- Chinese trade data point to improving domestic demand, while a sovereign downgrade from rating agency Fitch highlights increasing debt worries.
- The highlight on today's calendar is the FOMC minutes, which are due at 20:00 CET.
Chinese trade data signal recovery on track, amid increasing debt worries
. According to the data released overnight, China recorded a mild trade deficit of USD0.9bn in March driven by a surge in imports of 14.1% y/y. This could dispel concerns over weak domestic demand. The near-term economic outlook is further supported by moderating inflation as witnessed by yesterday’s report, which has eased pressure on PBoC to tighten policy.
Nonetheless, Chinese debt worries are moving higher on the agenda. Yesterday Fitch delivered the first downgrade by a major international rating agency since 1999, cutting the long-term local currency rating from AA- to A+ (stable). The foreign currency rating was affirmed at A+, underpinned by the country’s vast reserves. As reasons for the downgrade, Fitch cited the rapid expansion of bank credit, the indebtedness of local governments, a lower fiscal revenue base as well as the country’s less favourable record on inflation management than its A-rated peers.
US equities were supported yesterday as the earnings season continues. Being kicked off this Monday by Alcoa Inc. after the US close, 5% of US companies have reported so far. Three-quarters of the companies have topped expectations, although earnings growth has been limited according to Reuters. Sentiment was also supported by the decline in Chinese inflation, while overnight’s trade data is lifting Asian equities this morning.
In fixed income markets, US Treasuries ended the day mostly unchanged yesterday. During much of the day the trend was for lower yields in the 10yr segment, yet hawkish comments from Fed’s Bullard (voter, neutral) reversed the trend. Commenting in an interview on CNBC (link) on the outlook for QE, the FOMC member said that he is willing to look past last week’s downbeat jobs report, potentially opening the door for winding down the Fed’s bond buying programme in ‘small increments’. European debt markets saw bunds selling off slightly (+2bp), while the spread to peripherals, notably Spain and Ireland, continued to tighten.
In the FX market, USD/JPY continues to hover just below the 100 level, where hedging of option contracts could be acting as a temporary barrier to the yen’s further slide. Meanwhile, EUR/JPY has broken above 130, reaching the highest level since early 2010. EUR/SEK and EUR/NOK are relatively stable this morning.
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