CRB FMS morning report 31-03-2011

[Gertje]

Overnight Developments

Global stocks are mixed with the European Euro Stoxx 50 index down -0,73% and June S&Ps up +0.10 of a point. A weaker dollar has pushed most commodities higher and Treasuries are stronger on concern the European sovereign-debt crisis may worsen. Credit-default swaps on Portuguese government debt rose 13 bp to a record 579 bp while default swaps on Irish government bonds rose 8 bp to a 2-1/2 month high of 633 bp. The 10-year German bund yield climbed to a 14-month high of 3.364% after European inflation accelerated. The Mar Euro-Zone CPI estimate unexpectedly climbed to 2.6% y/y, the fastest pace since Oct 2008. An increase in French producer prices is undercutting bunds as well as Feb French producer prices rose a more than expected +6.3% y/y, its fastest pace in 2-1/2 years. Strength in the German labor market is limiting losses in European stocks as German unemployment fell for the 21st straight month in Mar. The Mar German unemployment change fell a more than expected -55,000 to 3.01 million, the lowest level of unemployment since Jun 1992. That helped push the Mar German unemployment rate down -0.2 to 7.1%, its lowest level since records for a reunified Germany began in 1991.
The Asian stock markets today closed mostly higher with Japan up +0.48%, Hong Kong +0.32%, China -1.01%, Taiwan +0.43%, Australia +0.33%, Singapore +0.34%, South Korea +0.66%, India +0.80%. Japan's Nikkei 225 Stock Index climbed to a 2-week high on optimism a strengthening recovery in the US will boost Japanese exports. The Mar Nomura/JMMA manufacturing PMI tumbled -6.5 to a 1-3/4 year low of 46.4 as Japan's manufacturing sector contracted following the aftermath of the Mar 11 earthquake. An electricity shortage after the disaster is threatening to exacerbate Japan's post-quake slump even as intact factories move to conserve power. Tokyo Electric Power has begun rolling blackouts in the capital and Toyota Motor said automakers may want to consider taking turns in running assembly lines to save energy, while Tokyo Steel Manufacturing has already shifted production west because of the power disruptions. Goldman Sachs Group today raised Chinese stocks to "overweight" from "market weight" saying investors should increase their holdings in Chinese stocks as the government may delay further policy tightening measures given signs inflation and the economy are slowing.


US Economic Previews

Unemployment claims - Today's weekly initial unemployment claims report for the week ended March 25 is expected to show a decline of -2,000 to 380,000, adding to last week's decline of -5,000 to 382,000. Meanwhile, weekly continuing claims are expected to fall by -16,000 to 3.705 million, adding to last week's decline of -2,000 to 3.721 million. Both the initial and continuing claims series continue to point to an improving labor market and are not signaling any fresh layoffs by U.S. businesses tied to the recent surge in gasoline prices or the Japanese disaster. The initial claims series last week at 382,000 was only 11,000 persons above the 2-3/4 year low of 371,000 posted in late February. The continuing claims series last week fell to a new 2-1/2 year low. Regarding the labor market, the financial markets are mainly looking ahead to tomorrow's March unemployment report which is expected to show a solid +190,000 increase in payrolls and an unchanged unemployment rate from February's 2-year low of 8.9%.
Chicago PMI - Today's March Chicago purchasing managers index is expected to show a -1.6 point decline to 69.6, reversing part of the +2.4 point increase to 71.2 seen in February. February's reading of 71.2 was the highest since July 1988, illustrating the very strong sentiment being seen in the Chicago-area manufacturing sector, at least before gasoline prices surged late in February and the Japanese earthquake occurred on March 11. At the national level, tomorrow's March ISM manufacturing index is expected to show a small 0.4 point decline to 61.0 following the 0.6 point increase to 61.4 in February, which matched the 27-year high originally posted in 2004.
Factory orders - Today's Feb factory orders report is expected to show an increase of +0.5%, adding to the strong report of +3.1% seen in January. Expectations for an increase in today's factory orders report are based on the already-reported news that March durable goods orders rose by 3.2%, although durable goods orders excluding transportation fell 3.0%. Durable goods orders account for more than half of the factory orders series. The markets will be watching orders carefully to see if businesses are getting cold feet from the recent surge in gasoline prices, the drop in U.S. consumer confidence, and the Japanese nuclear disaster.


