR GDP, Japan Q4 final GDP, US January Trade Balance and the Swiss National Bank's quarterly interest rate decision (expected unchanged at 0.25%). Friday EZ16 January Industrial Production, US Business Inventories, February Retail Sales and March University of Michigan Confidence Survey.

Positioning and Technical Analysis

Treasury yields should continue to decline, albeit slowly as absolute levels are so low, many reluctantly dragged in. Credit spreads will vary as they always do and, as in Argentina currently, some sub-sovereign ratings can be higher than the sovereign ones underpinned by higher recovery rates (according to Moody's). FX is looking for direction, ‘commodity' currencies likely to lead with sterling and the Euro dragging badly; dollar/yen a wild card and likely to swing randomly either side of 90.50. Precious metals look set to rally further, some probably inching to new highs for the year. Likewise some indices.

Mizuho Corporate Bank
Disclaimer
The information contained in this paper is based on or derived from information generally available to the public from sources believed to be reliable. No representation or warranty is made or implied that it is accurate or complete. Any opinions expressed in this paper are subject to change without notice. This paper has been prepared solely for information purposes and if so decided, for private circulation and does not constitute any solicitation to buy or sell any instrument, or to engage in any trading strategy.