In the UK, with less than a week to go to the 20th March budget, market is getting nervous around the potential announcement on monetary policy remit change. Market anticipation of a more ‘flexible’ inflation targeting regime has seen front-end breakevens shooting up to 5-year highs. GBP’s better tone in the last couple of days seems essentially position related, and it is hard to see any further test of the recent range extremes this side of the Budget unless it comes from an independent EUR or USD move.
European news yesterday confirmed the weak start to the year in the industrial sector and in turn threatens a softer-than-expected Q1 GDP. This reinforces the euro area’s need for stimulus. This is likely to be a focus of today’s EU Summit (ending tomorrow). This meeting is set to focus on the European Semester – a process of policy co-ordination aimed at introducing economic and structural reform. However, with the European Parliament rejecting the Budget proposed by the leaders, a revised Budget is likely to find its way onto the agenda. Markets are more likely to focus on any further developments in addressing Cyprus’s needs. EUR weakness yesterday may have been in part due to a slightly disappointing Italian auction, but even though EUR/USD range was extended slightly on the downside, Lloyds TSB expect the EUR to remain well supported on dips in the absence of further significant political or economic news. The only potential Eurozone news today is from Spain, with the retail sales numbers early on and a mini auction later. But it seems unlikely that these will be of sufficient importance to move the market.
A scant economic calendar today maintains focus on the US. The current account deficit looks set to post a modest widening in Q4, not helped by higher oil prices. Oil is also likely to be a feature of February’s PPI release and Lloyds TSB forecast headline PPI to rise to 1.7%. Yet markets will pay most attention on the weekly jobless claims. While volatile on a week-to-week basis, these have been edging lower in recent months, suggesting a new and lower trend. This should prove supportive of firmer payrolls growth over the coming months. The USD received a boost from the retail sales data yesterday. Today’s US current account and international transactions data will be of some interest, but more for the financial flows than the current account. Q3 data showed improvement in the US basic balance which seems likely to be maintained but not extended in Q4 judging by the TIC data. Fiscal uncertainty tempered market direction yesterday, despite the US posting a solid retail sales report for February, even after allowing for rising gasoline prices. President Obama’s comments that differences may be “just too wide” suggest that there is unlikely to be a swift resolution.
Swedish unemployment precedes the Norges Bank rate decision today, but most of the Scandi focus should be on Norway. While a change in rates is very unlikely, the predicted rate path will be a focus. The last Monetary Policy Report and the last statement both indicated a bias to tighten over the next year, but this is no longer really priced into the market. While the stance may be less hawkish than it was, we suspect it will still be biased towards tightening and this should be supportive for the NOK.
The Aussie was the star performer in overnight Asian and early European trade after the employment report revealed a mind boggling number of 71K new jobs versus 10K expected, but there were questions regarding its accuracy and the pair traded off its highs by midmorning European dealing. The Australian labour data was truly astounding as the economy created the largest amount jobs in more than a decade, the unemployment rate declined to 5.3% from 5.4% eyed and the labour participation rate rose a whopping 0.3% from 65% to 65.3%. To fully appreciate the magnitude of the report, Australia’s increase in labour demand was equivalent to the US economy creating one million jobs in a month.
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