U.S. Stock Market

June S&Ps this morning are trading up +0.10 of a point. The US stock market yesterday finished higher after a report that showed growth in jobs bolstered optimism about the economy: Dow Jones +0.58%, S&P 500 +0.67%, Nasdaq Composite +0.72%. The Dow posted a 1-1/4 month high, the S&P 500 rose to a 2-1/2 week high and the Nasdaq climbed to a 3-week high. Bullish factors for stocks included (1) the +201,000 increase in the Mar ADP employment change, which while slightly weaker than expectations of +208,000, was the third time in the last 4 months that hirings have exceeded 200,000 jobs, (2) strength in technology stocks after IT researcher Gartner raised its forecast for global IT spending in 2011 to an annual pace of 5.6% from its previous prediction of 5.1%, and (3) end of quarter window dressing as the S&P 500 Index is up nearly 6% this quarter, its biggest Q1 gain in 13 years, which prompts money managers to add stocks to their portfolios to show they were long stocks during the current upmove.
Bearish factors included (1) weakness in energy producers after crude oil tumbled, (2) comments from Kansas City Fed President Hoenig who said current central bank policies risk undermining world growth and that the Fed should raise the funds rate toward 1.00% in a "fairly short period," and (3) concern the European sovereign-debt crisis may worsen after credit-default swaps insuring Portuguese government debt rose to a record 557 bp and people with knowledge of the matter said 3 of Ireland's biggest banks may have to raise a combined 9 billion euros ($12.7 billion) in capital after bank stress tests are published on Thu.
Mosaic (MOS) slipped 1.1% in pre-market trading after the company late yesterday said Q1 sales increased 28% to $2.21 billion, below analysts' estimates of $2.34 billion.


U.S. Interest Rate Markets

June 10-year T-notes this morning are trading up +1.5 ticks. T-note prices yesterday recovered from a 3-week low and closed higher after the Mar ADP employment change showed companies added fewer jobs than forecast: TYM11 +11.5, FVM11 +7, EDU11 +1.0. Bullish factors included (1) the smaller-than-expected increase in the Mar ADP employment change along with the downward revision to Feb (Mar +201,000 versus expectations of +208,000 and Feb revised down to +208,000 from the originally reported +217,000), and (2) the prediction from High Frequency Economics that demand for Treasuries is poised to increase as investors seek refuge from Europe's debt crisis and Japan's "grisly" economic prospects. Bearish factors included (1) the rally in the S&P 500 to a 2-1/2 week high, which reduced the safe-haven demand for Treasuries, (2) comments from Kansas City Fed President Hoenig who said current central bank policies risk undermining world growth and that the Fed should raise the funds rate toward 1.00% in a "fairly short period," and (3) weak demand for the Treasury's $29 billion auction of 7-year T-notes that had a bid-to-cover ratio of 2.79, below the 2.88 average of the past 12 auctions.


Forex Markets

The dollar index this morning is lower with the dollar/yen -0.03 yen and the euro/dollar +0.84 cents. The dollar index yesterday finished weaker as a rally in stocks reduced the safe-haven demand for the dollar along with the prospects for the dollar's interest rate differentials to weaken further on the near certainty of an ECB interest rate hike next week: Dollar Index -0.131, USDJPY +0.418, EURUSD +0.00144. Bearish factors included (1) market expectations of an Apr 7 interest rate hike by the ECB, which will further strengthen the euro's interest rate differentials against the dollar, and (2) reduced safe-haven demand for the dollar as global stock markets rallied on increased economic optimism. Bullish factors included (1) weakness in the yen as Japan's quake crisis may prompt the BOJ to keep an overly easy monetary policy that will further weaken the yen's interest rate differentials against the dollar, and (2) euro negative comments from ECB Council member Bini Smaghi who said the risk of the European sovereign-debt crisis spreading to other EU nations is "not insignificant."


Crude Oil

May crude oil prices this morning are trading up +$1.10 a barrel and May gasoline is +2.08 cents per gallon. Crude oil and gasoline prices yesterday settled mixed as a larger-than-expected increase in weekly DOE crude supplies undercut crude while a larger-than-expected drop in gasoline inventories lifted gasoline: CLK11 -$0.52, RBK11 +1.37. Bearish factors included (1) the stronger dollar, which erodes investment demand for commodities, (2) the larger-than-expected increase in weekly crude inventories (+2.94 million bbl to a 3-1/2 month high of 356 million bbl versus expectations of +1.5 million bbl), and (3) reduced fuel demand after US gasoline demand dropped -2.3% w/w and -2.1% y/y to 8.87 million barrels a day in the week ended Mar 25, as higher prices have cut gasoline demand to lower than it was a year ago. Bullish factors include (1) strength in the stock market, which boosts confidence in the economic outlook and energy demand, and (2) strength in gasoline after weekly gasoline supplies fell more than expected (-2.68 million bbl to a 3-month low of 217 million bbl versus expectations of -1.8 million bbl).


