Thursday, 12 April 2012
MARKET TALK: EUR/CHF Spikes Slightly Higher As Traders Mull Floor
3:39 (Dow Jones) In normally thin US afternoon trading Wednesday, the euro quickly gained on the Swiss franc. The move appeared to be the result of market participants paying closer attention to a Dow Jones interview with Goldman Sachs' Jim O'Neill in which he says the SNB could raise its euro-franc exchange rate floor to CHF1.25 from CHF1.20. The euro, which had been hovering just above the CHF1.2000 SNB-imposed floor earlier in the session, jumped to CHF1.2035 before settling back to trade most recently at CHF1.2026, according to EBS via CQG. The Swiss National Bank has stepped into the market to hold the CHF1.20 level, but thus far hasn't necessarily made a push to drive it much above that floor.
Canadian Dollar Ends Flat, Hovering Near Key Pivot Level
TORONTO (Dow Jones)--The Canadian dollar ended little changed against its U.S. counterpart Wednesday, with the greenback hovering just below a key resistance level against its Canadian counterpart.
The U.S. dollar was at C$1.0039 late Wednesday, from C$1.0040 late Tuesday, according to data provider CQG. The U.S. unit reached a session high of C$1.0054 in overnight trading, its highest level since Jan. 31, according to data provider CQG.
The area around the C$1.0050 level is a key resistance level for the U.S./Canadian dollar pair that has formed the upper limit of its recent trading ranges, analysts said.
"[It's] still got to get through some pretty big resistance just up above and slightly below that 1.0050 level," said Stewart Hall, senior currency strategist at RBC Capital Markets.
"It kind of peaked above it overnight, but certainly didn't break through decisively," he added. "I think that remains one of the key points of [USD/CAD] resistance."
Although a more positive outlook on risk drove much of the activity in global financial markets Wednesday, it didn't translate to strength in the Canadian dollar, which was languishing towards the bottom of the performance table among major currencies.
Looking more deeply into the second quarter, weakness in U.S. economic data could enable the U.S. dollar to break decisively about that zone, Hall said.
Weakness in the U.S. often results in weakness in the Canadian dollar since Canada's economy is so closely tied to that of the U.S.
Strong March housing starts data in Canada released early in the session had little impact on the currency.
On Thursday, merchandise trade data and the new housing price index will be released.
These are the exchange rates at 3:29 p.m. EDT (1929 GMT) and 8:00 a.m. EDT (1200 GMT) Wednesday, and late Tuesday.
The U.S. dollar was at C$1.0039 late Wednesday, from C$1.0040 late Tuesday, according to data provider CQG. The U.S. unit reached a session high of C$1.0054 in overnight trading, its highest level since Jan. 31, according to data provider CQG.
The area around the C$1.0050 level is a key resistance level for the U.S./Canadian dollar pair that has formed the upper limit of its recent trading ranges, analysts said.
"[It's] still got to get through some pretty big resistance just up above and slightly below that 1.0050 level," said Stewart Hall, senior currency strategist at RBC Capital Markets.
"It kind of peaked above it overnight, but certainly didn't break through decisively," he added. "I think that remains one of the key points of [USD/CAD] resistance."
Although a more positive outlook on risk drove much of the activity in global financial markets Wednesday, it didn't translate to strength in the Canadian dollar, which was languishing towards the bottom of the performance table among major currencies.
Looking more deeply into the second quarter, weakness in U.S. economic data could enable the U.S. dollar to break decisively about that zone, Hall said.
Weakness in the U.S. often results in weakness in the Canadian dollar since Canada's economy is so closely tied to that of the U.S.
Strong March housing starts data in Canada released early in the session had little impact on the currency.
On Thursday, merchandise trade data and the new housing price index will be released.
These are the exchange rates at 3:29 p.m. EDT (1929 GMT) and 8:00 a.m. EDT (1200 GMT) Wednesday, and late Tuesday.
WSJ BLOG/Developments: Commercial Real Estate CDO Loans Buoyed By Low Rates, For Now
The bulk of loans backing some of the most complex commercial mortgage-backed securities carry below-market interest rates that are buoying performance, but risks lurk when borrowers seek new financing, according to Deutsche Bank.
About 80% of loans in commercial real estate collateralized debt obligations, also known as CRE CDOs, carry floating interest rates that have been held low by their benchmarks in recent years, said Deutsche Bank analysts, led by Harris Trifon. Compared with a fixed-rate loan, debt expense for floating-rate loans has declined at a time when many properties have seen revenue drop.
"Here is a situation where loans which are inherently riskier are benefiting tremendously from the floating-rate component," the analysts said in research note Wednesday. It's "amazing" that the coupons are less than where a stable, average quality property could get financing today, they said.
Investors have intensified their focus on CDOs in general over the past week after the Federal Reserve Bank of New York set the stage for possible sales from a portfolio taken on during the bailout of American International Group (AIG). Investors have zeroed in on a pair of commercial mortgage bond CDOs with face value of $7.5 billion, which contain securities versus the loans studied by the Deutsche Bank analysts.
Still, potential bulk sales of commercial real estate-related CDOs have rattled the market because of the impact of additional supply just as investors are questioning the wisdom behind a four-month rally. The weaker demand was accelerated as the New York Fed appeared to signal sales, and also as investors concerned about a flare-up in Europe's debt crisis and slower U.S. growth cut back on risk.
The risk premium on a benchmark commercial mortgage bond has jumped about 20% since March, according to Credit Suisse. CMBS derivative indexes have declined.
Focus on CDOs also comes as investors worry about greater defaults on boom-era commercial real estate loans as they reach maturity. Many won't be able to refinance because of revenue shortfalls and as property values have fallen by some 40% nationwide.
Debt service problems could surface once borrowers must seek refinancing under today's tighter lending standards.
The weighted-average coupon for fixed-rate loans is about 2 to 3 percentage points above that of floating rates, the analysts said. If the floating rates were converted to fixed and coupons brought to market rate, debt service would rise by about $450 million, they said.
"The ultimate performance and subsequent value of investments in the related notes will be dependent on the ability or inability of the borrowers to successfully refinance and pay off the existing debt," the analysts said.
About 80% of loans in commercial real estate collateralized debt obligations, also known as CRE CDOs, carry floating interest rates that have been held low by their benchmarks in recent years, said Deutsche Bank analysts, led by Harris Trifon. Compared with a fixed-rate loan, debt expense for floating-rate loans has declined at a time when many properties have seen revenue drop.
"Here is a situation where loans which are inherently riskier are benefiting tremendously from the floating-rate component," the analysts said in research note Wednesday. It's "amazing" that the coupons are less than where a stable, average quality property could get financing today, they said.
Investors have intensified their focus on CDOs in general over the past week after the Federal Reserve Bank of New York set the stage for possible sales from a portfolio taken on during the bailout of American International Group (AIG). Investors have zeroed in on a pair of commercial mortgage bond CDOs with face value of $7.5 billion, which contain securities versus the loans studied by the Deutsche Bank analysts.
Still, potential bulk sales of commercial real estate-related CDOs have rattled the market because of the impact of additional supply just as investors are questioning the wisdom behind a four-month rally. The weaker demand was accelerated as the New York Fed appeared to signal sales, and also as investors concerned about a flare-up in Europe's debt crisis and slower U.S. growth cut back on risk.
The risk premium on a benchmark commercial mortgage bond has jumped about 20% since March, according to Credit Suisse. CMBS derivative indexes have declined.
Focus on CDOs also comes as investors worry about greater defaults on boom-era commercial real estate loans as they reach maturity. Many won't be able to refinance because of revenue shortfalls and as property values have fallen by some 40% nationwide.
Debt service problems could surface once borrowers must seek refinancing under today's tighter lending standards.
The weighted-average coupon for fixed-rate loans is about 2 to 3 percentage points above that of floating rates, the analysts said. If the floating rates were converted to fixed and coupons brought to market rate, debt service would rise by about $450 million, they said.
"The ultimate performance and subsequent value of investments in the related notes will be dependent on the ability or inability of the borrowers to successfully refinance and pay off the existing debt," the analysts said.
US Budget Deficit $198.16 Billion In March
--U.S. budget deficit hit $198.16 billion in March; $10 billion more than in March 2011
--Budget deficit for first half of FY2012 was $778.99 billion, less than first six months of 2011
--March outlays of $369.37 billion was the highest monthly spending on record
WASHINGTON -- The U.S. budget deficit narrowed through the first half of the fiscal year, compared to the same period a year earlier, but the government spent more in March than it had in any prior month on record.
The U.S. Treasury Department on Wednesday said that, for the first six months of fiscal 2012, the government spent $778.99 billion more than it collected. This compares with a $829.42 billion deficit for the first half of the prior year.
For March alone, the U.S. recorded a budget deficit of $198.16 billion, about $10 billion more than in the same month last year, according to the Treasury's latest budget figures.
Government outlays totaled $369.37 billion last month--about $20 billion more than March 2011--and the most in any single calendar month.
