Daily Financial Market Outlook

Daily Forex Fundamentals | Written by Lloyds TSB | Apr 29 09 06:57 GMT |

Overview & economic commentary US GDP and the FOMC meeting dominate proceedings today. It seems the Fed can do little more to loosen monetary policy for now, with interest rates at 0-0.25% and a scheme to buy up to $300bn of long-term treasuries and expand agency debt and MBS already under way. Instead, it is likely that the Fed will maintain a wait and see approach, though markets will be looking out for any change in the tone relating to the pace of the downturn and the risk of deflation. Advance Q1 GDP is forecast to show annualised 5% contraction, slightly better than the 6.3% fall in Q4. Weak investment (residential and non-residential) and a reduction in inventories are expected to have weighed on overall growth, partly offset by a narrower trade deficit, especially in price-adjusted terms which goes into the GDP estimate, and an improvement in consumer spending. Overall, the risk could be a smaller decline than forecast. In Europe, EU-16 money supply and the European Commission's monthly economic sentiment indicators are due. Annual M3 money supply growth is forecast to slow further, with credit growth to households and corporates also easing. However, there may be an improvement in the euro zone industrial confidence indicator, in line with recent PMI and German IFO surveys. Overall, though, euro zone business confidence remains at very weak levels consistent with further policy easing by the ECB next week. ECB member Stark speaks in the afternoon and the US offers $26bn of 7yr notes, the remaining part of its $101bn of supply this week. Details of the quarterly treasury refunding should also be announced, and there is talk of a new 50y issue. The RBNZ tonight is expected to cut interest rates by 50bps to 2.5%. Currency commentary The steepening in the US 2y/10y yield curve to 206bp, the issuance of 7y notes and details of the US quarterly refunding later todayare likely to keep bonds under pressure, with rumours of a new 50y issue adding impetus to the under performance of the long end. US Q1 GDP and a less pessimistic assessment by the Fed on the economy in the FOMC statement tonight could thwart further buying interest in fixed income paper, but no sea change in policy expectations should materialise as long as unemployment continues to head upwards and housing data remains extremely weak. Speculation about what US banks and how much extra capital may need to be raised should cap upside in stocks and may help to underpin the safe haven bid. The dollar is a touch softer this morning, led by a return of some degree of risk appetite in Asia where equity indices are up around 2% on average. €/$ is bid above 1.32 and £/$ cleared 1.47. The rand enjoyed a remarkable session overnight, firming to 8.4043 v the usd. £/rand hit a low of 12.3583 Major data and events today EU-16 money supply, M3 (sa) (09:00) Feb Y-O-Y +5.9% Mar (f'cast) Y-O-Y +6.0% Median +5.7% Range +4.1%:+6.0% EU-16 consumer confidence (10:00) Mar -34 Apr (f'cast) -34 Median -33 Range -35:-31 EU-16 industrial confidence (10:00) Mar -38 Apr (f'cast) -37 Median -36 Range -38:-30 US GDP (sa, annualised) (13:30) Q4 -6.3% Q1 (f'cast) -5.0% Median -5.0% Range -8.0%:-3.3% US GDP deflator (sa, annual) (13:30) Q4 +0.5% Q1 (f'cast) +1.5% Median +1.8% Range -0.4%:+3.1% US FOMC interest rate decision (19:15) Current: 0-0.25% Forecast: 0-0.25% US weekly oil inventories are published (15:30) ECB member Stark speaks (16:30) US Treasury auctions $26bn 7yr notes (18:00) Chart of the day: The US economy expected to remain mired in recession in Q1 2009, but is there is a risk of smaller than forecast decline? 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