Risk Willingness Still Hard to Come By

While the Asian equity session and better-than-expected Tesco earnings have injected a degree of positivism into the markets, we continue to observe the markets through cautious lenses.

MAJOR HEADLINES – PREVIOUS SESSION

• SW CPI – Headline Rate MoM/YoY (Mar) out at 0.9%/3.4% vs 0.7%/3.2% exp. Prior 0.4%/3.1%
• SW CPI – Underlying Inf MoM/YoY (Mar) out at 0.9%/2.3% vs 0.5%/2.1% exp. Prior 0.4%/2.0%
• US Advance Retail Sales (Mar) out at 0.2% vs vs 0.0% exp. Prior -0.4%
• US Retail Sales Less Autos (Mar) out at 0.1% as exp. Prior -0.1%
• US Business Inventories (Feb) out at 0.6% as exp. Prior 0.9%
• NZ Consumer Prices QoQ/YoY (1Q) out at 0.7%/3.4% vs 0.8%/3.5% exp. Prior 1.2%/3.2%

THEMES TO WATCH – UPCOMING SESSION

• US Mar. Producer Price Index (12:30)
• US Mar. PPI Ex Food & Energy (12:30)
• US Feb. Net Long-Term TIC Flows (13:00)
• US Apr. NAHB Housing Market Index (17:00)

Market Comments

In our weekly review last Friday, we summoned your attention to key U.S. growth and inflation figure releases this week. Now that the Retail Sales have come and passed, leaving behind a surprisingly positive impression of U.S. clients' continued appetite for all things consumable, our focus will be turning to the inflation figures with today's PPI figures and tomorrow's CPI release. 

While the U.S. annual producer price index has corrected from a high of 7.4 registered at the end of January, all of this year's readings are significantly above the annual trend line figure of 4.8%. A median Bloomberg surveyed figure points to a further 20 bp correction from the last reading of 6.4%, but a reading below 6% is clearly needed to signify a moderating industrial price development.

Our attention is also keenly on the carry trades, as emerging market crosses show a noticeable degree of diverse reaction to the continued risk aversion that is underway in the post G-7 environment. While the positive Asian equity session and better-than-expected Tesco and State Street earnings have created a generally high-yielder friendly conditions today, we continue to exercise caution in our approach to the carry trades, due to the high correlation we have seen between cooperate earnings releases and carry trades.

Judging from the JPY trade-weighted index, which measures the initial value of the JPY by averaging between the JPY and other major currencies, the index is lacking direction in the range from the 55 day MA to the 21 day MA at 103.78-105.91. Before we see a real break of either, trading and direction is congested. We value the risks in USDJPY as very high to the downside and sell the break of 100.79 offer, targeting 100.20, stop bid at 100.97. Triggers are most likely the TIC flows, if they disappoint the market as they are showing the investment willingness from the foreigners in the US, signaling a continued reluctance to add funds to the US before we see a real turn in growth.