Metals

Metals prices this morning are trading mixed: GCJ11 +$9.40, SIK11 +0.359 and HGK11 -0.005. Metals prices yesterday settled mixed as mounting European debt concerns boosted precious metals while copper fell on concern Japan's struggle to contain its nuclear crisis will slow global growth: GCJ11 +$7.60, SIK11 +0.524, HGK11 -0.0725. May copper posted a 1-1/2 week low. Bullish factors included (1) the weaker dollar, and (2) increased safe-haven demand for precious metals on concern the European debt crisis may worsen after credit-default swaps insuring Portuguese government debt rose to a record 557 bp and people with knowledge of the matter said 3 of Ireland's biggest banks may have to raise a combined 9 billion euros ($12.7 billion) in capital after bank stress tests are published on Thu. Bearish factors included (1) concern that Japan's failure to contain its nuclear crisis will slow the global economy and industrial metals demand, and (2) the larger-than-expected decline in Mar Euro-Zone economic confidence, which may slow global growth prospects along with industrial metals demand.


Grains

Grain prices this morning are mixed ahead of this morning's planting intentions report: CK1 -1-3/4 cents, SK1 +5-1/2 cents, and WK1 -1-1/4 cents. The grain markets yesterday finished mixed on speculation US farmers will plant more corn at the expense of wheat and soybean acreage: CK1 -8-1/2 cents, SK1 +10-1/2 cents, WK1 -10 cents. May soybeans climbed to a 1-week high. Bullish factors included (1) the weaker dollar, which encourages investment demand in commodities and may boost US grain export prospects, (2) strength in gasoline, which boosts ethanol prices and corn demand, and (3) expectations that US soybean acreage this year may fall to a 3-year low. Bearish factors included (1) expectations that US corn acreage this year will be the second-largest since WWII, and (2) the statement from India's junior farm minister that India, the world's second-largest wheat grower, may end a ban on exports that has been in place since 2007 a production is expected to exceed forecasts.


Meats & Softs

Meat prices yesterday settled mixed as nearest-futures cattle prices surged to $1.208 a pound, the highest since cattle futures trading began in 1964, on speculation that radiation contamination of Japan's food supply will lead to higher Japanese imports of US meats: LCJ1 +21.75, LHJ1 -0.50. Softs yesterday finished mixed as May cocoa fell to a 2-1/2 month low on speculation that political unrest in Ivory Coast may be easing and May cotton slipped to a 2-week low on expectations for an increase in cotton acreage in Thursday's planting intentions report: SBK1 +0.19, KCK1 +3.35, CCK1 -70, CTK1 -1.21.


Global Financial Calendar

Thursday 3/31/11
US 0830 ET Weekly initial unemployment claims expected –2,000 to 380,000, previous –5,000 to 382,000. Weekly continuing claims expected –16,000 to 3.705 million, previous –2,000 to 3.721 million.
0830 ET USDA weekly export sales.
0945 ET Mar Chicago purchasing managers index expected –1.6 to 69.6, Feb +2.4 to 71.2.
1000 ET Feb factory orders expected +0.5%, Jan +3.1%.
1030 ET Richmond Fed President Jeffrey Lacker speaks at the Richmond Fed’s 2011 Credit Markets Symposium on “The Changing Landscape for Credit.”
1230 ET Fed Governor Daniel Tarullo speaks at the Richmond Fed’s 2011 Credit Markets Symposium.
1405 ET Cleveland Fed President Sandra Pianalto speaks on “The Economic Outlook, Oil Prices and Monetary Policy” at a conference in Pittsburgh, PA.
1630 ET Weekly money supply report and Fed balance sheet.
JPN 0100 ET Feb Japan housing starts expected +7.4% y/y, Jan +2.7% y/y.
0100 ET Feb Japan construction orders, Jan –10.7% y/y.
1950 ET Q1 Japan Tankan large manufacturers business conditions index expected +1 to 6, Q4 –3 to 5.
UK 0200 ET Mar UK nationwide house prices expected unchanged m/m and –0.6% y/y, Feb +0.3% m/m and –0.1% y/y.
FRA 0245 ET Feb French producer prices expected +0.8% m/m and +6.2% y/y, Jan +0.9% m/m and +5.6% y/y.
GER 0200 ET Feb German retail sales expected +0.4% m/m and +1.5% y/y, Jan +0.4% m/m and +2.6% y/y.
0355 ET Mar German unemployment change expected –29,000, Feb –52,000. Mar unemployment rate expected -0.1 to 7.2%, Feb –0.1 to 7.3%.
EUR 0500 ET Mar Euro-Zone CPI estimate expected +2.3% y/y, Feb +2.4% y/y.
n/a Officials from the Group of 20 nations meet in Nanjing, China.
CAN 0830 ET Jan Canada GDP expected +0.6% m/m, Dec +0.5% m/m and +3.2% y/y.
CHI 2100 ET Mar China PMI manufacturing expected +2.1 to 54.3, Feb –0.7 to 52.2.