Euro Vulnerable on Bond Sale Outcomes, German Forecasts Update

2012-04-24 05:49:00 Ilya Spivak, Head Strategist, APAC

Talking Points

Euro Appears Vulnerable on Italian and Dutch Bond Auction Outcomes
Germany to Release Updated Set of Macro-Economic Forecasts for 2012
Australian Dollar Sinks After CPI Disappoints, Boosting RBA Rate Cut Bets

The Euro is in a precarious position as markets set sights on the outcomes of Dutch andItalian bond auction and the release of updated macro-economic forecasts from the German Economy Ministry. Rome will sell zero-coupon 2014 debt as well as inflation-linked 2017 and 2019 paper while Amsterdam puts 2014 and 2037 bonds on offer. Traders will be keeping a close eye on average yields for signs of returning sovereign stress.

The auction comes amid rising worries that anti-austerity sentiment is fueling political instability in the region and may undermine debt-reduction efforts. French President Nicolas Sarkozy lost the first round of his reelection campaign to anti-austerity challenger Francois Hollande over the weekend while Dutch Prime Minister Mark Rutte and his cabinet resigned yesterday having failed to reach agreement on further deficit-reduction measures.

Meanwhile in Germany, an updated set of the government’s official economic forecasts will be sized up against yesterday’s sharp drop in April’s manufacturing- and service-sector PMI readings. Officials cut their 2012 GDP growth outlook to 0.7 percent in January from 1.0 percent predicted in October of last year. Another reduction may prove to weigh on risk appetite – boosting safe haven currencies such as the US Dollar and Japanese Yen – as the dominant theme across financial markets remains the degree to which a recession in the Eurozone will derail global output as a whole.

The Australian Dollar underperformed in overnight trade, slumping as much as 0.8 percent against its leading counterparts, after Consumer Price Index figures fell short of economists’ forecasts and reinforced expectations of an RBA interest rate cut at next week’s policy meeting. The report showed the annualized inflation rate fell to 1.6 percent in the first quarter, the lowest in two and half years.

More ominously still, the 1.5 percentage point drop from the 3.1 percent rate recorded in the three months through December 2011 marked the largest quarterly decline in over a decade. The markets now price in the certainty of a 25bps decrease in the benchmark lending rate with a slight possibility of a larger reduction, according to data compiled by Credit Suisse. The 12-month outlook now implies 110bps in overall easing.

Asia Session: What Happened

GMT	CCY	EVENT	ACT	EXP	PREV
22:45	NZD	Net Migration s.a. (MAR)	130	-	-440
23:50	JPY	Corporate Service Price (YoY) (MAR)	-0.3%	-0.6%	-0.6%
1:30	AUD	Consumer Prices Index (QoQ) (1Q)	0.1%	0.6%	0.0%
1:30	AUD	Consumer Prices Index (YoY) (1Q)	1.6%	2.2%	3.1%
1:30	AUD	RBA Trimmed Mean (QoQ) (1Q)	0.3%	0.6%	0.6%
1:30	AUD	RBA Trimmed Mean (YoY) (1Q)	2.2%	2.4%	2.6%
1:30	AUD	RBA Weighted Median (QoQ) (1Q)	0.4%	0.6%	0.5%
1:30	AUD	RBA Weighted Median (YoY) (1Q)	2.1%	2.3%	2.6%
2:00	CNY	Conference Board Leading Economic Index (MAR)	230.6	-	228.7
3:00	NZD	Credit Card Spending s.a. (MoM) (MAR)	0.3%	-	0.5%
3:00	NZD	Credit Card Spending (YoY) (MAR)	5.2%	-	4.0%

Euro Session: What to Expect

GMT	CCY	EVENT	EXP	PREV	IMPACT
6:00	CHF	Trade Balance (CHF)	3.00B	2.61B	Medium
6:00	CHF	Exports (MoM)	1.0%	9.2%	Low
6:00	CHF	Imports (MoM)	-	-12.3%	Low
6:00	CHF	UBS Consumption Indicator	-	0.87	Low
6:45	EUR	French Consumer Confidence Indicator (APR)	87	87	Low
6:45	EUR	French Business Survey – Overall Demand (APR)	-	-12	Low
8:00	EUR	Netherlands to Sell 2014-2037 Bonds	-	-	Medium
8:00	EUR	Italian Hourly Wages (MoM) (MAR)	-	0.0%	Low
8:00	EUR	Italian Hourly Wages (YoY) (MAR)	-	1.4%	Low
8:30	GBP	Public Finances (PSNCR) (£) (MAR)	13.0B	-7.8B	Medium
8:30	GBP	PSNB ex Interventions (MAR)	16.0B	15.2B	Low
8:30	GBP	Public Sector Net Borrowing (£) (MAR)	14.2B	12.9B	Medium
9:00	EUR	Italy Sells 2014 Zero-Cpn, 2017-2019 I/L Bonds	-	-	Medium
9:00	EUR	German Econ Ministry Releases Forecasts	-	-	Medium