US/Washington/POLITICS $SPY

         Fed's Kohn comments echo tone from recent minutes – eco still weak although slowly recovery; eco operating well below potential; inflation isn't going to be a problem; rates to remain low for extended period.  "I last spoke on the economic outlook in October, and my views since then remain largely unchanged".  Kohn notes that home sales have stalled recently.  Says while signs of recovery are emerging in jobs, "the labor market remains extremely weak".  Says core inflation rates have shown a substantial deceleration.  That said, he isn't calling for deflation – "I anticipate that inflation will remain low for a while, with core PCE inflation not likely to fall much further from the subdued pace I cited a few minutes ago".  Kohn repeats "extended period" - the Federal Open Market Committee has stated that the current exceptionally low level of interest rates is likely to be required for "an extended period" to make progress toward our legislative goals of maximum employment and stable prices.  However, he also says the Fed can't leave policy at current levels forever – "we will also want to be sure that we haven't left highly accommodative policy in place so long that economic and financial conditions become conducive to future inflation. Given the lags in the effects of monetary policy, that means we will not be able to wait until the unemployment rate is down close to its long-term level" link 

INTERNATIONAL NEWS WRAP; Euro zone inflation; Eurozone growth outlook; Greece plans to sell a global bond in dollars in late April or early May

         Euro zone inflation was much higher than expected in March; Inflation in the 16-country area was 1.5 percent year-on-year, the highest since December 2008, after 0.9 percent in February; the 1.5% compares w/expectations of a 1.1% increase.  Reuters 

         Eurozone unemployment inline - The euro zone's 10 percent jobless rate in February was the highest since August 1998 and in line with market expectations.  Reuters

         German jobs #s surprise on upside - The number of people registered as unemployed dropped by 31,000 in March to 3.568 million, defying expectations for an increase by 10,000 (DJ)  

         Eurozone – new S&P report on the region's eco growth outlook; S&P views the overall recovery in member countries as still fragile, which calls into question the single currency zone's growth model, as detailed in the article "The Eurozone's Two Growth Models Collide," 

         ECB lends banks less than forecast; The European Central Bank will lend banks less than economists forecast in its final offer of unlimited funds over six months.  Sixty two banks bid for 17.9 billion euros ($24.1 billion).  Economists forecast that it would lend 60 billion euros – Bloomberg 

CEEMEA Rates Trade Idea Pay 5y Turkish CCS

Rationale: The TRY 5y CCS seems to be trading at the bottom of the range (10-10.80). Given our economists’
view that CPI inflation will climb higher this year before starting to fall in 4Q10 (Exhibit 1), the risk/reward of
tactically paying rates in Turkey looks attractive to us.

While we acknowledge that the curve is already quite steep, we do not think that sufficient rate hikes are priced in at the moment. Based on our estimates, the curve is pricing in around 250bp of hikes by end-2011,
compared with Morgan Stanley’s forecast of 325bp.

Real yields are also reaching a turning point. Given the historically strong relationship between real GDP and real yields, we think that real yields are close to the
bottom and should turn around soon, following the trend in real GDP. Even as inflation starts to fall after 4Q10, we think that nominal yields should continue to rise, given our economists’ GDP forecast of 4%Y at end-2010 and 4.2%Y at end-2011.

Oil and food also pose upside risks to our inflation
forecast, in our view. Furthermore, the longer the CBT
keeps rates on hold, the higher the likelihood that
inflation expectation might deteriorate further, thus
mitigating some of the (positive) base effects from 4Q10.
Carry/rolldown: Over a 1-month period, the
carry/rolldown on a pay 5y CCS position is around -9bp.
This compares more favourably with -20bp in 2y and
-22bp in 1y.

Alternatives: We still like paying breakeven inflation by
holding 2y linkers versus paying 2y CCS.
Key risks: Persistent lira strength, a significant
improvement in inflation profile (e.g., lower oil or food
prices), a potential IMF package and a lower domestic
debt rollover ratio in March and April could put
downward pressure on rates, in our view.

Link here

India: Inflation prints above RBI’s end-March target; nonfood inflation gathers pace

Asia Pacific Economic Research India: Inflation prints above RBI’s end-March target; nonfood inflation gathers pace WPI inflation surged to a 15-month high of 8.56%oya in January – higher than the consensus expectations (8.26%) as well as the RBI’s end-March target of 8.5% – from 7.3% in December. The overall index gained 1.1%m/m, sa from 0.8% in the prior month. However, nonfood primary articles and manufactured products were the key drivers of the WPI rise this month, unlike recent trends wherein higher food prices contributed to the WPI rise. Release of food stocks from the government’s buffer, increased imports along with expectation of a healthy winter crop helped lower the food prices. The increase in our food composite index – including primary and manufactured food articles – was thus limited to 0.2%m/m, sa as compared to the recent peak of 5.6% in November. While food prices moderated, prices of non-food primary articles like fibers, oil seeds and minerals strengthened. Even the energy index gained 2.1%m/m, sa from 1.5% in the prior month. Given that these commodities feed into the manufactured products as industrial inputs, continued high prices of these articles is likely to exert upward pressure on the manufactured products as well. Indeed, the latest print for the Markit manufacturing PMI further augments this risk, as the input price index for January surged to its all-time high since April 2005 (when the index was released). For January, the manufacturing index excluding food products increased 0.9%m/m, sa from 0.6% in the prior month. Directionally, this trend of increasing price pressure on the non-food commodity basket is expected to continue, driven by strengthening industrial activity. From here on, the movement in food prices will be determined by the output of the winter crop. Separately, the November print was revised up to 5.6%oya from the provisional estimate of 4.8%, largely driven by revision in the food price index (18.7%oya; 5.8% m/m, sa). In 1Q10, we expect the headline inflation to peak around 9.0-9.5%, driven by higher commodity prices and a weak base last year. On policy, we do not expect that today’s higher WPI print will prompt the RBI to bring forward the likely tightening. We maintain our expectation of a CRR hike of another 25bp in the April policy meeting along with a 25bp increase in the policy rates. Gunjan Gulati J.P. Morgan India Private Limited

US Economics Updating Our Themes: Fed Exit and Sustainable Growth

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Fed will exit in 2010 – What’s New: Fed Chairman Ben Bernanke’s congressional testimony reinforced the notion that progress towards an eventual Fed exit is underway. We continue to believe that the exit process will unfold fairly quickly during 2H10, spurred by market-based indications of rising inflation expectations as the economic recovery takes hold. The Fed is getting closer to hiking the discount rate as part of ending its liquidity facilities. The stance of policy might be best communicated using the IOR (interest on reserves) rate rather than the fed funds target – at least during the initial stage of the exit process.

Sustainable Growth through 2011 – What's new: The jobless claims report released on Thursday, February 11, showed that filings plunged 43,000 in the latest week to 440,000, the lowest reading since the week ended January 2. The latest claims data, layoff survey info, rising temporary help jobs, and consumer sentiment gauges are all supportive of gradual progress toward recovery in the labor market.
LINK TO FULL REPORT HERE