Market comments

The Irish stress tests reported that its banking sector will require EUR24 bln in additional capital. This takes the total cost to around EUR70 bln. Although the front end of the Irish curve had come under pressure ahead of the results, the market showed little reaction to the news; it being close to market estimates. S&P had deferred a downgrade of Ireland until after the stress tests. These results suggest a two notch move is likely.

Portugal was in meltdown mode yesterday with yields hitting a fresh EMU era high. The 2010 budget deficit was reported at 8.6% of GDP well above the official 7.3% target. The Portuguese government has announced an auction of EUR1.5 bln one year paper today and confirmed that the general election will be held on June 5 just ten days before the second of the country’s forthcoming large bond redemptions on June 15.

Notably, in contrast to the recent trend, Spain was showing signs of being susceptible to these stresses. This was linked to a Bloomberg article citing a possible funding crisis in Southern European banks should Ireland impose haircuts on its banks senior bondholders. Irrespective of its cause, the jitters currently visible in the broader periphery underline fears the crisis may continue to spread once the firebreak that is Portugal is airlifted out of the market via the EFSF.

In contrast to recent sessions, this peripheral wobble saw Bunds enjoy a modest safe haven bid. Despite the peripheral crisis, the EUR continues to hold firm although EUR/USD closed off the day’s highs following more hawkish remarks from Fed officials. Kocherlakota called for a 75 bps Fed hike before yr-end 2011.

Eurostat’s preliminary estimate for March inflation came in at 2.6%, 0.2%-points above consensus. This was somewhat of a surprise to the market having seen Germany’s harmonised inflation rate remaining unchanged in that month. The notion that eurozone headline inflation has now surpassed another psychological barrier (of 2.5%) will only strengthen the hands of those within the Governing Council who believe a rate hike is already overdue.

Meanwhile, German unemployment fell by a whopping 55K in March following the 54K decline in February. So, after a temporary slowdown in the labour market recovery in Q4, it has picked up speed again. This is good news for domestic spending, particularly as Germany is expected to shoulder a large chunk of the eurozone’s economic expansion in coming years.

Unfortunately, the better German labour market conditions may not be entirely visible in consumer data yet. Feb Retail sales disappointed, falling back 0.3% following a (downwardly revised) rise of 0.4% in January. However, these may not be as weak as they seem. Compared to the trend in retail sales growth over the period 2000-2009, sales are actually doing remarkably well.

72% of the data that made up today’s Japanese Q1 Tankan survey was collected ahead of the earthquake and tsunami on March 11. This will water down the impact of the mostly better than expected data. The balance for large manufacturing rose to 6 from 5 in Q4.

Day ahead

The market expects US March non-farm payrolls to rise by 190K and the unemployment rate to hold steady at 8.9%. Data in line with expectations would continue the theme of improving labour market conditions noted in the previous 2 quarters.

March Manufacturing PMI data are expected for Eurozone, UK and the US today (ISM). A continuation of healthy expansion is expected in all regions. The February US manufacturing ISM matched the highest reading since May 04. The manu sector is a bright spot for the UK economy.

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