50bp ECB rate cut widely expected but non-conventional element will grab the headlines


  • US Mar. ADP Employment Change fell -742k vs. -663k expected and revised -706k prior
  • US Mar. ISM Manufacturing out at 36.3 vs. 36.0 expected and 35.8 prior
  • US Mar. ISM Prices Paid out at 31.0 vs. 33.0 expected and 29.0 prior
  • US Feb. Construction Spending out at -0.9% m/m vs. -1.9% expected and revised -3.5% prior
  • US Feb. Pending Home Sales out at +2.1% m/m vs. flat expected and -7.7% prior
  • AU Feb. Trade Balance out at +A$2.109b vs. +A$700m expected and revised A$926m prior
  • UK Mar. Nationwide House Prices out at +0.9% m/m, -15.7% y/y vs. -1.5% m/m, -18.1% y/y exp


  • Norway PMI (0700)
  • Norway Unemployment Rate (0800)
  • UK PMI Construction (0830)
  • EU ECB Rate Announcement (1145)
  • US Initial Jobless Claims (1230)
  • US Factory Orders (1400)

Market Comment:

There were some minor positives to be garnered from the US data releases last night. After an early wobble following the dismal ADP employment change, at a far worse than expected -742k, wall St latched on to an uptick in the ISM manufacturing index in March and a rebound in pending home sales. The positive ISM number marked the third in this series, with the components posting strong gains with new orders significantly higher and inventories on the decline. The icing on the cake came after hours when March domestic US vehicle sales came in above forecast. This complemented earlier data from Italy which also saw a rebound in March though it remains to be seen how much of this is down to heavy discounting at the factory gate and showroom.

Markets were on “bad jobless claims alert” after the ADP employment change number showed a far worse than expected drop of 742k. Recent polls suggest the market is looking for a number similar to last week, around the 650k mark, but a number above the 700k would be a serious setback in sentiment and represent the biggest drop since erratic data from 1949.

All eyes will be on the ECB meeting today, with markets broadly expecting a 50bp rate cut to bring official lending rates down to 1%. There is some question whether the cut to its deposit rates will be of the same magnitude. The current 100bp gap would create market complications if the official lending rate is cut to 1%, thereby slashing the rate the ECB pays on deposits to zero. Traders will be on the lookout for mention of measures beyond conventional steps to boost the Euro-zone economy. These may include extending the maturities for its repo operations (currently 6 months max), buying corporate bonds to improve companies' accessibility to credit, buying bonds issued by the financial sector, buying assets from banks' balance sheets (an inherent risk for the ECB's own balance sheet), buying short-term commercial paper to ease short-term liquidity concerns and finally buying government bonds (note current legislation prevents direct buying from governments, though the secondary market may provide an option).  The EUR clearly has potential for a big move should details deviate from these expectations and patience will likely be required until then.

The other major event on the agenda is of course the G20 meeting in London. The leaked draft of the communiqué outlines that the focus of the summit is IMF funds, tighter financial sector regulation to include hedge funds, pledges to refrain from competitive devaluations of currencies, commit to greater independent IMF surveillance of economies and financial sectors and wage war on tax havens, deploy sanctions while declaring “the era of banking secrecy is over”. The commitment to refrain from competitive devaluations is an interesting one given the prior ECB decision and its potential to cause just that.

Ahead of the G20, Germany's Merkel and France's Sarkozy joined forces to warn that they would refuse to sign any agreement that did not meet their so-called “red lines” on tax havens, hedge fund regulation, tracing securitized assets sold around the world and capping bankers' remuneration. While having the potential to provide the only fireworks in the summit which is designed to present to the world a unified stance and plan to stabilize global financial markets and get the global economy going again, the “hard stance” demands are still broadly in line with the gist of the drafted communiqué and unlikely to come to anything.

Later today, the US' Financial Accounting Standards Board will decide on whether to relax mark-to-market rules for credit securities. The change is expected to give auditors more flexibility in valuing illiquid assets that may have long-term value and strong cashflows. With the adjustment set to be retroactive, banks would be able to revalue some assets in time for the Q1 reporting season. Asia has seen further speculative flows into financial stocks this morning, betting on a positive outcome, but a sharp reversal is in prospect should the FASB surprise and keep things status quo.

Back on the day-to-day business, the AUD received a welcome lift from the Australian trade numbers this morning. Data showed a much better than expected surplus of A$2.11 bln in February vs. an expected marginal increase to A$700 mln from A$926 mln in January. Total exports were 4.4% higher than a month earlier, led by a steep 55% gain in gold exports, while imports were 0.6% lower on lower demand for consumption goods. AUDUSD scaled the 0.7000 mark but struggled to post impressive gains past 0.7040.