A Treasury Department official said outlays in March were higher this year in part because the government moved an additional $30 billion in recurring benefit payments into the month since April 1 fell on a weekend. Outlays also increased by about $20 billion, compared to March 2011, due to a non-cash accounting re-estimate for the cost of economic stimulus programs, the official said.
March receipts totaled $171.22 billion, about $20 billion more than the government took in the same month a year earlier.
Economists surveyed by Dow Jones Newswires had projected a monthly deficit of $197.5 billion.
Still, the slowing pace of deficit growth for the first half of the year means it is less likely that Congress will need to raise the debt ceiling before the November election.
The first half of the year tends to include higher-deficit months, while greater receipts typically are collected in the final six months of the fiscal year, particularly in April, June and September, the Treasury official said.
The government's debt ceiling is $16.394 trillion. As of Monday, the Treasury held $15.578 trillion in debt subject to the limit, according to a separate report.
The budget deficit, and how to address it, is likely to be a key issue in this year's presidential election, although both parties have acknowledged that the current level is unsustainable.
Earlier Wednesday, President Barack Obama called for increased taxes on the wealthiest Americans as a means to close the gap. Likely Republican nominee Mitt Romney has said raising taxes would hurt small businesses, slow economic growth and thus worsen budget woes.
The Congressional Budget Office, a nonpartisan budget scorekeeper, last week projected this year's federal budget shortfall will total $1.2 trillion in fiscal 2012, down slightly from the $1.3 trillion deficit in the previous fiscal year.
If realized, the CBO forecast would mean the U.S. has been more than $1 trillion in the red for four straight years.
The year-to-date deficit has narrowed somewhat mainly because tax revenue has increased.
Wednesday's Treasury report showed receipts for the first six months of fiscal 2012 totaled $1.064 trillion, about $44 billion more than in the same period in fiscal 2011.
Revenue from both individual income taxes and corporate taxes was higher than a year before, the figures showed.
Spending in the first half of fiscal 2012 totaled $1.843 trillion, about $6 billion less than in the same period a year earlier.
--Budget deficit for first half of FY2012 was $778.99 billion, less than first six months of 2011
--March outlays of $369.37 billion was the highest monthly spending on record
WASHINGTON -- The U.S. budget deficit narrowed through the first half of the fiscal year, compared to the same period a year earlier, but the government spent more in March than it had in any prior month on record.
The U.S. Treasury Department on Wednesday said that, for the first six months of fiscal 2012, the government spent $778.99 billion more than it collected. This compares with a $829.42 billion deficit for the first half of the prior year.
For March alone, the U.S. recorded a budget deficit of $198.16 billion, about $10 billion more than in the same month last year, according to the Treasury's latest budget figures.
Government outlays totaled $369.37 billion last month--about $20 billion more than March 2011--and the most in any single calendar month.
A Treasury Department official said outlays in March were higher this year in part because the government moved an additional $30 billion in recurring benefit payments into the month since April 1 fell on a weekend. Outlays also increased by about $20 billion, compared to March 2011, due to a non-cash accounting re-estimate for the cost of economic stimulus programs, the official said.
March receipts totaled $171.22 billion, about $20 billion more than the government took in the same month a year earlier.
Economists surveyed by Dow Jones Newswires had projected a monthly deficit of $197.5 billion.
Still, the slowing pace of deficit growth for the first half of the year means it is less likely that Congress will need to raise the debt ceiling before the November election.
The first half of the year tends to include higher-deficit months, while greater receipts typically are collected in the final six months of the fiscal year, particularly in April, June and September, the Treasury official said.
The government's debt ceiling is $16.394 trillion. As of Monday, the Treasury held $15.578 trillion in debt subject to the limit, according to a separate report.
The budget deficit, and how to address it, is likely to be a key issue in this year's presidential election, although both parties have acknowledged that the current level is unsustainable.
Earlier Wednesday, President Barack Obama called for increased taxes on the wealthiest Americans as a means to close the gap. Likely Republican nominee Mitt Romney has said raising taxes would hurt small businesses, slow economic growth and thus worsen budget woes.
The Congressional Budget Office, a nonpartisan budget scorekeeper, last week projected this year's federal budget shortfall will total $1.2 trillion in fiscal 2012, down slightly from the $1.3 trillion deficit in the previous fiscal year.
If realized, the CBO forecast would mean the U.S. has been more than $1 trillion in the red for four straight years.
The year-to-date deficit has narrowed somewhat mainly because tax revenue has increased.
Wednesday's Treasury report showed receipts for the first six months of fiscal 2012 totaled $1.064 trillion, about $44 billion more than in the same period in fiscal 2011.
Revenue from both individual income taxes and corporate taxes was higher than a year before, the figures showed.
Spending in the first half of fiscal 2012 totaled $1.843 trillion, about $6 billion less than in the same period a year earlier.
WSJ UPDATE: Earthquake Rattles Communities Around Indian Ocean
JAKARTA (Dow Jones)--A massive earthquake and strong aftershock rattled Indonesia's westernmost province of Aceh on Wednesday, spurring fears of a tsunami in the same region where a 2004 tsunami killed more than 200,000.
The 8.6-magnitude earthquake was felt as far away as Thailand, Malaysia and India. The Pacific Tsunami Warning Center had issued a tsunami watch Wednesday afternoon in Asia but later canceled it, saying that while a significant tsunami was generated by the quake, the threat for most areas had diminished.
The initial alert said the tsunami watch was in effect from Indonesia to India, Sri Lanka, Australia, Somalia, Oman, Iran, Bangladesh, Kenya, South Africa and Singapore.
Indonesian President Susilo Bambang Yudhoyono said that early reports were that there was limited damage. "There is no tsunami threat," he said Wednesday evening ahead of a news conference with British Prime Minister David Cameron. "The tsunami early-warning system is working well and at the moment there are no casualties."
India also canceled its tsunami warnings and alerts for several states and territories, including the Andaman and Nicobar Islands in the Indian Ocean.
In a statement, India's Home Ministry said it had asked the chief secretaries of the Andaman and Nicobar Islands, and all east-coast states, to advise fishermen not to venture out to sea and to take other precautions.
Teams from the National Disaster Response Force were placed on standby in case they were needed to carry out emergency relief efforts, the agency said.
The U.S. Geological Survey said the powerful quake was centered about 20 miles beneath the ocean floor, about 300 miles from Aceh's provincial capital.
Indonesian television news showed crowded roads as people tried to drive away from the coast.
"It felt like the earthquake back when we had a tsunami in 2004," said driver and Aceh resident Edi, who like many Indonesians goes by one name. "Everybody ran around in a panic and we ran up a hill."
Coastal residents in Sri Lanka were told to move to higher ground. Thailand's National Disaster Warning Center issued an evacuation order to residents in six provinces along the country's west coast, including the popular tourist destinations of Phuket, Krabi and Phang-Nga. Thailand later canceled its tsunami warning.
Indonesia sits atop a web of fault lines that makes the sprawling archipelago prone to volcanic and seismic activity. A giant 9.1-magnitude quake off the country on Dec. 26, 2004, triggered a tsunami in the Indian Ocean that killed 230,000 people, nearly three quarter of them in Aceh.
Indonesia's government has improved its monitoring of earthquake data since then by positioning buoys to take sea-level readings and warn of potential tsunamis. Officials have noted the problem of getting timely information to people who live in remote areas of coastal Sumatra.
Experts said the kind of devastation seen in the 2004 disaster and last year in Japan was caused by a particular type of earthquake. During Wednesday's quake, the tectonic plates were likely shifting sideways rather than up and down, leaving less of a chance for the giant waves, said Susanne Sergeant, a seismologist at the British Geological Survey.
"The earthquake today was different from that in 2004 off Aceh and in Japan" last year, and less likely to create massive water displacement, she said.
The 8.6-magnitude earthquake was felt as far away as Thailand, Malaysia and India. The Pacific Tsunami Warning Center had issued a tsunami watch Wednesday afternoon in Asia but later canceled it, saying that while a significant tsunami was generated by the quake, the threat for most areas had diminished.
The initial alert said the tsunami watch was in effect from Indonesia to India, Sri Lanka, Australia, Somalia, Oman, Iran, Bangladesh, Kenya, South Africa and Singapore.
Indonesian President Susilo Bambang Yudhoyono said that early reports were that there was limited damage. "There is no tsunami threat," he said Wednesday evening ahead of a news conference with British Prime Minister David Cameron. "The tsunami early-warning system is working well and at the moment there are no casualties."
India also canceled its tsunami warnings and alerts for several states and territories, including the Andaman and Nicobar Islands in the Indian Ocean.
In a statement, India's Home Ministry said it had asked the chief secretaries of the Andaman and Nicobar Islands, and all east-coast states, to advise fishermen not to venture out to sea and to take other precautions.
Teams from the National Disaster Response Force were placed on standby in case they were needed to carry out emergency relief efforts, the agency said.
The U.S. Geological Survey said the powerful quake was centered about 20 miles beneath the ocean floor, about 300 miles from Aceh's provincial capital.
Indonesian television news showed crowded roads as people tried to drive away from the coast.
"It felt like the earthquake back when we had a tsunami in 2004," said driver and Aceh resident Edi, who like many Indonesians goes by one name. "Everybody ran around in a panic and we ran up a hill."
