Only when you think you have seen it all, the market pushes you back into humility. Indeed, the meeting of the Bank of Japan on Thursday proved to be a remarkable day. Still the ramifications of the BOJ action will take many weeks to come fully apparent. The Yen lost almost five percent of its value against the dollar in less than 24 hours after the Bank of Japan just announced a new monetary easing programme. As a result, Japan’s 10-year yield fell to 0.425 percent, the lowest on record as a first response.
On the other hand, during the latest European Central Bank meeting, the governing council mentioned that an interest-rate cut is rising up the bank’s agenda. However, the ECB decided to keep the main interest rate on hold at 0.75 percentfor the ninth consecutive month. Draghi also mentioned they stood “ready to act” as economic weakness started creeping further into Euro zone countries unaffected by the sovereign debt crisis.
On the foreign exchange side, markets were extremely volatile on Thursday and Friday. Speaking after the bank’s council meeting, Draghi responded cautiously to the Bank of Japan’s dramatic easing plan that will see it double its monetary base over two years.
Currencies closed the week with a stronger euro and sterling pound. Profit taking pushed the dollar lower after the ECB’s meeting while a short squeeze pushed GBP up against the dollar. After reaching a low of 1.5030 on Thursday, the pound ended the week at 1.5336.
Euro on the other side behaved in a much more volatile way. After dropping to a low of 1.2740 during Draghi’s speech, the euro exploded higher to close the week at 1.2991.
In the commodity complex, Gold continued to slide to a low of 1,540 as investors continued to shun the metal on hope that the US economy would continue outperform its peers, while forcing the Fed to consider ending its QE program.
In summary, this week’s US data disappointed investors as numbers ranging mainly from manufacturing to employment figures came much worse than expected. Although analysts blamed the holiday season for the weakness, uncertainty over equity markets pressured investors to stay on the sideline and reinforced a perception of a US slowdown in Q2
Disappointing ISM Manufacturing, However The Trend Is Still Intact
As mentioned above, fears of a US slowdown in growth returned this week as manufacturing ISM disappointing slightly. The Institute for Supply Management Index was 51.3 in March, down from 54.2 in February, however still above the 50 level diving from growth to decline. Details of the report showed that the pullback from earlier in the year was due to slowing growth in a number of areas, notably new orders and production. The number also suggested that companies continue to delay hiring, spending and capacity. In another report, the non-manufacturing data also grew at a slower rate than expected in March, hitting a five-month low. The index indeed fell to 54.4 in March compared to 56 in February. The New Orders Index decreased by 3.6 points to 54.6, and the Employment Index declined 3.9 points to 53.3
Analysts however continued to emphasize the underlying trend of manufacturing growth rather than the month-to-month changes in the ISM numbers.
Jobless Claims and ADP disappoint.
US jobless claims rose more than expected last week reaching a 16-week high. The data increased by 28k to 385k compared to expectations for a decrease of 7k to 350k. The four-week moving average however remains at 354k an increase of 11k from the previous week revised average of 343k.
Earlier in the week, ADP rose by 158k from an upwardly revised 237k gain in Feb, which weighted also on the USD. Still, other reports also raised concerns that job gains may be moderating and Q2 might be harder for the economy. Employers eliminated 49,255 jobs in March, down from 55,356 in February but 30 percent higher than March 2012. Analysts continue to blame Washington’s spending cuts for the increased layoffs.
Europe & UK
Draghi Asks for National Government and Central Banks to do their Share
At the last council meeting, a dovish Mario Draghi triggered a Euro move down to 1.2745, but this was quickly reversed after he stated that he was looking at non-standard measures and will continue to debate small and medium-sized enterprises lending. After acknowledging the deterioration in Europe’s situation, Draghi’s message during his speech was that additional unconventional measures cannot be undertaken by the ECB within the central bank’s mandate. This leaves the ECB with its conventional tools only, which the Governing Council seems more willing to deploy. The market now has priced in a rate cut over the next few months even with Draghi refusing to pre-commit. Furthermore, Draghi implicitly called on national governments and national central banks to do their own share and take initiatives, but refrained to explain how technically these could put in place.
In summary, the ECB relative decision to the Bank of Japan suggests that the market might want to be funding in Japanese Yen not in Euro as the ECB refuses to start printing money similarly to the Fed and the BoJ.
Germany Inflation Dropping as the Euro Zone Retail Sales continue Falling
The inflation rate in Germany fell to 1.7 percent from 1.8 percent in February, the lowest since November 2010. This was driven by energy price inflation falling to 0.5 percent (3.6 percent prev.), while food price inflation accelerated moderately from 3.1 percent to 3.7 percent. However, with downside risks in the Euro zone growing, the risks of missing the 2013 inflation forecast of the ECB has materialized, adding to the pressure of an additional interest rate cut over the next few months. Adding to the pressure, Retail Sales in the Euro zone fell 0.3 percent in February and by 1.4 percent on the year.
The Peninsula
