Market comments

Asian stock markets have remained largely flat overnight. Yesterday's poor US economic data and this week's falls in commodity prices continue to weigh on risk appetite. Fears that BRIC countries are stepping up the battle against inflation is also weighing on sentiment. The surprise -0.5% m/m fall in Australian Mar retail sales heightened the downward pressure on the AUD.

The US April ISM non-manufacturing report plunged to 52.8 from 57.3 in March with most of the components registering a decline. The orders index registered the sharpest fall and the employment component also declined.

The drop in the employment index of the ISM non-manufacturing report followed a worse than expected headline figure from the April ADP employment report. This registered a 179K increase in jobs following an moderately upwardly revised 207K in March.

The weak US data temporarily propelled EUR/USD above the USD1.4900 level and chased the USD index to a fresh 3 year low. The sharp market reaction suggests that investors have revised lower their forecasts for Friday's payrolls release. The printed market median stands at 185K.

Atlanta Fed Dennis Lockhart, a known dove and presently a non-voter at the Fed, says it would be premature to anticipate removal of monetary accommodation is going to happen right away. This sits with our view that the Fed may not hike until mid-2012.

UK lending, mortgage and money supply data all projected a weak economic backdrop. These numbers should thus poise no barrier to the market consensus that the BoE are unlikely to hike rates until the end of the year.

Final April Eurozone services PMI edged lower to 56.7. The fall was outweighed by the stronger showing of manufacturing which took the composite index to 57.8, in line with the flash estimate.

Yields rose further at Portugal's 3 mth bill auction. At 4.65% Portuguese 3 mth bills are carrying roughly the same yield as Italian 10 yr paper.

Portuguese bond yields fell following the outline of the EU/IMF bail-out. However, the rally ran out of steam during the day as the market weighed up the difficulties still faced by the country.

Day ahead

The ECB is expected to announce steady policy today. The market will be looking to see if President Trichet uses the words 'strong vigilance' during his press conference. The market would read this as implying that the ECB will tighten policy in June, in line with our view. If this phrase is absent the market will likely focus on July for the next rate hike and this expectation is likely to limit any profit-taking in long EUR positions if a June hike is not signalled.

German factory orders are expected to increase by 0.4% m/m in March. This moderate rise would follow the sharp 2.4% m/m February increase.

Steady policy is expected from the BoE today. At the end of last year the market was betting on May for the first hike. On the back of recent soft economic data, the market is now of the view that the first tightening of the cycle is unlikely until the end of the year; a view in line with our own.

UK April PMI services are expected to soften to 56.0, though this is still consistent with a decent expansion. Survey data will be providing the first clues as to how the economy is coping with the April round of fiscal austerity.

US weekly initial claims are expected to decline by around 19K. While the trend has been improving, the impact of better data today will be dampened by yesterday's poor US releases.

Disclaimer

This document is issued by Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A. incorporated in the Netherlands, trading as Rabobank International (“RI”). RI is authorised by De Nederlandsche Bank and by the Financial Services Authority and regulated by the Financial Services Authority for the conduct of UK business. This document is directed exclusively to Eligible Counterparties and Professional Clients. It is not directed at Retail Clients. This document does NOT purport to be an impartial assessment of the value or prospects of its subject matter and it must not be relied upon by any recipient as an impartial assessment of the value or prospects of its subject matter. No reliance may be placed by a recipient on any representations or statements outside this document (oral or written) by any person which state or imply (or may be reasonably viewed as stating or implying) any such impartiality. The information and opinions contained in this document have been compiled or arrived at from sources believed to be reliable, but no representation or warranty, express or implied, is made as to their accuracy, completeness or correctness. This document is for information purposes only and is not, and does not constitute or intends to constitute investment advice or any investment service as referred to in the Act on Financial Supervision. You must make your own independent decisions regarding any securities or financial instruments mentioned herein. You are advised to seek independent professional advice as to the suitability of any products and their tax, accounting, legal or regulatory implications. All opinions expressed in this document are subject to change without notice. Neither RI, nor other legal entities in the group to which it belongs accept any liability whatsoever for any direct or consequential loss howsoever arising from any use of this document or its contents or otherwise arising in connection therewith. Insofar as permitted by the Rules of the Financial Services Authority, RI or other legal entities in the group to which it belongs, their directors, officers and/or employees may have had or have a long or short position and may have traded or acted as principal in the securities described within this document, (or related investments). Further it may have or have had a relationship with or may provide or have provided corporate finance or other services to companies whose securities (or related investments) are described in this document. The distribution of this document in other jurisdictions may be restricted by law and recipients of this document should inform themselves about, and observe any such restrictions. This document may not be reproduced, distributed or published, in whole or in part, for any purpose, except with the prior written consent of RI. By accepting this document you agree to be bound by the foregoing restrictions.

© Rabobank International, Croeselaan 18, 3521 CB Utrecht, The Netherlands

Source: Rabobank Group