Coastal residents in Sri Lanka were told to move to higher ground. Thailand's National Disaster Warning Center issued an evacuation order to residents in six provinces along the country's west coast, including the popular tourist destinations of Phuket, Krabi and Phang-Nga. Thailand later canceled its tsunami warning.
Indonesia sits atop a web of fault lines that makes the sprawling archipelago prone to volcanic and seismic activity. A giant 9.1-magnitude quake off the country on Dec. 26, 2004, triggered a tsunami in the Indian Ocean that killed 230,000 people, nearly three quarter of them in Aceh.
Indonesia's government has improved its monitoring of earthquake data since then by positioning buoys to take sea-level readings and warn of potential tsunamis. Officials have noted the problem of getting timely information to people who live in remote areas of coastal Sumatra.
Experts said the kind of devastation seen in the 2004 disaster and last year in Japan was caused by a particular type of earthquake. During Wednesday's quake, the tectonic plates were likely shifting sideways rather than up and down, leaving less of a chance for the giant waves, said Susanne Sergeant, a seismologist at the British Geological Survey.
"The earthquake today was different from that in 2004 off Aceh and in Japan" last year, and less likely to create massive water displacement, she said.
WSJ BLOG/Real Time Economics: Fed's Bullard Sees Jobless Rate at 7.8% by Year-End
The Federal Reserve needs to wait and see more economic reports before deciding whether more easing or potential monetary policy tightening is needed, St. Louis Federal Reserve President James Bullard said during an interview with Bloomberg Radio.
Bullard, who said he sees the unemployment rate at 7.8% by the end of the year, noted that March's monthly employment report was just one "mediocre" report and not an immediate concern that would push the central bank toward further easing.
On Friday, the government said employers added 120,000 workers in March, well below the 203,000 economists had forecast. The unemployment rate dipped to 8.2% from 8.3% a month earlier.
The central bank is waiting for more data to confirm where the economy is headed before any future policy decisions are decided, he said during the interview.
Investors have been closely watching for any clues about whether the Fed will embark on more bond purchases, known as quantitative easing. Bullard isn't a voting member of the Federal Open Market Committee in 2012, but his comments are still analyzed to see what the Fed might be discussing.
Bullard is uncertain whether rates will stay exceptionally low until the end of 2014 as was projected in an official forecast from the Fed earlier this year. The central banker said he was uneasy about providing such an extended forecast since true economic conditions over the next three years are still so uncertain.
If economic conditions change dramatically, Bullard said he would not be afraid to change his forecast for when the central bank might tighten policy.
Bullard, who said he sees the unemployment rate at 7.8% by the end of the year, noted that March's monthly employment report was just one "mediocre" report and not an immediate concern that would push the central bank toward further easing.
On Friday, the government said employers added 120,000 workers in March, well below the 203,000 economists had forecast. The unemployment rate dipped to 8.2% from 8.3% a month earlier.
The central bank is waiting for more data to confirm where the economy is headed before any future policy decisions are decided, he said during the interview.
Investors have been closely watching for any clues about whether the Fed will embark on more bond purchases, known as quantitative easing. Bullard isn't a voting member of the Federal Open Market Committee in 2012, but his comments are still analyzed to see what the Fed might be discussing.
Bullard is uncertain whether rates will stay exceptionally low until the end of 2014 as was projected in an official forecast from the Fed earlier this year. The central banker said he was uneasy about providing such an extended forecast since true economic conditions over the next three years are still so uncertain.
If economic conditions change dramatically, Bullard said he would not be afraid to change his forecast for when the central bank might tighten policy.
ECB's Knot: Spain Currently Is The Euro Zone's Biggest Problem
THE HAGUE (Dow Jones)--European Central Bank governing council member Klaas Knot on Wednesday said Spain is currently the main risk in the euro zone and he urged that country to speed up reforms to restore market confidence.
Spain's borrowing costs increased this week amid concerns about whether the country will be able to meet its deficit-reduction targets. Even after the Spanish government on Monday presented a package of EUR10 billion in new spending cuts, investors resumed their selling of Spanish stocks and bonds on Tuesday.
Knot, who spoke at a conference in The Hague, said the Spanish government failed to implement necessary reforms in the past months as the improved climate in financial markets took away some pressure.
While markets may have overreacted to Spain's problems this week, Knot said that "confidence has to be restored soon."
Knot, who is also the head of the Dutch central bank, stressed that he didn't want to speculate on whether Spain will need financial support. However, he noted that the country now poses the main risk in the currency area.
"Experience has taught me this may be different in one week. But I think that Spain is now the biggest problem," he said.
Knot reiterated that the ECB's Long-Term Refinancing Operation, or LTRO, which gave European Union banks cheap access to much-needed liquidity, provided no fundamental solution to the euro-zone debt crisis and only bought time.
"[The LTRO's] success will depend on how this time will be used," he said.
Spain's borrowing costs increased this week amid concerns about whether the country will be able to meet its deficit-reduction targets. Even after the Spanish government on Monday presented a package of EUR10 billion in new spending cuts, investors resumed their selling of Spanish stocks and bonds on Tuesday.
Knot, who spoke at a conference in The Hague, said the Spanish government failed to implement necessary reforms in the past months as the improved climate in financial markets took away some pressure.
While markets may have overreacted to Spain's problems this week, Knot said that "confidence has to be restored soon."
Knot, who is also the head of the Dutch central bank, stressed that he didn't want to speculate on whether Spain will need financial support. However, he noted that the country now poses the main risk in the currency area.
"Experience has taught me this may be different in one week. But I think that Spain is now the biggest problem," he said.
Knot reiterated that the ECB's Long-Term Refinancing Operation, or LTRO, which gave European Union banks cheap access to much-needed liquidity, provided no fundamental solution to the euro-zone debt crisis and only bought time.
"[The LTRO's] success will depend on how this time will be used," he said.
Friday, 6 April 2012
MARKET TALK: EUR/CHF Dip Part Short-Trimming, 'Courage' Building -DB
12:03 (Dow Jones) Pointing to CFTC data showing speculative market is largely short Swiss francs, Alan Ruskin at Deutsche Bank says euro/Swiss's brief dip below 1.20 is a combination of traders scaling back on anti-Swiss bets, and gradually "plucking up the courage" to test the level. "The Swissie's being used as a funding currency, so this is a wake-up call in a sense." Yet with the SNB's credibility clearly on the line, Ruskin says the central bank may even try to raise the floor, which comes with its own set of perils. "If it goes below 1.20, the SNB could reinstate a new floor, but we could get to 1.10 very quickly. I don't think it's going to happen anytime soon, but usually if [a peg] snaps it will snap big." EUR/CHF briefly dips to 1.1990 before ticking back up to 1.2019, according to EBS via CQG.
BOJ Watch: Political Pressure On BOJ Reduces Room For Inaction
-- BOJ may want to refrain from further easing action at next week's meeting
-- Inaction becoming less likely amid persistent political pressure
-- BOJ watchers say surprise February easing has made it difficult to predict timing of central bank's next move
TOKYO (Dow Jones)--The Bank of Japan may want to refrain from taking action when its policy board meets next week, having acted in the past two months. But inaction is becoming less of an option amid persistent political pressure to be proactive in the fight against deflation.
"Normally, the bank would try to gauge the effects (of recent actions)," said one person familiar with the BOJ's thinking, referring to its February move to increase bond purchases and set a near-term 1% inflation goal, and to its loan program expansion in March.
The February measures, which took markets by surprise, weakened the yen and sent share prices higher, giving the economy some breathing space.
Many BOJ watchers expect the BOJ to hold off from deciding on any new measures at its two-day board meeting from Monday, as the options are limited with interest rates already near zero.
The central bank is wary of pushing the envelope on the unconventional easing measures it has already undertaken, such as the buying of government bonds. Further purchases could raise questions about Japan's commitment to fiscal reform and lead to a spike in interest rates.
"While aggressive monetary easing is definitely needed after the bursting of bubbles, its side effects and limits should be also be taken into consideration," BOJ Gov. Masaaki Shirakawa said last month at a meeting of central bankers in Washington.
But BOJ watchers admit that the February easing--which was a surprise in that it was carried out when the BOJ was seeing an improvement in the economy--has made it difficult to predict the timing of the central bank's next move. Market participants are increasingly keeping an eye on political pressure, seen as a key factor behind the February move.
"Over the year, there would be more scope for politicans to put pressure on the BOJ, and its independence is likely to be threatened," said Kyohei Morita, chief Japan economist at Barclays Capital in Tokyo.
In a sign of such pressure, the parliament on Thursday voted down the nomination of an economist for the BOJ's policy board, as lawmakers looked for candidates more supportive of further easing.
For Prime Minster Yoshihiko Noda, ending deflation has gained more importance as he tries to push through a bill to double the sales tax by 2015 to fix the nation's deteriorating finances.
The tax hike has met strong opposition, even within Noda's ruling party, from lawmakers who say it would further weaken an economy that remains mired in deflation. After days of heated debate within the party, Noda submitted the tax increase legislation to parliament last week, promising the government will do all it can to fight deflation alongside the BOJ.
