Risk Retreat Continues
Heightened concerns about slower global growth have sustained the risk retreat, manifest in weaker equities, lower UST yields, softer commodities, and a firmer yen. In the wake of the data disappointments over the past 24 hours – stretching from the Q4 GDP print in New Zealand (0.3% q/q) to the March flash manufacturing PMI in China (48.1 vs 49.6) and the March manufacturing PMI for the Eurozone (47.7 vs 49.0) – the US figures continue to stand out for the right reasons. Indeed, US initial claims are still trending lower, with the 5k drop to 348k in the week of March 17 providing further evidence of improving labour market conditions. Note that this covered the survey week for the March employment report; the four-week average of 355k was down from 360k in the sample week for the February jobs report. The recovery here has filtered through to the index of leading economic indicators, which rose 0.7% m/m in February, with labour market components accounting for almost two-fifths of the rise in February and half of the gain in January. Though the US dollar lost ground vs the yen overnight, the downside should be limited by the prospect of a durable US recovery that will allow the Fed to keep the QE option off the table – as the BoJ continues to ease. Press reports are flagging Kouhei Watanabe (an adviser to a major trading company) as a candidate for one of the two impending vacancies on the BoJ’s Policy Board. Though not much is known about Watanabe’s policy leanings, the new appointments to the Board are unlikely to challenge our view that further monetary easing will emerge as early as next month. USDJPY bulls can also glean encouragement from the absence of any major repatriation activity in the run-up to the book closing on March 31. Weekly portfolios flows data for the March 11-17 period will be released by the MoF later this morning, but the hard evidence confirms that the Japanese have been better buyers than sellers of foreign bonds of late. Net foreign bond purchases have been recorded in 9 of the 10 weeks through March 10, reinforcing our sense that the bulk of the liquidations (primarily out of EUR-denominated paper) took place in 2011.
Ahead today, we have UK consumer confidence data, Canadian CPI, US new home sales, and Bernanke’s speech.
Click here to read the full report: UBS Morning Adviser Asia
UBS Investment Bank