Good morning. Here’s what you need to know.
FOMC minutes. The release of the minutes from the FOMC’s March 18-19 meeting at 2 PM ET will be the main event today. Market participants will be watching closely for colour on the views of Committee members with regard to the economic outlook and the pace of rate hikes, especially given the market reaction to the meeting itself. “Investors blew off pretty strong JOLTS and small business confidence releases [on Tuesday] and will probably not respond to anything less than full-handed hawkishness,” says Steven Englander, global head of G10 FX strategy at Citi. “10-year Treasury yields are almost back to where they were on the eve of FOMC (helped by the S&P 500 being 20 points lower), but 2-year and 5-year yields remain 5 basis points and 12 basis points higher, respectively, so there has not been a complete dissipation of the hawkish takeaway. Hence the bar for a big upward move in rates, with knock-on effects to FX, is pretty high.”
Talking yen. The most notable feature of Tuesday’s trading session was the sharp rise in the Japanese yen. “Judging by the stronger tone of the yen yesterday, many participants have pared back their hopes for further easing on the back of the upbeat tone of the statement issued after the Bank of Japan’s policy meeting yesterday and following the comments from Governor Kuroda that the BoJ is not considering additional easing right now,” says Jane Foley, a senior currency strategist at Rabobank. “While expectations regarding further BoJ easing have become unsettled, there are no market-relevant projections regarding tapering in Japan. By contrast, the market has been nudged by the Federal Reserve into a general acceptance that QE in the U.S. will draw to a close this year and that policy tightening could follow in the second half of 2015. This policy divergence could force the yen back into the role of funding currency over the medium-term and is consistent with our view that USD/JPY will move higher in the coming months.”
Greece returns to market. Greece will issue €2.5 billion of 5-year notes on Thursday, marking its first issuance since before the euro crisis. “
Greece has been the most conspicuous example of the dramatic improvement in sentiment towards the eurozone periphery,” says Nicholas Spiro, managing director of Spiro Sovereign Strategy. “Markets have gone from being paranoid to complacent in a very short period of time, with the recent sell-off in developing economies playing into the hands of debt managers across the eurozone periphery. However, the fact that even Sri Lanka just sold 5-year debt at a yield of roughly 5% speaks volumes about the ‘reach for yield’ that pervades financial markets right now.”
Markets are quiet. U.S. stock futures are little changed this morning, and equity indices across Europe are rallying. The U.S. dollar is up about 0.3% against the Japanese yen following yesterday’s big slide, and little changed against the euro. U.S. Treasuries are giving up gains ahead of today’s auction and release of the March FOMC minutes.
German trade. German exports fell 1.3% from the previous month in February, more than the 0.5% drop predicted by economists. Import growth slowed to 0.4% in February from 4.1% in January, but topped the consensus estimate of 0.1% growth. The trade surplus registered at €16.3 billion in February, below expectations for €17.8 billion, while the current account surplus came in at €13.9 billion, below the consensus €18 billion estimate. “This is not inconsistent with the recent survey data warning that the European locomotive was losing some momentum,” says Marc Chandler, global head of currency strategy at Brown Brothers Harriman.
British trade. The U.K.’s goods trade deficit narrowed to £9.1 billion in February, smaller than the £9.2 billion deficit predicted by economists. The improvement was driven by a better trade balance with non-EU countries, where the U.K.’s deficit narrowed to £2.9 billion from £3.9 billion.
Alcoa earnings. Alcoa unofficially kicked off Q1 earnings reporting season on Tuesday afternoon after the closing bell with its announcement of quarterly results. The aluminium giant reported earnings of $US0.09 per share, above Wall Street analysts’ consensus estimate of $US0.05. Revenues were $US5.45 billion, below the consensus $US5.56 billion estimate. Shares are more than 3% higher in pre-market trading.
Mortgage apps. Mortgage applications fell 1.6% in the week through April 4, according to data released this morning by the Mortgage Bankers Association. The decline was driven by a 5% drop in refinancing applications, whereas purchase applications actually rose 3%.
Wholesale trade. Monthly U.S. wholesale trade data are due out at 10 AM ET. Economists predict inventory growth slowed to 0.5% in February from the previous month following a 0.6% advance in January. Sales are expected to have risen 1% in February following a 1.9% decline in January.
10-year auction. The U.S. Treasury will auction $US21 billion of 10-year notes today at 1 PM ET. “The 10s30s curve is still at a very flat level post the March FOMC meeting and the demand for duration could show up for the belly of the curve amid a struggling equity market,” say interest rate strategists at Nomura. “Investors, however, will likely also note that the bullish momentum since last week’s NFP has driven the 10-year yield back to the pre-FOMC level, and that the 10-year yield currently does not look compelling, either outright or against the 7s30s curve. We would expect more concession for the auction takedowns.”
Below is a Q&A with Sean Callow, a senior currency strategist at Westpac Institutional Bank.
BUSINESS INSIDER: What is the most exciting trade out there right now, in your opinion?
SEAN CALLOW: Buying the Aussie dollar against the New Zealand dollar. The cyclical tide is turning once again, so trade in the 1.06-1.07 region looks very cheap against a long-term average of 1.22.
BI: Which developments in global financial markets, if any, would you flag as most concerning for risk appetite?
SC: The risk that the Fed declares “mission accomplished” on the U.S. economy too early, winding down QE when the economy is still sluggish. Emerging markets would suffer another wave of turmoil.
BI: On the other hand, what is the most encouraging sign?
SC: It is very encouraging to see the ECB being open-minded about further easing measures given slow growth and very low inflation. Draghi is proving a far better ECB president for the euro zone — and in turn the world — than Trichet.
BI: What pieces of new information (e.g. economic data releases, price action in a given market over the next few days/weeks, etc.) do you think have the biggest potential to alter your outlook?
SC: Over the next month, Australia’s Q3 CPI and the RBNZ’s policy meeting will be key to the AUD/NZD outlook. Also, April 30 will be a huge day, featuring the Bank of Japan semi-annual outlook meeting, U.S. Q1 GDP, and perhaps most important, euro zone CPI.
BI: What do you perceive to be the most misunderstood trend or event in or characteristic of today’s markets?
SC: Aussie dollar bears who are counting on AUD to tumble on either a China growth slowdown or a collapse in Australian house prices will be waiting a long time.
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