"We are strongly hoping that the BOJ will take appropriate and decisive monetary policy and we would like to continue to keep in close contact," Noda said in parliament this week.
Noda's economy minister, Motohisa Furukawa, followed up by saying he hopes the BOJ will take appropriate measures to exit deflation and realize its 1% inflation goal.
The ministers made similar remarks ahead of the February easing.
If the BOJ were to take further action, options include expanding the size of its Y65 trillion asset purchase program and buying government debt with maturity of over two years. It currently buys JGBs up to two years under the program.
The BOJ is concerned that buying such longer-term debt will be regarded as monetization, or financing government borrowing. But some government officials brush aside such concerns.
"They shouldn't be worried so much about it. Rather, the lack of further easing may threaten to change market sentiment," said one government official.
Many BOJ watchers expect any further action to come later this month when the board holds another meeting. But some said the central bank may move next week, eyeing its impact on markets.
Yasunari Ueno, chief market economist at Mizuho Securities, said he also believes the BOJ will act after its April 27 meeting, but that there is a chance the central bank will bring forward the action.
"It could move at the first meeting in April to surprise markets," Ueno said.
The BOJ will release its semi-annual economic outlook at the April 27 meeting. The outlook is expected to show that board members expect inflation to fall short of the 1% goal, giving justification for further easing, BOJ watchers said. Japan's core consumer price index rose a mere 0.1% in February from a year earlier.
-- Inaction becoming less likely amid persistent political pressure
-- BOJ watchers say surprise February easing has made it difficult to predict timing of central bank's next move
TOKYO (Dow Jones)--The Bank of Japan may want to refrain from taking action when its policy board meets next week, having acted in the past two months. But inaction is becoming less of an option amid persistent political pressure to be proactive in the fight against deflation.
"Normally, the bank would try to gauge the effects (of recent actions)," said one person familiar with the BOJ's thinking, referring to its February move to increase bond purchases and set a near-term 1% inflation goal, and to its loan program expansion in March.
The February measures, which took markets by surprise, weakened the yen and sent share prices higher, giving the economy some breathing space.
Many BOJ watchers expect the BOJ to hold off from deciding on any new measures at its two-day board meeting from Monday, as the options are limited with interest rates already near zero.
The central bank is wary of pushing the envelope on the unconventional easing measures it has already undertaken, such as the buying of government bonds. Further purchases could raise questions about Japan's commitment to fiscal reform and lead to a spike in interest rates.
"While aggressive monetary easing is definitely needed after the bursting of bubbles, its side effects and limits should be also be taken into consideration," BOJ Gov. Masaaki Shirakawa said last month at a meeting of central bankers in Washington.
But BOJ watchers admit that the February easing--which was a surprise in that it was carried out when the BOJ was seeing an improvement in the economy--has made it difficult to predict the timing of the central bank's next move. Market participants are increasingly keeping an eye on political pressure, seen as a key factor behind the February move.
"Over the year, there would be more scope for politicans to put pressure on the BOJ, and its independence is likely to be threatened," said Kyohei Morita, chief Japan economist at Barclays Capital in Tokyo.
In a sign of such pressure, the parliament on Thursday voted down the nomination of an economist for the BOJ's policy board, as lawmakers looked for candidates more supportive of further easing.
For Prime Minster Yoshihiko Noda, ending deflation has gained more importance as he tries to push through a bill to double the sales tax by 2015 to fix the nation's deteriorating finances.
The tax hike has met strong opposition, even within Noda's ruling party, from lawmakers who say it would further weaken an economy that remains mired in deflation. After days of heated debate within the party, Noda submitted the tax increase legislation to parliament last week, promising the government will do all it can to fight deflation alongside the BOJ.
"We are strongly hoping that the BOJ will take appropriate and decisive monetary policy and we would like to continue to keep in close contact," Noda said in parliament this week.
Noda's economy minister, Motohisa Furukawa, followed up by saying he hopes the BOJ will take appropriate measures to exit deflation and realize its 1% inflation goal.
The ministers made similar remarks ahead of the February easing.
If the BOJ were to take further action, options include expanding the size of its Y65 trillion asset purchase program and buying government debt with maturity of over two years. It currently buys JGBs up to two years under the program.
The BOJ is concerned that buying such longer-term debt will be regarded as monetization, or financing government borrowing. But some government officials brush aside such concerns.
"They shouldn't be worried so much about it. Rather, the lack of further easing may threaten to change market sentiment," said one government official.
Many BOJ watchers expect any further action to come later this month when the board holds another meeting. But some said the central bank may move next week, eyeing its impact on markets.
Yasunari Ueno, chief market economist at Mizuho Securities, said he also believes the BOJ will act after its April 27 meeting, but that there is a chance the central bank will bring forward the action.
"It could move at the first meeting in April to surprise markets," Ueno said.
The BOJ will release its semi-annual economic outlook at the April 27 meeting. The outlook is expected to show that board members expect inflation to fall short of the 1% goal, giving justification for further easing, BOJ watchers said. Japan's core consumer price index rose a mere 0.1% in February from a year earlier.
Greek Economic Sentiment Improves Slightly In March
ATHENS -(Dow Jones)- Economic sentiment in Greece improved marginally in March following the successful debt restructuring deal, but pessimism remains due to ongoing uncertainties over the direction the economy will take and the complexity of the new funding program's implementation requirements.
The Foundation for Economic and Industrial Research, also known as IOBE, said its monthly economic climate index in March rose to 75.7 from 74.9 in February.
According to IOBE, the monthly economic climate index is 94.4 in the euro zone and 93.2 in the European Union for the same period.
The index reached its lowest level in Greece in March 2009 to 67.2 and its highest in April 2004 to 111.9, indicating how badly the economic crisis has affected the main sectors of the country's economy.
IOBE's economic climate index combines consumer confidence with sub-indexes of business expectations in industry, construction, retail trade and services.
In March, business expectations across all other sectors deteriorated, with the exception of services sub-index, which improved marginally, IOBE added.
"The pre-election period--as well as the liquidity of the post-election political scene--raises doubts about the timely and effective promotion of all reform interventions that should be undertaken in the next period," it said in the report.
"It should be noted that since 1981 [when the research for this index started in Greece], there has always been improvement in the climate during the pre-election months, as the approach to a process of direct intervention in the country's political environment creates positive expectations."
Greek Prime Minister Lucas Papademos will likely set a date for national elections next week, but still expects a vote at the end of April or in early May.
The Foundation for Economic and Industrial Research, also known as IOBE, said its monthly economic climate index in March rose to 75.7 from 74.9 in February.
According to IOBE, the monthly economic climate index is 94.4 in the euro zone and 93.2 in the European Union for the same period.
The index reached its lowest level in Greece in March 2009 to 67.2 and its highest in April 2004 to 111.9, indicating how badly the economic crisis has affected the main sectors of the country's economy.
IOBE's economic climate index combines consumer confidence with sub-indexes of business expectations in industry, construction, retail trade and services.
In March, business expectations across all other sectors deteriorated, with the exception of services sub-index, which improved marginally, IOBE added.
"The pre-election period--as well as the liquidity of the post-election political scene--raises doubts about the timely and effective promotion of all reform interventions that should be undertaken in the next period," it said in the report.
"It should be noted that since 1981 [when the research for this index started in Greece], there has always been improvement in the climate during the pre-election months, as the approach to a process of direct intervention in the country's political environment creates positive expectations."
Greek Prime Minister Lucas Papademos will likely set a date for national elections next week, but still expects a vote at the end of April or in early May.
MARKET TALK: SNB Resolve Expected To Hold Firm -SocGen
1149 GMT [Dow Jones] The Swiss National Bank's resolve is expected to hold firm, says Societe Generale, which thinks it was unsurprising that the central bank was tested Thursday given the thinner markets ahead of the long weekend. "It would make sense for the SNB to accumulate a large EUR long and then raise the floor, but that seems unlikely behavior for sober central bankers," notes Kit Juckes, chief currency strategist at Societe Generale. Juckes adds that the floor "appears to have holes in it, if today's low quoted on screens at 1.1999 is anything to go by, but that is a detail." EUR/CHF now trades at 1.2018
WORLD: SNB Euro Floor Breached As Euro-Zone Jitters Resurface
-- Broad euro slide sends Swiss franc soaring
-- SNB seen in the market buying euros to defend floor, traders say
-- Spain jitters drive euro lower across the board
-- GBP falls after manufacturing data disappoints
LONDON (Dow Jones)--The euro sank in European trading Thursday, touching multi-week lows against other major currencies and briefly breaching the Swiss National Bank's floor at CHF1.20 for the first time since its introduction last September.
The euro fell below CHF1.2000 against the Swiss franc on the EBS trading platform via CQG shortly after 0930 GMT, slipping to as low as CHF1.1990 in thin pre-Easter holiday trading.
Market participants said the move was triggered by stops around the CHF1.2030 level and came after the euro slid against the dollar, pound and yen in an extended reaction to Wednesday's disappointing Spanish bond auction as yields on benchmark Spanish bonds rose to levels last seen before European Central Bank's first three-year long-term refinancing operations.
