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G7 Financial Stability Board (FSB) head Draghi said "what is needed above all is to restore confidence in the solidity of the financial system and to restore banking credit flows"; it will take a year or two to work out the details for reinforcing banks’ capital bases
$ Fed Chairman Bernanke: "The Federal Reserve will make responsible use of all of its tools to stabilize financial markets and institutions, to promote the extension of credit to creditworthy borrowers, and to help build a foundation for economic recovery"
$ The March non-farm payrolls result came in line with consensus, posting a decline of 663k on the month versus -651 in February; the 3m cumulative decline eased versus February
$ The US unemployment rate rose 0.4 percentage points as expected to 8.5% the highest since Oct’83
$ US ISM non-manufacturing index disappointed to the downside of consensus and fell to 40.8 in March from 41.6 previously; the 3m average rose to 41.8 versus 40.7 at the end of Q4
€ The final Eurozone services PMI was revised higher to 40.9 in March from the preliminary estimate of 40.1, marking a slower pace of contraction versus the series low of 39.2 posted in February (since 1998); the 3m average remained weaker at 40.8 versus 43.4 at the end of Q4
£ The UK services PMI rose 2.3pts to 45.5 to post the slowest pace of contraction since Sep’08; the 3m average rose to 43.7 versus 40.9 at the end of Q4
¥ The Japanese government plans to outline a new economic stimulus package on 10 April which may total more than 2% of GDP
The Week Ahead
The BoE announcement on Thursday is the main policy event this week. Bank Rate has reached a cycle low of 0.50% and we do not expect this to change any time soon. This leaves focus on the BoE Asset Purchase Programme. Although the BoE has succeeded in flattening the medium-to-long end of the gilt curve and bringing in credit spreads, it is too early to judge the effect of the BoE programme on the money supply or nominal spending. The BoE plans to buy back £2.5bn in 2020-2032 gilt stock today and £3.5bn in 2014-2018 gilts on Wednesday, which would bring the total amount of gilts purchased to £25bn, out of £75bn in total purchases planned. Corporate bond purchases (since 25 March) totaled only £329m as of Friday. Commercial paper holdings amount to £2bn since 13 February. Thus the MPC is unlikely to adjust the size of the planned purchases at this meeting; indeed any efforts to widen the buyback liquidity pool after the mixed success of government issuance since the launch of QE would be seen as political interference, which would undermine the credibility of the process. On the data front, figures on UK and Eurozone February industrial activity dominate the calendar this week, with UK output released Tuesday, German factory orders on Wednesday, and French output on Friday. On the US agenda, the February trade deficit is expected to stabilize around $35bn after six months of decline.
In policy events today, ECB's Bini Smaghi speaks on European economic policy at 09:20. Fed's Warsh (voter) speaks on financial market and economic developments at 18:00. In debt supply, Italy details the amount of BTPs (fixed rate bonds) to be auctioned on Thursday. The US Treasury will announce the amounts of the 3- and 10-year note auctions to take place on Tuesday and Wednesday respectively. The US also auctions $6bn in 10yr TIPS on Tuesday. The UK Treasury will auction £3.0bn in 2019 gilts on Tuesday and £1.1bn in 2032 inflation-linked bonds on Wednesday.
Markets
US equities rose on Friday led by financials and the Dow closed above 8,000 for the first time since 9 February. The S&P 500 posted a weekly gain of 3.3%, up for the fourth consecutive week as confidence begins to solidify that policy actions will result in an eventual US recovery. The Nikkei rose 1.2% to 8857.93 and European equities have opened higher. With little of note on the economic data calendar this week focus will be on the sustainability of the recovery in risk assets and policy activity along the pre-agreed parameters – government supply and central bank interventions. The actions of the major economic powers of the world over the past month – Fed and BoE QE, the US Treasury's detailed plan for bank toxic and legacy assets, and an expanded international credit default hedge for EMs via the IMF/G20 - have given rise to market hopes that policy will succeed in finding a floor for institutional liquidity needs. This implies that, while the rot on bank and real economy balance sheets continues, the risk of extreme stress scenarios is contained, at least in the near term. After a period of extreme economic and financial uncertainty over the past six months, this is a powerful feel-good factor which looks likely to support the risk rally further. Friday's NFP report went a long way to seal this positive momentum; indeed we see the report as a watershed for market risk sentiment. NFPs continued to signal an alarming pace of production capacity destruction as the real economy continues to de-leverage. However the headline details were broadly as expected, or at least not as bad as feared, and support the view that Q4/Q1 marked the worst period for growth and the global economy will not disappear by the year-end. A bumpier road ahead is consistent with our W-shaped projection for global growth but to the extent that the first and steepest slide for the global economy from the height of the earlier bubble peak is over, the more “orderly implosion” of global economic activity that lies ahead is likely to look and feel better. This asymmetry in market risk sensitivity bodes well for risk assets this week which together with a shift in market focus towards government supply should support the risk end of the fx complex (GBP, AUD, SEK, NOK) vs USD and JPY, and support flows out of govies and into high-quality (i.e. liquid) credit, depressing swap spreads and producing some credit risk spread compression.
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