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Purchasing Managers' Indexes are in focus post-Easter time after data released on Monday
showed that in the US The Institute for Supply Management's, manufacturing purchasing managers
index staged a marked decline and Chinese PMIs also failed to beat expectations in March.
The Institute for Supply Management's manufacturing purchasing manager’s index fell to a disappointing
51.3 in March (from 54.0). However, the details of the report were in fact less dismal than
the headline figure: with notably the employment index higher and indications that the housing
and automotive sectors are doing well; also, February’s data on construction spending
revealed that the US property market continues to recover. Thus, while the large drop in
the headline ISM PMI is the first clear sign that US fiscal issues are taking their toll
on both activity and sentiment, it nevertheless appears that the US consumer may in fact have
been reasonably resilient. This suggests that while a US soft patch is
unavoidable it may not be as profound and prolonged as one could have feared given recent
extensive federal budget cuts. A few key developments in Europe over the
Easter period to note: In Cyprus, banks opened again and despite strict capital controls
now in place, withdrawals took place in a relatively orderly fashion; however, over
the weekend it has emerged that large depositors in the Bank of Cyprus may face a much higher
haircut than initially thought and that the loss for Laiki depositors may also be larger
than first suggested. At the same time however, Cyprus has been given an extra year (to 2017)
to meet budget targets and may negotiate yet another one.
In Italy, Bersani failed to form a government but Italian president Napoli-tano has vowed
to stay until his mandate runs out mid May and thus no new elections will be called at
this stage. Two groups of mediators have now been formed to come up with government programme
proposals. Thus, while the situation in the eurozone has calmed down somewhat following
the Cypriot bailout, markets could remain nervy – not least if European data continues
to come in on the weak side. In equity markets, US indices closed lower
after the weak ISM report; Asian markets are mixed this morning with notably the Nikkei
dragged down by a stronger Japanese Yen. In the Forex market, the US Dollar has lost
against all other majors overnight with the Japanese Yen in front. The Australian Dollar
was supported by the Reserve Bank of Australia holding its cash rate target unchanged at
3.00% this morning, as widely expected, and as governor Stevens reiterated previous hints
that further rate cuts are not imminent. The Japanese Yen has been the big winner over
the Easter period as poor US data has added to safe-haven demand ahead of the Bank of
Japan meeting later this week where we expect that a set of changes to the asset-purchase
programme, including making it open-ended, will weigh on the yen. EUR/USD has traded
in a fairly narrow range, being largely confined to the 1.2750-1.2850 interval, over Easter.
The pair rose after the disappointing ISM report, confirming the recent tendency for
the US Dollar to react positively to good data points, and vice versa. Unsurprisingly,
investors continued to short the single currency on a net basis in the week to the 26th March
(amid the Cyprus crisis) according to latest CFTC data. Adding to the picture of the Euro
moving out of favour, on a more structural note was the release last week of the quarterly
COFER data from the IMF showing developing countries dumping the euro from their Forex
reserves. We think the euro could be in for another tough week ahead of Thursday’s European
Central Bank meeting – not least if eurozone data disappoints today – as the possibility
of rate cuts will remain a key discussion point.
The Focus today will be on Italian president Napoli-tano´s continued negotiations to create
the foundation for a new government after the leader for the centre-left Democratic
Party,Pier Luigi Bersani, was not able to find support for a minority government last
week. Focus will now be on first agreeing on a common
political and economic programme. The President has appointed two small groups of advisors
representing mainly Bersani’s Democratic Party and Silvio Berlusconi’s People of
Liberty. It appears that the populist Five Star Movement has been largely left out of
the negotiations and focus is on creating a grand coalition or alternatively a new technocratic
government with support from the two main fractions in the parliament. The two groups
of advisors will meet today at 11am and 12am CET, respectively.
On the data front, focus is on manufacturing PMIs in Europe. In the euro area, where a
preliminary estimate has been released, focus will be on the first estimates for Italy and
Spain. Germany will also release preliminary March CPI today.
Finally, speeches by Fed members Kocherlakota and Lockhart are scheduled for this evening.