"The LTRO effect of keeping peripheral bond yields down is definitely behind us... So we're likely to see a period of stress in bond markets and some weakness in the euro but I wouldn't want to extrapolate this week's weakness into Armageddon," said London-based chief currency strategist Kit Juckes at Societe Generale.
Traders said the Swiss National Bank bought euros in the market shortly after its floor was breached, helping the single currency to move back up to CHF1.2016 by 1056 GMT.
In the aftermath, the Swiss National Bank reiterated that it will do its utmost determination to keep the floor in place by buying foreign currency in unlimited quantities.
"It will be difficult for momentum to build for investors to start positioning against the floor," said Michael Sneyd, a currency strategist at BNP Paribas.
-- SNB seen in the market buying euros to defend floor, traders say
-- Spain jitters drive euro lower across the board
-- GBP falls after manufacturing data disappoints
LONDON (Dow Jones)--The euro sank in European trading Thursday, touching multi-week lows against other major currencies and briefly breaching the Swiss National Bank's floor at CHF1.20 for the first time since its introduction last September.
The euro fell below CHF1.2000 against the Swiss franc on the EBS trading platform via CQG shortly after 0930 GMT, slipping to as low as CHF1.1990 in thin pre-Easter holiday trading.
Market participants said the move was triggered by stops around the CHF1.2030 level and came after the euro slid against the dollar, pound and yen in an extended reaction to Wednesday's disappointing Spanish bond auction as yields on benchmark Spanish bonds rose to levels last seen before European Central Bank's first three-year long-term refinancing operations.
"The LTRO effect of keeping peripheral bond yields down is definitely behind us... So we're likely to see a period of stress in bond markets and some weakness in the euro but I wouldn't want to extrapolate this week's weakness into Armageddon," said London-based chief currency strategist Kit Juckes at Societe Generale.
Traders said the Swiss National Bank bought euros in the market shortly after its floor was breached, helping the single currency to move back up to CHF1.2016 by 1056 GMT.
In the aftermath, the Swiss National Bank reiterated that it will do its utmost determination to keep the floor in place by buying foreign currency in unlimited quantities.
"It will be difficult for momentum to build for investors to start positioning against the floor," said Michael Sneyd, a currency strategist at BNP Paribas.
China P&I Halting Coverage For Tankers Carrying Iran Oil -Reuters
Major Chinese ship insurer China P&I Club said it will halt indemnity coverage for tanker ships carrying Iranian oil from July, Reuters reported Thursday, citing officials at the company.
The move narrows insurance options for shipments of Iranian oil already constricted by payment barriers set by Western sanctions. The company did not want to stand alone in the market after other insurers in Japan and Europe decided to ban or limit their own coverage of tankers operating in Iran, the officials said.
The move narrows insurance options for shipments of Iranian oil already constricted by payment barriers set by Western sanctions. The company did not want to stand alone in the market after other insurers in Japan and Europe decided to ban or limit their own coverage of tankers operating in Iran, the officials said.
BIG PICTURE: ADP Data Should Quell Irrational Job Exuberance
-- ADP says 209,00 private-sector jobs created in March
-- Economists stick with modest forecast of 203,000 increase in March non-farm payrolls
-- Hopes about labor markets may have gotten ahead of reality
NEW YORK (Dow Jones)--Sometimes the best surprise is no surprise at all.
Wednesday's report from ADP showed private sector jobs rose 209,000 in March--just a bit above the median forecast of 200,000.
After seeing the ADP data, economists did not rush to mark up their expectations for Friday's important payrolls figure [which includes government jobs]. The median forecast for non-farm payrolls is a gain of 203,000, down from the 227,000 reported for February.
And that moderation is a good thing.
When it comes to hopes about employment data, the financial markets and consumers may have gotten ahead actual job growth. A reality check--in the form of a moderate gain in March payrolls--will remind investors and consumers that the labor markets and the U.S. economy as a whole still face risks and headwinds.
Given the modest strength of gross domestic product growth, businesses aren't likely to go on hiring sprees. That means the unemployment rate will only fall gradually, with a risk of an increase sometime this year.
The disconnect between economic growth and labor-market improvement is concerning the Federal Reserve. In the minutes of the March 13 meeting released Tuesday, policymakers discussed that "the decline in the unemployment rate over the past year was larger than what seemed consistent with the modest reported rate of real GDP growth."
Economists who watch consumers also worry householders are getting ahead of themselves when it comes to jobs.
Richard Curtin, chief economist at the University of Michigan Surveys of Consumers that puts together the consumer sentiment index, said the quick decline in pessimism may have been too rapid, "as expected job and income gains may be unrealistically high for the economy to meet."
Joel Prakken, chairman of Macroeconomic Advisers that compiles the jobs data for ADP, says while the recent trend in hiring has been good, it is not strong enough to make a serious dent in the jobless rate especially if more people rejoin the labor force.
He says the economy needs to step up hiring to a monthly rate of 300,000 or more to bring down the jobless rate significantly. When does Macroeconomic Advisers expect hiring to reach that hefty pace? Not until late 2013.
-- Economists stick with modest forecast of 203,000 increase in March non-farm payrolls
-- Hopes about labor markets may have gotten ahead of reality
NEW YORK (Dow Jones)--Sometimes the best surprise is no surprise at all.
Wednesday's report from ADP showed private sector jobs rose 209,000 in March--just a bit above the median forecast of 200,000.
After seeing the ADP data, economists did not rush to mark up their expectations for Friday's important payrolls figure [which includes government jobs]. The median forecast for non-farm payrolls is a gain of 203,000, down from the 227,000 reported for February.
And that moderation is a good thing.
When it comes to hopes about employment data, the financial markets and consumers may have gotten ahead actual job growth. A reality check--in the form of a moderate gain in March payrolls--will remind investors and consumers that the labor markets and the U.S. economy as a whole still face risks and headwinds.
Given the modest strength of gross domestic product growth, businesses aren't likely to go on hiring sprees. That means the unemployment rate will only fall gradually, with a risk of an increase sometime this year.
The disconnect between economic growth and labor-market improvement is concerning the Federal Reserve. In the minutes of the March 13 meeting released Tuesday, policymakers discussed that "the decline in the unemployment rate over the past year was larger than what seemed consistent with the modest reported rate of real GDP growth."
Economists who watch consumers also worry householders are getting ahead of themselves when it comes to jobs.
Richard Curtin, chief economist at the University of Michigan Surveys of Consumers that puts together the consumer sentiment index, said the quick decline in pessimism may have been too rapid, "as expected job and income gains may be unrealistically high for the economy to meet."
Joel Prakken, chairman of Macroeconomic Advisers that compiles the jobs data for ADP, says while the recent trend in hiring has been good, it is not strong enough to make a serious dent in the jobless rate especially if more people rejoin the labor force.
He says the economy needs to step up hiring to a monthly rate of 300,000 or more to bring down the jobless rate significantly. When does Macroeconomic Advisers expect hiring to reach that hefty pace? Not until late 2013.
MARKET TALK: Inflation Data May Have Sparked CHF Move -BBH
1134 GMT [Dow Jones] Inflation data may have sparked CHF move says BBH noting that official figures published earlier Thursday showed Swiss CPI rose 0.6% in March, more than the 0.4% expected. "While it is true that in the past price pressures did end SNB efforts to prevent franc strength, that is most certainly not the case now," BBH says. Adds that while there is some debate as to whether the market actually traded below CHF1.20, the SNB has made its intentions known. "Ironically, the SNB's intervention to buy euros and sell francs may actually add to the pressure on the euro since it recycles the intervention proceeds," it says, adding that market talk suggests large leveraged accounts joined the SNB on the cross. EUR/CHF now at 1.2022
Geithner Sees China As Source Of Strength
--China's economy had been growing too fast, Geithner said
--U.S. wants China's yuan to appreciate further
--U.S. economy is getting stronger, Geithner said
WASHINGTON -- U.S. Treasury Secretary Timothy Geithner Wednesday said he expects China to be a source of strength for the world economy even as the country's rate of growth is slowing.
China's economy "is slowing to a more-sustainable pace. They were growing faster than they could sustain over time," Geithner said on Fox Business. "It looks to most people now, I think, from the outside that they have been able to slow it to a more-sustainable level and that will ultimately be good for us."
Chinese Premier Wen Jiabao last month reduced his country's growth target to 7.5% from the 8% annual target he has used since 2005. That sparked concerns that slower growth in China could hurt other economies.
Geithner also said he would like China to take more action on U.S. concerns regarding its currency; the U.S. has argued that the yuan should be allowed to appreciate further--intellectual property, subsidies and other economic matters.
"I would say that the Chinese are moving to try to be more responsive to our concerns," Geithner said.
Elsewhere, the Treasury secretary said the U.S. economy is gradually improving, though risks remain.
"Even though it's a tough economy--a lot of tough challenges ahead--we are really getting stronger, and there's a lot of strength here too," Geithner said.
