The equity markets continued its recent rally with the S&P 500 Index reclaiming the 11 hundred point level closing up 7 points to 1106. The dollar was mostly softer most currencies except the Euro.
The euro cannot seem to get out of its own way. After a brief period of calm, euro zone credibility issues have come back to haunt the euro. Greek bonds are under pressure again after Greece was ordered by EU Economic and Monetary Affairs Commissioner Rehn to hand over information on the swaps by Friday making the market nervous about the possibility of still concealed debt. In addition, Greece will reportedly issue a new EUR 3 to 10 bln of bonds next week as part of its plans to raise a total of EUR54 bln in 2010 (of which about three-quarters still needs to be raised) putting additional pressure on bonds. The developments create a picture of fragility for the euro with the market ignoring news Greece is working on new measures alongside the EU recommendations.
The Federal Reserve surprised the markets by increasing the discount rate from 50 to 75 basis points. Although Ben Bernanke signaled to the markets that this was going to take place soon, most market participants believe this would take place at the next FOMC meeting.
The UK fiscal position was in deficit for the first January on record putting added pressure on the pound. The January PSNB figures were highly disappointing, reporting a £4.3bn borrowing requirement – when a £2.6bn repayment was expected and following a revised £14bn borrowing requirement (from £15.7bn) previously. January is usually a month of seasonal surpluses due to corporation tax revenues so the data added to already existing concerns about the next UK government’s ability to address the deficit. The ONS indicated that the much worse than expected PSNB data was driven by much higher government expenditure and lower tax receipts. Today’s report is a fresh reminder of precarious UK public finances and comes at a time when debt concerns have been a driving force in the market. With a current account deficit to GDP ratio at 2% and a budget deficit to GDP ratio expected at nearly 12% in 2010, sterling bears have plenty of ammunition especially as this is happening in a sub-trend growth environment.
On the economic front in the US, Producer Prices grew at a greater than expected 1.4% month on month for January 2010. Ex-food and energy PPI grew at a .3% month over month rate. Economists had expected a .8% and .1% increase respectively. Additionally, jobless claims increased by 31,000 in the past week.
Consumer prices in Canada were 1.9% above year ago levels last month, the highest since Nov 2008, representing a 0.3% increase on the month. More importantly from a policy making point of view, the core rate rose to 2.0% from 1.5%. The Bank of Canada has promised no rate hikes before mid-year. The stickiness of core inflation warns of a risk of a BOC hike in Q3.