HighlightsThe U.S. dollar remains largely on the defensive despite the recovery in North America Tuesday. The euro slipped to almost $1.3380 in Asia, but has recovered smartly in Europe, but it is sterling that is the standout Wednesday. While the euro has made a lower low each day this week, sterling by contrast has made a higher low and a higher high each day. Often it appears sterling is in demand ahead of the quarter-end, frequently amid talk of official interest. While the dollar is heavy against the European currencies, its gains have been extended against the yen. The greenback reached JPY93.60, just shy of the year's highs set in early April near JPY93.77. The dollar has also firmed against the Australian dollar, in which an unexpected decline in retail sales and weak building approvals gave the market second thoughts about a Reserve Bank of Australia rate hike next week, despite the recent hawkish comments by RBA Governor Stevens. Short-term technical indicators warn that it may be difficult for the market to sustain the momentum. North American participants appear to be somewhat less dollar negative. The risk is for the dollar to recover against the European currencies, while seeing its gains against the yen pared back. Asian equities were mostly lower Wednesday, while European bourses are holding on to minor gains. The MSCI Asia-Pacific Index is off a little more than 0.5% as most markets saw month-end profit-taking. The 5.4% gain this month is the best performance since last July. Raw materials and the financial sector in particular were soft. European bourses are up about 0.2% to 0.5%, led by technology and basic materials. Of note, the Irish banks that had been hit hard earlier this week have rallied back. The Dow Jones Stoxx 600 is up almost 7.7%. The S&P 500 looks a tad softer, but with two sessions left in the mont but is up about 6.25%. Global bond markets are generally quiet, but with two notable exceptions. First, U.K. gilts are outperforming Wednesday with a 5 basis points decline in the 10-year yield and is now off 10 basis points since last Friday. Initially, it looked like the gilts were going to wilt after the U.K.'s Debt Management Office announced Tuesday that it would issue 4.5 British pound five-year gilts next week, but recovered fully Wednesday.
The other main exception is Greek debt. The 10-year yield is up 8 basis points and the two-year is up 15 basis points. The seven-year bond that was sold on Monday with a 6% yield rose to 6.27% Tuesday and 6.44% Wednesday. Elsewhere as expected, Poland left rates steady at 3.5%. Lastly in the emerging market space, note that the stronger-than-expected fourth-quarter Turkey gross domestic product (6% year over year vs. consensus of about 4.5%) has weighed on Turkish debt prices. The two-year yield is up about 10 basis points, bringing the rise on the month to 40 basis points.
Currency MarketsOfficials had hoped that last week's European Union/International Monetary Fund deal on Greece would have put the issue to rest for a little bit, but it hasn't. Month-end considerations appear to be offsetting the impact on the euro. Mediocre-to-weak demand for Greek bonds this week has resulted in widening premiums Greece is being forced to pay. While the Greek government indicates that next month's funding needs have been taken care of, it still needs to raise another roughly 11.6 billion euros by the end of May and another roughly 21 billion euros by the end of the year. In the first three months of the year, it has raised about 18 billion euros. The Greek budget appears to assume about a 5% interest rate and it is not seeing that. In order to bring down its borrowing costs, Greece appears to be looking at shortening maturities and is devising a regular bill issuance schedule. This poses its own roll-over risks. In addition, Greece is considering a dollar-issue in the next couple of months. Meanwhile, Moody's warned that Italy will have to generate a large primary budget surplus (budget balance excluding debt servicing), but Italian bonds appeared to shrug it off. In this vein, we note that Portugal, which was downgraded last week, has seen its spread (over Germany) narrow by about 11 basis points over the past week. In Japan, improved exports and corporate profitability has not translated into higher wages. Wages, including overtime and bonus pay, fell 0.6% year over year in Februay, the 21st consecutive negative monthly reading. In January, wages were 0.2% below year-ago levels. Even a 10-month low in the unemployment rate has failed to push wages up. However, the bigger economic story is the Tankan survey due out in early Tokyo on Thursday. The market expects improvement, but with the diffusion index for both large manufacturers and large non-manufacturers to remain in negative territory. Given the importance of capex for the Japanese economy, the market will be very interested in this reading. Recall that in the December survey capex was expected to contract nearly 14%. Another decline is expected, but a much smaller one of kless than 1%.
Lastly, we note that the calculation of the Tokyo Interbank Offered Rate will include two more foreign banks starting Thursday. This is potentially important because foreign banks typically have lower rates than Japanese banks. TIBOR rates are at a premium to LIBOR. For the benchmark three-month tenor, TIBOR is about 18 basis points above the 24 basis points LIBOR fix. The eurozone did report February unemployment at 10% (up from 9.9%), the highest since the third quarter of 2008. Germany reported its March figures. Unemployment fell 31,000, contrary to expectations that called for a small rise. On top of that, the 7,000 rise in February was revised to a decline of 1,000. The market did not respond much. Nor did it respond to the sharper-than-expected rise in the eurozone consumer price index. The market had expected a small increase from the 0.9% pace seen in February, but the 1.5% year-over-year rise was well above expectations. The eurozone employment report may offer a stark contrast with the U.S. jobs report released on Friday. One of the reasons we suspect that European unemployment may be more intractable than in the U.S. is that the real challenge in Europe is with integrated young people into the labor market. For people under the age of 25, Ireland has an unemployment rate of nearly 29%, Italy is near 26%, France is a little above 22% and Portugal is close 21%. Spain has the dubious honor of first place with an unemployment rate among young people of a little more than 40%.