Geithner highlighted Europe's financial crisis, tensions surrounding Iran that are causing higher oil prices, and potential deadlock in U.S. politics as the biggest threats to the recovery.
--U.S. wants China's yuan to appreciate further
--U.S. economy is getting stronger, Geithner said
WASHINGTON -- U.S. Treasury Secretary Timothy Geithner Wednesday said he expects China to be a source of strength for the world economy even as the country's rate of growth is slowing.
China's economy "is slowing to a more-sustainable pace. They were growing faster than they could sustain over time," Geithner said on Fox Business. "It looks to most people now, I think, from the outside that they have been able to slow it to a more-sustainable level and that will ultimately be good for us."
Chinese Premier Wen Jiabao last month reduced his country's growth target to 7.5% from the 8% annual target he has used since 2005. That sparked concerns that slower growth in China could hurt other economies.
Geithner also said he would like China to take more action on U.S. concerns regarding its currency; the U.S. has argued that the yuan should be allowed to appreciate further--intellectual property, subsidies and other economic matters.
"I would say that the Chinese are moving to try to be more responsive to our concerns," Geithner said.
Elsewhere, the Treasury secretary said the U.S. economy is gradually improving, though risks remain.
"Even though it's a tough economy--a lot of tough challenges ahead--we are really getting stronger, and there's a lot of strength here too," Geithner said.
Geithner highlighted Europe's financial crisis, tensions surrounding Iran that are causing higher oil prices, and potential deadlock in U.S. politics as the biggest threats to the recovery.
BOE Leaves Monetary Policy Unchanged, May Meeting Key
LONDON -(Dow Jones)- The Bank of England left its monetary policy unchanged Thursday amid evidence of a widening split among policy makers over the need for more stimulus, as conflicting economic data stoke fears about the health of the U.K. economy.
The U.K. central bank said its Monetary Policy Committee left its key interest rate at a record low of 0.5% and the target for its bond-buying stimulus program at GBP325 billion. The BOE's key rate has been held at 0.5% since March 2009.
The decision came as no surprise to investors, and both sterling and U.K. government bonds were largely unmoved following the central bank's announcement.
May is shaping up as a key test of policy makers' appetite for further stimulus. Next month's policy meeting will coincide with the completion of the central bank's latest batch of bond purchases under its quantitative easing program as well as its newest quarterly forecasts on inflation and growth.
Unlike in the U.S., where the Federal Reserve appears to have called time on its stimulus program, in the U.K. weak growth and slowing inflation mean expectations of further bond buying by the central bank remain very much alive.
But economists are divided on whether rate-setters will endorse a further dose soon, or pause to take stock as the U.K. charts its way through what BOE Governor Mervyn King expects will be a "zig-zag" recovery.
"I would not be surprised if in May they paused, only to come back to it later," said Neil Williams, chief economist at Hermes Fund Managers, who worries that the central bank's actions risk stoking inflation that will in turn sap growth.
"Expect next to no growth in the U.K. at all this year and possibly next year," he said.
Philip Rush, an economist at Nomura, believes the BOE will act sooner, endorsing another GBP25 billion of stimulus in May in the belief that inflation will continue to slow and growth to disappoint.
Mixed signals on the economy and the emergence of a rift among the central bank's nine rate-setters have made predicting the likely path of U.K. monetary policy trickier than usual.
Official figures published Thursday showed U.K. manufacturing output fell at the sharpest annual rate for more than two years in February, stoking fears of renewed recession. But more timely surveys of purchasing managers in manufacturing, construction and the U.K.'s dominant services sector suggest the economy will expand, albeit modestly, in the first quarter of 2012 after shrinking at the end of last year.
The annual rate of inflation slowed to 3.4% in February from a peak of 5.2% in September, and the BOE expects it to slow towards its 2% target by the end of the year. Yet rising oil prices and the threat of a drought in the U.K. could slow its decline.
The MPC appears divided between policy doves Adam Posen and David Miles, who have already been pushing for more stimulus, and rate-setters Martin Weale and BOE chief economist Spencer Dale, who fear inflation may prove far more persistent than their colleagues expect.
The U.K. economy's prospects for later in the year are clouded by one-off events that risk skewing the data and masking its underlying performance, including Queen Elizabeth's diamond jubilee and the Olympic Games in London. Economists warn the U.K. economy could also be thrown off course if the euro-zone's sovereign debt crisis flares up again.
The U.K. central bank said its Monetary Policy Committee left its key interest rate at a record low of 0.5% and the target for its bond-buying stimulus program at GBP325 billion. The BOE's key rate has been held at 0.5% since March 2009.
The decision came as no surprise to investors, and both sterling and U.K. government bonds were largely unmoved following the central bank's announcement.
May is shaping up as a key test of policy makers' appetite for further stimulus. Next month's policy meeting will coincide with the completion of the central bank's latest batch of bond purchases under its quantitative easing program as well as its newest quarterly forecasts on inflation and growth.
Unlike in the U.S., where the Federal Reserve appears to have called time on its stimulus program, in the U.K. weak growth and slowing inflation mean expectations of further bond buying by the central bank remain very much alive.
But economists are divided on whether rate-setters will endorse a further dose soon, or pause to take stock as the U.K. charts its way through what BOE Governor Mervyn King expects will be a "zig-zag" recovery.
"I would not be surprised if in May they paused, only to come back to it later," said Neil Williams, chief economist at Hermes Fund Managers, who worries that the central bank's actions risk stoking inflation that will in turn sap growth.
"Expect next to no growth in the U.K. at all this year and possibly next year," he said.
Philip Rush, an economist at Nomura, believes the BOE will act sooner, endorsing another GBP25 billion of stimulus in May in the belief that inflation will continue to slow and growth to disappoint.
Mixed signals on the economy and the emergence of a rift among the central bank's nine rate-setters have made predicting the likely path of U.K. monetary policy trickier than usual.
Official figures published Thursday showed U.K. manufacturing output fell at the sharpest annual rate for more than two years in February, stoking fears of renewed recession. But more timely surveys of purchasing managers in manufacturing, construction and the U.K.'s dominant services sector suggest the economy will expand, albeit modestly, in the first quarter of 2012 after shrinking at the end of last year.
The annual rate of inflation slowed to 3.4% in February from a peak of 5.2% in September, and the BOE expects it to slow towards its 2% target by the end of the year. Yet rising oil prices and the threat of a drought in the U.K. could slow its decline.
The MPC appears divided between policy doves Adam Posen and David Miles, who have already been pushing for more stimulus, and rate-setters Martin Weale and BOE chief economist Spencer Dale, who fear inflation may prove far more persistent than their colleagues expect.
The U.K. economy's prospects for later in the year are clouded by one-off events that risk skewing the data and masking its underlying performance, including Queen Elizabeth's diamond jubilee and the Olympic Games in London. Economists warn the U.K. economy could also be thrown off course if the euro-zone's sovereign debt crisis flares up again.
Thursday, 5 April 2012
Budget Concerns Put Dutch Bond Auction Under Scrutiny Next Week
-- Budget concerns turn focus on the Netherlands
-- Bond issuance from core euro-zone countries to dominate
-- New 10-year bund from Germany
FRANKFURT (Dow Jones)--The Netherlands's five-year bond auction Tuesday may draw more attention than usual as newly resurfaced concerns over budget deficits have put Dutch borrowing costs under some pressure.
The fading impact of the European Central Bank's cash boost has shifted attention back to economic fundamentals in the euro zone, putting pressure particularly on yields of peripheral countries such as Spain, which had to pay higher borrowing costs at a rather weak auction this week.
The Dutch minority government is currently in difficult talks about new cutbacks to meet the European Union's deficit target of 3% of gross domestic product, although a short interruption in the negotiation caused some unease among investors.
The talks, which are now in their fifth week, are troubled by divisions within the right-wing coalition and the supporting Freedom Party about the size and type of cutbacks. Analysts at Citigroup have recently said the Netherlands no longer belongs to the euro-zone core, mainly because of a weak economic outlook and shaky political landscape.
Dutch central bank chief Klaas Knot last week warned that the uncertainty has led to a slight increase in borrowing costs for the Netherlands and he urged the government not to delay spending cuts. The negotiations are expected to drag on for a couple of more weeks.
"Coalition politics have long been a feature of the Dutch government but that has not prevented a solid social compact and effective policy implementation over the medium term," said Luca Jellinek, head of European rates strategy at Credit Agricole CIB, adding that "it is absurd to characterize the Netherlands as anything but a 'core' country," as opposed to one of the weaker peripheral members of the currency area.
"Although the budgetary outlook and the current political and economic situation in the Netherlands raise some eyebrows abroad, the fundamentals still point out that the Netherlands belongs to the core of the euro area," Rabobank economists agreed in a note.
They said they expect the Dutch economy to climb out of the recession in the course of this year because of a gradual pick-up in exports, although for the year as a whole they forecast a 0.75% contraction, before a return to a 1% GDP growth in 2013.
During the crisis, Dutch debt has been a favored alternative to German bonds for investors who have been seeking safety but wanted higher returns than what rock-solid German debt would offer. Spreads between 10-year Dutch and German bonds currently trade at around 56 basis points, according to Tradeweb, up from levels of below 40 basis points at the beginning of the year.
