The Morning After

March 14, 2012

Yesterday was a good day for investors, who sighed continuing relief because 1) a disorderly Greek default had been averted and prompted Fitch to upgrade that country’s credit rating to B-, 2) a Fed statement that upgraded growth prospects but did not tighten its policy stance, 3) U.S. stress test results where 15 of 19 financial institutions passed, and the failures were not by a large margin, 4) several banks led by JP Morgan boosted their dividends and 5) the European ZEW indices of investor sentiment exceeded forecasts.

U.S. stocks rallied strongly late yesterday, and the DOW closed at its highest level since the final trading day of 2007.  Following that spike, equities in the Pacific Rim overnight advanced by 1.5% in Japan, 1.3% in Singapore, 1.1% in Indonesia, 1.2% in Taiwan, 1.0% in South Korea, 0.9% in The Philippines, Thailand and Australia, and 0.8% in Malaysia and New Zealand.  China’s 2.8% drop was an exception to this buoyancy, but in Europe, the German Dax, Paris Cac and British Ftse have so far improved by 1.1%, 0.7% and 0.4%.

Sovereign bond yields are much higher.  The ten-year British gilt and German bund have risen by 11 basis points and 9 bps, while the 10-year Treasury futures of 2.19% compares to 1.97% only a week ago.  The 10-year Japanese JGB rose 3 basis points and is back above 1.00%.

Gold tanked 1.9% to $1661.70 per ounce, while oil slipped 0.3% to $106.43 per barrel.

The dollar is starting to react positively to good U.S. economic news, a shift from a risk on/risk off market environment that saw the dollar often thrive on bad news and vice versa.  Overnight gains in the dollar amount to 1.3% against the kiwi, 0.6% versus the Aussie dollar and yen, 0.4% relative to the Swiss franc, 0.3% against the loonie, and 0.1% versus the euro, which is holding slightly above $1.3000.  Sterling is steady against the greenback.

The yuan is marginally weaker than 6.33 per dollar amid mounting chatter that such may have reversed direction.  Premier Wen indicated that the currency is now close to equilibrium even as the United States and other advanced economy governments threaten trade sanctions against unfair Chinese trade practices.

The four institutions that did not pass the latest round of U.S. stress tests are Citigroup, Sun Trust Capital, Met Life, and Ally Financial.  In yesterday’s primaries, Santorum won Alabama and Mississippi, while Romney came in third place in those states while taking first prize in Hawaii.

Now it’s the morning after, and it remains to be seen if market euphoria continues or whether renewed anxiety and bargain-hunting knock equities back downward.  The U.S. data calendar today includes the quarterly current account, monthly import prices, and weekly petroleum inventories.  Also Bernanke will be speaking publicly.

Euroland reported weaker-than-assumed industrial production for January, which rose just 0.2% on month despite a 1.5% advance in German industrial output.  Euro area output was 0.6% lower than the average 4Q11 level and 1.2% below the level in January 2011.  Over the past 12 months, production increased 1.6% in Germany but fell by 0.4% in Ireland, 2.2% in France, 4.2% in Spain, 4.0% in Portugal, 5.0% in Italy, 6.0% in Finland, and 5.2% in Greece.

Euroland CPI inflation remained steady in February at 2.7%, well above the ECB’s target ceiling of 1.9%.  While the energy component was 9.5% higher than in February 2011, core inflation of 1.5% was tame.

British labor statistics showed average wages in January having increased just 0.7% including bonus pay from a year earlier.  In November-January, regular pay was 1.7% greater than a year earlier, while total wage earnings posted a 1.4% increase.  The ILO measure of British unemployment averaged 8.4% in November-January, up from 8.3% in August-October and 7.9% in May-July 2011.  The claimant count of unemployment went up by 7.2K last month after increases 7.0K in January and 1.9K in December.  The monthly average rise over the past year has been 13.5K.

Japan’s Ministry of Finance released a quarterly business survey that showed a similarly weak business sentiment index for large firms of negative 2.7 in the first quarter of this year after minus 2.5 in 4Q11.  An improving mood is projected over the coming two quarters, however.  The reading for large manufacturers in 1Q of minus 7.3 was weaker than that for large non-manufacturers of minus 0.1.

In the Bank of Japan’s monthly economic assessment, personal consumption was upgraded to “has firmed up in part due to the effects of measures to stimulate demand for automobiles.”  Monetary officials said that overall activity is more or less flat but noted some signs of a pick up.

Revised Japanese industrial production showed a rise of 1.9% on month and a drop of 1.3% on year.  The inventory ratio increased 1.4% on month and 5.2% on year.  Capacity fell 0.5% in January, while capacity use climbed by 3.1%.  Japanese machine tool orders were 8.6% lower in February than a year before.  The Conference Board’s Japanese index of leading economic indicators rose 0.3% in January.

Indian wholesale price inflation accelerated by 0.4 percentage points to 6.95% last month.

Sri Lanka’s central bank repo rate was left unchanged at 7.5% as had been expected.  Bank Rossii of Russia likewise held its refinancing rate at 8.0%.

Australian housing starts slumped 6.9% last quarter, and consumer confidence fell by 5.0% in March.

Finnish consumer prices increased 0.6% last month and posted a 3.1% twelve-month rise.

Canada will release quarterly figures on capacity usage and monthly auto sales.  U.S. mortgage applications fell by 2.4% last week, and the 30-year mortgage rate of 4.08% held near record lows.

Copyright 2012, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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