Financial markets weakened yesterday amid disappointing manufacturing in China and the Eurozone. The PMI data in China suggested that manufacturing activities in the country have slowed for 5 months. In the Eurozone, the honeymoon period provided by the ECB's LTRO has gone as economic indicators showed fatigue in the region's recovery path. These upstaged the news that US jobless claims slipped to the lowest level since February 2008. Wall Street dropped with the DJIA and the S&P losing -0.60% and -0.72% respectively. In the commodity sector, the front-month contract for WTI crude oil fell to as low as 104.5 before ending the day at 105.35, down -1.79%, while the equivalent Brent crude contract slipped to as low as 122.3 before settling at 123.14, down -0.85%.
The US initial jobless claims fell -5K to 348K in the week ended March 17 while claims in the prior were revised higher by +2K. These have taken the 4-week average to 355K. Initial jobless claims have now declined to the lowest level in 4 years. While improvement in the employment situation should be optimistic, the market worried that this would make the Fed reverse the ultra accommodative monetary policy before the economic recovery in the US has been firm. St Louis Fed President James Bullard stated that the current situation warrant to change the central bank's policy. He stated that 'as the U.S. economy continues to rebound and repair', further easing 'may create an over-commitment to ultra-easy monetary policy' and 'it may be a good time to take stock of whether we may be at a turning point'.
Yet, Fed Chairman Ben Bernanke remained cautious on the economic outlook, citing consumer spending, currently taking up 70% of the US GDP, is not robust enough to sustain growth. He stated that 'every country needs to have an appropriate balance of consumption, capital formation, exports and government spending, and that's an important task for us going forward...In terms of debt and consumption and so on, we're still way low relative to the patterns before the crisis'.
Yet, government stimulus is always a two-edged sword. The Fed's loosening monetary policy is USD depreciative and this has inflationary impacts on the economy. The fact is that an increasing number of investors is anticipating higher inflation going forward. The latest round of 10-year Treasury Inflation Protected Securities (TIPS) were sold at a record negative yield (-0.089%) at a bid-to-ask ratio of 2.81, suggesting that investors were willing to pay a premium to get protected from the risks of higher inflation going forward.
On the dataflow, the US new home sales probably climbed +4K to 325K in February. In Canada, headline CPI might have gained +2.7% m/m in February, up from +2.5% a month ago.