Budget: Figures Flattered...but Not Much Changes
Jonathan Ashworth & Melanie Baker, CFA, Morgan Stanley
The Budget and the OBR's March 2012 Economic & Fiscal Outlook contained no major surprises, with the key details already well covered by the media in recent days. The Budget was fiscally neutral, and Chancellor Osborne remains on course to achieve his fiscal mandate and supplementary target according to the OBR. The public finance projections were flattered by the planned transfer of Royal Mail pension assets. But, underlying all that, nothing much changed. The government finances are looking only slightly better than they did last November (i.e., moving in the right direction, but still rather unhealthy).
FX: Another Bump in the Road
Sverre Holbek, Senior Analyst, Danske Bank
Yesterday (Thursday) saw a series of negative surprises for global investors. Signs of weakness in the Chinese and European manufacturing sectors contributed to undermining faith in the strength of the global recovery. China’s PMI index fell somewhat surprisingly for the fifth consecutive month to signal growth of around 7% q/q annualised. Hence, there is still no indication of this all-important global growth engine shifting up a gear. The second major negative surprise of the day was the PMI number from Europe, which suggested that the recession may not be over yet. Meanwhile, concerns about the Spanish housing market pushed Spanish yields sharply higher.
European Rates Have Receded
John E. Silvia, Chief Economist, Wells Fargo
As we discussed in this space in our January 20, 2012 weekly report, LIBOR rates declined after central banks took some steps to improve liquidity in funding markets. First, on Nov. 30, six central banks (including the Federal Reserve) reduced interest rates that they charge each other for swap-line borrowing. Second, not only did the European Central Bank (ECB) cut its main policy rate by 50 bps late last year, but it conducted two long-term refinancing operations that allowed European banks to lock up funding from the ECB for three years.
United States – Bond Bulls Will Have Another Run
Martin Schwerdtfeger, Senior Economist,TD Bank Financial Group
This week was relatively light in terms of data releases in the U.S. and the calendar was dominated by housing market data. Housing starts, existing and new home sales all came slightly below expectations. However, the softness was chalked up to month-to-month volatility and did not alter the market perception that a modest improvement remains under way in the housing market. So, despite the negative surprises, these reckonings did not rock the markets. What did move the markets this week were the manufacturing purchasing managers’ indexes of the euro zone and China. The former dropped to 48.7 in March, down from 49.3 in February, pushed down by contractions in both the German and French indexes. In China, the HSBC/Markit PMI came down to 48.1 in March, which put it below the 50-point mark that separates contraction from expansion for the fifth consecutive month. These indicators suggested that manufacturing activity is having a hard time gaining momentum globally, which combined with the recent spike in crude-oil prices, casts a shadow on the short-term global economic outlook.
Compiled by David Song, Currency Analyst