by: Saxo Bank

Most of the data series released yesterday were above forecast, and helped counter the negative sentiment that had built up in Asia amid stress test and swine flu concerns. First off, GBP benefitted from stronger-than-expected demand for Tuesday’s gilt auction with the GBP3 bln on offer oversubscribed 2.25 times while the CBI distributive trades data beat forecasts by a large margin, coming in at +3 vs. -40 expected. That sent GBP on an upward stop hunt to regain all the day’s losses.

Next up, US house price data showed a slower pace of decline and consumer confidence rebounded to its highest level since Sep. 2008, coming in at 39.2 vs. 29.7 expected. Meanwhile, ECB member Bini Smaghi doused expectations that quantitative easing measures would be revealed at the next ECB meeting on May 7 with comments suggesting that discussions were still on-going and far from reaching any conclusion. As a result, EURUSD rebounded from its foray below the 1.30 mark, recouping all of the day’s losses. The Asian session was relatively subdued with a Japan market holiday resulting in lackluster and mostly range-bound activity. Further signs of a rebound in risk appetite were evident with some attributing the shift to reports that a WHO member dismissed claims that the number of deaths in Mexico linked to swine flu was nowhere near the close to 150 reported, as the organization had only officially recorded 7 around the world. Early focus in Europe will be on Euro-zone confidence indicators to see if the recent upturn in PMI is also reflected in this series. Note that it will not be difficult to surprise to the upside since the indices of consumer, economic, industrial and services confidence have been in an extremely depressed state since mid-2007.Later, attention shifts to the US with the first advance Q1 GDP numbers on tap. These are expected to show that the economy contracted at a near -5% annualized rate after Q4 2008's 6.3% contraction. This would be the worst two quarters of negative growth since the sharp recession of 1981-2 and the first time the economy has shrunk 3 quarters in a row since 1974. The market impact may be limited on this data, unless there is a dramatic surprise to the upside as everyone desperately looks for signs of a recovery and attempt to gauge its strength.

Subsequently, we have the FOMC rate decision where the Fed is not expected to spring a similar surprise to that seen in the March meeting. Recall at that meeting the Fed declared that it would move aggressively with expansion of its non-traditional monetary policy measures and most importantly, laid out plans to purchase US treasuries outright. This time around no such surprise is likely and any announcement is likely to express continuity or fine-tuning of measures already announced and the hope that measures taken already will begin to bear fruit. With the rate effectively at zero and the Fed already having stated that it is likely to remain at zero for some time, we should expect no new guidance on the trajectory of the Fed Funds rate.

Very late in the session the RBNZ follows with its own rate review. Seen and still behind other central banks in its rate-cutting cycle, another cut in the official cash rate is on the cards, though the magnitude of the cut is unclear, with the market evenly divided between a 25bp or 50bp rate cut from the current 3% level. NZ economic data released earlier this morning may have edged sentiment towards a more conservative 25bp cut as the trade balance for March came in above forecast at +NZ$324 mln though still lower than February’s revised +NZ$487 mln. In addition, business sentiment improved in April, producing the strongest rebound in 16 years to -15 from -39.3 in March. Tactically, the Bank may not want to be forced to take rates to very low levels in a bid to continue to attract foreign investment. However following the adverse reaction in swap rates, and the clear worsening in the country’s econ outlook following its optimism in March's review, a bearish 50bps rate cut this time round may be necessary to speak louder than words.