Market comments

Stocks and commodity prices have retreated. Fears about further Chinese monetary policy tightening are being linked with the poorer tone after the PBoC said stabilizing prices is critical. Silver prices have plunged, oil is lower and the JPY and the CHF are finding support.

Portuguese caretaker PM Socrates has announced the country has reached an agreement with the EU and the IMF for a EUR78 bln bail-out package over three years. Portugal will be required to reduce the budget deficit to 5.9% of GDP this year from 9.1% in 2010. This is less testing that the government’s previous target of 4.6% of GDP. Portugal is require to cut its deficit to 3% by 2013. This is a year later than the government’s previous plan.

Yesterday Eurozone peripheral bond markets enjoyed a decidedly firmer tone with yields in the Portuguese front end dropping sharply. The market will be relieved the plan has been outlined before Portugal’s June bond redemption deadline. News that Finland may be closer to supporting the bailout despite the opposition of the True Finns party is also positive. That said, the prospect of further ECB policy tightening will reduce growth potential in the region.

US March factory orders rose a better than anticipated 3.0% m/m following an upwardly revised 0.7% m/m February gain. The March data was the fifth consecutive rise and supports the view that demand from fast growing nations such as Brazil and China are stirring demand. The data implies reduced levels of inventories which could translate to a downward revision to US Q1 GDP.

UK April manufacturing PMI registered a disappointing 54.6 following a downwardly revised March number. While the April data are still consistent with an expansion in the sector, this was the lowest reading in seven months and will increase concerns that the government’s fiscal squeeze is impacting domestic confidence and demand.

The UK CBI also brought worrying news. Although the overall balance on its retail survey climbed to 21 in April from 15, a measure of retailers’ outlook dropped to -1 from +18 in March suggesting that tough conditions are foreseen for the high street.

Sterling weakened on the back of the manufacturing PMI data. Comments from BoE Governor King that higher interest rates could worsen the UK’s debt woes added to pressure on money market rates and sterling. The market no longer expects a BoE rate hike until yr-end.

Day ahead

Eurozone final April PMI services data are expected to show a continued healthy pace of expansion. The preliminary German survey highlighted a slowing in the pace of expansion relative to March, though at current levels the ECB hawks are set to remained poised for action.

UK lending, mortgage and money supply data are set to stay at levels which are low compared with historical averages. These numbers should thus poise no barrier to the market’s newly found consensus that the BoE are unlikely to hike rates until the end of the year.

The US April ADP employment data are expected to show a 195K increase. This is very close to the 185K printed market median for Friday’s non-farm payrolls reports. The two surveys are closely correlated but only after both series have been subjected to hefty backward revisions. The market is well aware the headline ADP release can provide misleading indications for nonfarm payrolls.

Similarly the employment component of today’s US non-manufacturing ISM will be dissected for clues as to Friday’s payrolls data. The overall index is expected to strengthen modestly in April.

Portugal is due to auction 3 mth t-bills. The average yield at the previous 3 mth sale was 4%.

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