Friday, March 12, 2010

What's more important: A jump in retail sales data that you'd have bet the bank would decline amid February's winter snowstorms, or the proposed appointment of a dove as number two at the Fed? With the dollar apparently weakening ahead of the report on rumors that San Francisco Fed President would be nominated as vice chairman to Ben Bernanke, investors began to wonder if ever short term interest rates will rise. Ms. Yellen is a firm proponent of a lower for longer approach to monetary policy and recently noted that if she could set negative rates in this climate she probably would.


Eurodollar futures -Eurodollar futures were already weaker ahead of today's surprise 0.3% gain for store sales during the Super Bowl month of February. And so an incremental weakening is nothing to write home about. June treasury futures have rebounded from an earlier slip to an intraday low of 116-08 to 116-23 where the yield reads 3.71%. A weaker than expected reading for consumer confidence tipped stocks into the red for a while and helped reverse those treasury market losses.

Australian rate futures -Aussie yields remain susceptible to revisions to views on the top of the rate cycle. Until recently investors predicted the top of the monetary cycle would be 5%. But a recent acceleration in Asian demand and domestic job growth for a nation set to achieve several years of above average growth - according to its central bankers - is causing analysts to reformulate options. 10-year notes fell in price earlier in the week in response to the firming labor market data but stemmed that decline overnight. The yield at the 10-year area of the curve rose one basis point to 5.66% today. Meanwhile three month bill prices traded on the soft side with yields edging one or two pips higher. The March 2011 future currently implies a three month cash rate of 5.56% at expiration. That's the most pessimistic since mid-January. During the interim while risk aversion mounted implied yields had slipped to as low as 4.92% as investors discounted a more dovish RBA.


Canada's 90-day BA's - A 20,900 employment add for February created ongoing havoc for Canadian money rates on Friday as investors tried to second-guess how much longer the Bank of Canada might be able to maintain a conciliatory tone. It's only three-months to mid-year at which point the BoC is no longer committed to maintaining a near zero interest rate policy. Bill prices shed a further five basis points across the strip while Canadian bond yields rose despite the rebound in U.S. notes. The 10-year yield in Toronto rose to 3.53% allowing the spread between the two to narrow to 21 basis points.

European short futures - European futures rebounded from earlier losses while German bund prices reversed piercing losses causing yields to spike above 3.20% following the shortfall in the reading of the University of Michigan sentiment report. June bunds reached 122.07 before rallying to 122.55 where yields sit at 3.19%.

British interest rate futures - Short sterling futures rose as did gilt futures where the June contract added 36 ticks on the day rising to 113.92. Yields declined to 4.12% after a torrid week. A poll suggests a lower impending likelihood of a minority government after a summer election.

Japan - Tokyo stocks rose forcing the 10-year yield higher to finish the week at 1.32%. The economy remains in poor shape and investors await the outcome of a Bank of Japan meeting next week when the central bank my well attempt to provide further monetary support by adding fresh funds into the banking system. In addition it may even attempt to weaken the yen, which is hampering domestic recovery at a time when the Asian region is starting to boom. Prime Minister Hatoyama said earlier on Friday, At a time when Japan's economy and industries aren't necessarily strong, I don't think this is being reflected by the strong yen. We need to take firm measures against such yen strength.

Andrew Wilkinson

Senior Market Analyst