Euro-zone government bond supply will total around EUR15 billion next week. On Tuesday, Austria will auction EUR1.32 billion of the 3.20% February 2017 and 3.40% November 2022 bonds, while the Netherlands will offer EUR2.5 billion to EUR3.5 billion of the 2.50% January 2017 Dutch State Loan, or DSL. Germany will launch a new, July 2022-dated 10-year bund Wednesday.
Austrian five-year paper has seen strong performance, but going into next week's auction, "we expect some supply concession, especially when compared to its nearest perceived credit counterpart--France," said analysts at RBC Capital Markets.
Rounding off next week's scheduled bond sales, Italy will auction Buoni del Tesoro Poliennali, or BTP, April 12 for series and amounts to be announced later Thursday.
"The improvement in Italy's perceived creditworthiness over the past few months is being put to the test," said Nicholas Spiro, managing director at Spiro Sovereign Strategy.
-- Bond issuance from core euro-zone countries to dominate
-- New 10-year bund from Germany
FRANKFURT (Dow Jones)--The Netherlands's five-year bond auction Tuesday may draw more attention than usual as newly resurfaced concerns over budget deficits have put Dutch borrowing costs under some pressure.
The fading impact of the European Central Bank's cash boost has shifted attention back to economic fundamentals in the euro zone, putting pressure particularly on yields of peripheral countries such as Spain, which had to pay higher borrowing costs at a rather weak auction this week.
The Dutch minority government is currently in difficult talks about new cutbacks to meet the European Union's deficit target of 3% of gross domestic product, although a short interruption in the negotiation caused some unease among investors.
The talks, which are now in their fifth week, are troubled by divisions within the right-wing coalition and the supporting Freedom Party about the size and type of cutbacks. Analysts at Citigroup have recently said the Netherlands no longer belongs to the euro-zone core, mainly because of a weak economic outlook and shaky political landscape.
Dutch central bank chief Klaas Knot last week warned that the uncertainty has led to a slight increase in borrowing costs for the Netherlands and he urged the government not to delay spending cuts. The negotiations are expected to drag on for a couple of more weeks.
"Coalition politics have long been a feature of the Dutch government but that has not prevented a solid social compact and effective policy implementation over the medium term," said Luca Jellinek, head of European rates strategy at Credit Agricole CIB, adding that "it is absurd to characterize the Netherlands as anything but a 'core' country," as opposed to one of the weaker peripheral members of the currency area.
"Although the budgetary outlook and the current political and economic situation in the Netherlands raise some eyebrows abroad, the fundamentals still point out that the Netherlands belongs to the core of the euro area," Rabobank economists agreed in a note.
They said they expect the Dutch economy to climb out of the recession in the course of this year because of a gradual pick-up in exports, although for the year as a whole they forecast a 0.75% contraction, before a return to a 1% GDP growth in 2013.
During the crisis, Dutch debt has been a favored alternative to German bonds for investors who have been seeking safety but wanted higher returns than what rock-solid German debt would offer. Spreads between 10-year Dutch and German bonds currently trade at around 56 basis points, according to Tradeweb, up from levels of below 40 basis points at the beginning of the year.
Euro-zone government bond supply will total around EUR15 billion next week. On Tuesday, Austria will auction EUR1.32 billion of the 3.20% February 2017 and 3.40% November 2022 bonds, while the Netherlands will offer EUR2.5 billion to EUR3.5 billion of the 2.50% January 2017 Dutch State Loan, or DSL. Germany will launch a new, July 2022-dated 10-year bund Wednesday.
Austrian five-year paper has seen strong performance, but going into next week's auction, "we expect some supply concession, especially when compared to its nearest perceived credit counterpart--France," said analysts at RBC Capital Markets.
Rounding off next week's scheduled bond sales, Italy will auction Buoni del Tesoro Poliennali, or BTP, April 12 for series and amounts to be announced later Thursday.
"The improvement in Italy's perceived creditworthiness over the past few months is being put to the test," said Nicholas Spiro, managing director at Spiro Sovereign Strategy.
UPDATE: Germany, Switzerland To Sign Amended Tax Deal Thursday
--Germany and Switzerland wrap up tax deal that sets higher tax rates
--Agreement must win support from German opposition
--Deal may generate billions of euro in extra tax revenues for Germany
DOW JONES NEWSWIRES
BERLIN (Dow Jones)--Germany and Switzerland are close to signing a new tax deal which allows wealthy Germans to retain their anonymity, while generating billions of euros in tax revenues for Berlin and ending a bruising dispute between the two neighboring countries over tax evasion and bank secrecy.
The deal comes after Berlin and Berne agreed last-minute amendments to a pact reached last summer in an effort to make it more appealing to German opposition leaders, who said they plan to veto it.
The two countries ended a long-running tax dispute in September, signing a draft deal to tax German citizens' investment income in Switzerland, but German Finance Minister Wolfgang Schaeuble will need the support of the federal states led by the Social Democrats, or SPD, and the Greens before the German parliament can vote on it.
Germany's finance ministry said Berlin and Bern agreed on higher tax rates than previously planned. Unreported savings of wealthy Germans will be taxed retroactively at 21% to 41%, up from 19% to 34%, while future capital gains will be taxed by 26.4%.
In addition, those Germans inheriting bank accounts in Switzerland can choose between reporting their new assets and paying the respective individual tax rate or paying a tax rate of over 50% and retaining anonymity.
Swiss Finance Minister Eveline Widmer-Schlumpf and Germany's ambassador will sign the amended agreement in Bern later Thursday. The deal will need to be ratified by lawmakers in both countries if it is to be implemented by 2013, and the SPD and Greens-led German states may still block the deal in the German upper house claiming it is too lenient on tax evaders.
Switzerland, which has developed a $2 trillion offshore financial sector over the years, is battling to preserve its bank secrecy laws in the face of mounting international pressure from countries seeking to repatriate taxes owed by citizens who have stashed funds in Swiss accounts.
Germans are estimated to have around CHF150 billion ($163.5 billion) deposited in secret Swiss accounts, and with the ongoing euro-region debt crisis straining public budgets, the country is keen to get the owed monies back.
The Swiss and U.K. governments recently signed a similar tax agreement which will be presented to the respective parliaments this year for implementation in 2013.
The agreement with Germany comes as tensions between the two countries are high due to a recent Swiss warrant for the arrest of three German tax investigators in connection with a case involving a compact disc that was stolen from Credit Suisse Group (CS) containing confidential data about Germans suspected of tax evasion.
The German government has expressed understanding for the Swiss warrants, which are a result of the neighboring states' different views over the same element of an offense. It has also called on opposition parties to back the deal because it would prevent similar conflicts resulting from different legal systems once the agreement becomes effective.
--Agreement must win support from German opposition
--Deal may generate billions of euro in extra tax revenues for Germany
DOW JONES NEWSWIRES
BERLIN (Dow Jones)--Germany and Switzerland are close to signing a new tax deal which allows wealthy Germans to retain their anonymity, while generating billions of euros in tax revenues for Berlin and ending a bruising dispute between the two neighboring countries over tax evasion and bank secrecy.
The deal comes after Berlin and Berne agreed last-minute amendments to a pact reached last summer in an effort to make it more appealing to German opposition leaders, who said they plan to veto it.
The two countries ended a long-running tax dispute in September, signing a draft deal to tax German citizens' investment income in Switzerland, but German Finance Minister Wolfgang Schaeuble will need the support of the federal states led by the Social Democrats, or SPD, and the Greens before the German parliament can vote on it.
Germany's finance ministry said Berlin and Bern agreed on higher tax rates than previously planned. Unreported savings of wealthy Germans will be taxed retroactively at 21% to 41%, up from 19% to 34%, while future capital gains will be taxed by 26.4%.
In addition, those Germans inheriting bank accounts in Switzerland can choose between reporting their new assets and paying the respective individual tax rate or paying a tax rate of over 50% and retaining anonymity.
Swiss Finance Minister Eveline Widmer-Schlumpf and Germany's ambassador will sign the amended agreement in Bern later Thursday. The deal will need to be ratified by lawmakers in both countries if it is to be implemented by 2013, and the SPD and Greens-led German states may still block the deal in the German upper house claiming it is too lenient on tax evaders.
Switzerland, which has developed a $2 trillion offshore financial sector over the years, is battling to preserve its bank secrecy laws in the face of mounting international pressure from countries seeking to repatriate taxes owed by citizens who have stashed funds in Swiss accounts.
Germans are estimated to have around CHF150 billion ($163.5 billion) deposited in secret Swiss accounts, and with the ongoing euro-region debt crisis straining public budgets, the country is keen to get the owed monies back.
The Swiss and U.K. governments recently signed a similar tax agreement which will be presented to the respective parliaments this year for implementation in 2013.
The agreement with Germany comes as tensions between the two countries are high due to a recent Swiss warrant for the arrest of three German tax investigators in connection with a case involving a compact disc that was stolen from Credit Suisse Group (CS) containing confidential data about Germans suspected of tax evasion.
The German government has expressed understanding for the Swiss warrants, which are a result of the neighboring states' different views over the same element of an offense. It has also called on opposition parties to back the deal because it would prevent similar conflicts resulting from different legal systems once the agreement becomes effective.
MARKET TALK: Blame Thin Markets For EUR/CHF Floor Breach -BNPP
1049 GMT [Dow Jones] Thin markets are to blame for the EUR/CHF move, says BNP Paribas after the cross fell below 1.20. BNP Paribas expects SNB to defend any challenge of its floor and for EUR/CHF to hold above 1.20. "It will be difficult for momentum to build for investors to start positioning against the floor. But any further clearing out of positions could see 1.20 level tested again," says BNP Paribas strategist Michael Sneyd. Any SNB intervention will be done through EUR/CHF, leaving the SNB holding a large amount of euros, notes Sneyd. "EUR/USD could continue to move lower as [the SNB] recycles increased euro holdings into other currencies," he adds. EUR/CHF at 1.2019.
Swiss Franc's Euro Floor Breached
LONDON -- The Swiss franc strengthened sharply against the euro Thursday, briefly breaching the minimum floor of CHF1.20 per euro set by the Swiss National Bank.
It was the first test of the floor since it was established on Sept. 6 and the euro fell to as low as CHF1.1990 on the EBS trading platform via CQG against the franc before climbing just above the key CHF1.20 level.
EBS is one of two key inter-bank trading platforms in the foreign-exchange market.
At 0950 GMT, the euro was trading at CHF1.2007 against the franc.
The test came amid broad-based euro weakness against a host of currencies, which saw stops get taken out at CHF1.2030 and below, according to London-based traders.
The SNB declined to comment on the apparent break of the floor.
It was the first test of the floor since it was established on Sept. 6 and the euro fell to as low as CHF1.1990 on the EBS trading platform via CQG against the franc before climbing just above the key CHF1.20 level.
EBS is one of two key inter-bank trading platforms in the foreign-exchange market.
At 0950 GMT, the euro was trading at CHF1.2007 against the franc.
The test came amid broad-based euro weakness against a host of currencies, which saw stops get taken out at CHF1.2030 and below, according to London-based traders.
The SNB declined to comment on the apparent break of the floor.
French Long-Term Bond Sale Smooth But Costly
The French government sold close to the maximum targeted amount of long-term government bonds at auction Thursday, but it had to pay slightly higher yields as a result of uncertainty ahead of presidential elections that conclude May 6, and as the impact of the European Central Bank's cash boost starts to wear off.
The strength of demand contrasted with a Spanish government bond auction Wednesday, in which the government sold close to the minimum targeted amount at higher yields. Its relative success should cool fears that France will soon find itself in the bond market's crosshairs.
The euro zone's second largest economy heads for the first round of polls later this month against a backdrop of weak growth, rising unemployment and a large budget deficit.
The French Treasury Agency on Thursday sold EUR8.439 billion of long-term government bonds, known as OATs, at the upper end of its EUR7 billion to EUR8.5 billion target range. It auctioned the 4.25% October 2017, 3% April 2022, 3.50% April 2026 and 4.50% April 2041 OATs. The three shortest-dated OATs were previously auctioned in March, while the 2041-dated OAT was last sold in January.
The average yield on the 2017 OAT was set at 1.96%, up from 1.91% previously. The average yield on the 2022 OAT was 2.98%, up from 2.91%, while the average yield on the 2026 OAT came in at 3.46%, up from 3.30% previously. The average yield on the 2041 OAT was 3.79%, down from 3.97% at its January sale.
The yields were in line with secondary market levels.
"Demand was again relatively strong on the 30-year area despite the incoming presidential elections which is a good signal for French bonds," said Cyril Regnat, strategist at Natixis.
Demand for European government bonds has received a boost in recent months as banks invested cheap funds provided by the European Central Bank in two Long Term Refinancing Operations.
But analysts at the Royal Bank of Scotland said that the weakness of recent Italian and Spanish auctions suggests much of the money provided by the ECB has been already deployed, "which will affect France too."
According to an opinion poll released Wednesday, President Nicolas Sarkozy would lead the Socialist Party's Francois Hollande in the first round of the election to be held April 22, though he would lose in the event of a run-off.
"We believe that the French government will have no choice but to stick to its commitment to reduce the public deficit, if anything because the pressure of the European Union, the markets and/or rating agencies will return in case of slippage," economists at Credit Agricole CIB said in a note.
France's 2011 budget deficit reached 5.2% of GDP, which the current government of plans to reduce to 4.5% of GDP this year. Euro-zone rules dictate that member countries bring down the deficit to 3% of GDP next year.
French public debt reached 85.8% of gross domestic product at the end of 2011, only marginally below the euro-zone average of 88%, but above Germany's 82%.
The strength of demand contrasted with a Spanish government bond auction Wednesday, in which the government sold close to the minimum targeted amount at higher yields. Its relative success should cool fears that France will soon find itself in the bond market's crosshairs.
The euro zone's second largest economy heads for the first round of polls later this month against a backdrop of weak growth, rising unemployment and a large budget deficit.
The French Treasury Agency on Thursday sold EUR8.439 billion of long-term government bonds, known as OATs, at the upper end of its EUR7 billion to EUR8.5 billion target range. It auctioned the 4.25% October 2017, 3% April 2022, 3.50% April 2026 and 4.50% April 2041 OATs. The three shortest-dated OATs were previously auctioned in March, while the 2041-dated OAT was last sold in January.
The average yield on the 2017 OAT was set at 1.96%, up from 1.91% previously. The average yield on the 2022 OAT was 2.98%, up from 2.91%, while the average yield on the 2026 OAT came in at 3.46%, up from 3.30% previously. The average yield on the 2041 OAT was 3.79%, down from 3.97% at its January sale.
The yields were in line with secondary market levels.
"Demand was again relatively strong on the 30-year area despite the incoming presidential elections which is a good signal for French bonds," said Cyril Regnat, strategist at Natixis.
Demand for European government bonds has received a boost in recent months as banks invested cheap funds provided by the European Central Bank in two Long Term Refinancing Operations.
But analysts at the Royal Bank of Scotland said that the weakness of recent Italian and Spanish auctions suggests much of the money provided by the ECB has been already deployed, "which will affect France too."
According to an opinion poll released Wednesday, President Nicolas Sarkozy would lead the Socialist Party's Francois Hollande in the first round of the election to be held April 22, though he would lose in the event of a run-off.
"We believe that the French government will have no choice but to stick to its commitment to reduce the public deficit, if anything because the pressure of the European Union, the markets and/or rating agencies will return in case of slippage," economists at Credit Agricole CIB said in a note.
France's 2011 budget deficit reached 5.2% of GDP, which the current government of plans to reduce to 4.5% of GDP this year. Euro-zone rules dictate that member countries bring down the deficit to 3% of GDP next year.
French public debt reached 85.8% of gross domestic product at the end of 2011, only marginally below the euro-zone average of 88%, but above Germany's 82%.
German Industrial Output May Recover After Cold Snap
FRANKFURT -- Unusually cold weather in February put a damper on German industrial output, data from the economy ministry showed Thursday.
Industrial production fell 1.3% on the month in adjusted terms, the ministry said. Experts polled by Dow Jones Newswires ahead of the release had expected a more modest 0.5% drop.
The ministry also revised downward the previous month's figures, saying output grew only 1.2%, instead of the 1.6% first reported.
Construction was mainly to blame for the February downturn, dropping by a whopping 17.1% during a bout of unusually cold weather.
Among other key categories, manufacturing output was down by a more modest 0.4%, while output in capital goods rose 0.3%, maintaining some momentum after January's 1.9% gain. This could be a positive sign for Germany's economy, which depends heavily on the manufacture and export of heavy machinery.
Energy output was also positive, increasing by 1.6% in February, the ministry said.
Consumer goods output dropped by 2.1%, with durable goods falling 2.6% and non-durables down 2%.
For the two months combined, output was down 0.8% compared with the total for November and December.
The ministry said, however, that sentiment from firms remains positive, suggesting output will improve soon.
Industrial production fell 1.3% on the month in adjusted terms, the ministry said. Experts polled by Dow Jones Newswires ahead of the release had expected a more modest 0.5% drop.
The ministry also revised downward the previous month's figures, saying output grew only 1.2%, instead of the 1.6% first reported.
Construction was mainly to blame for the February downturn, dropping by a whopping 17.1% during a bout of unusually cold weather.
Among other key categories, manufacturing output was down by a more modest 0.4%, while output in capital goods rose 0.3%, maintaining some momentum after January's 1.9% gain. This could be a positive sign for Germany's economy, which depends heavily on the manufacture and export of heavy machinery.
Energy output was also positive, increasing by 1.6% in February, the ministry said.
Consumer goods output dropped by 2.1%, with durable goods falling 2.6% and non-durables down 2%.
For the two months combined, output was down 0.8% compared with the total for November and December.
The ministry said, however, that sentiment from firms remains positive, suggesting output will improve soon.
Subscribe to:
Posts (Atom)