Sentiments Mildly Hurt By Sequestration And China PMI

Sentiments were mildly hurt by the rejection of partisan proposals in the US Senate to replay the spending cuts which set to start today. The spending reductions would be up to USD 85b the rest of this fiscal yea,r and could be up to USD 1.2T over a period of nine years. The Congressional Budget Office expected that this would reduce US growth this year by as much as 0.6%. On the other hand, sentiments were also weighed down by a weaker than expected manufacturing from China. The official manufacturing PMI dropped to 50.1 in February versus expectations of a rise to 50.5. The HSBC manufacturing PMI also finalized to 50.4, much lower than the previous month's 52.3. Forex markets are basically stuck in tight range, even though some strength is seen in the US dollar against Swiss Franc and Canadian dollar.

In Japan, prime minister Abe will hold Diet confirmation hearings for nomination of Kuroda as BoJ government as early as next week. The major opposition DPJ has already indicated support for Kuroda, so markets are expecting a smooth appointment transition. Latest US treasury figures showed that Japan's holding of US securities jumped to USD 1.84T at the end of last June, surpassing China, the holding of which dropped to USD 1.59T. Data from Japan indictaed that the national CPI core dropped -0.2% yoy in January, unchanged from December's figure. Tokyo CPI dropped to -0.6% yoy in February, down from the prior month's -0.5% yoy. Unemployment rate was unchanged at 4.2%, while January household spending rose 2.4% yoy.

In US, Chicago Fed Evans urged the Fed "not to undermine our own policies and remove accommodation prematurely, as the Japanese did ... mindful of this danger, we must guard against complacency and not deviate in our approach...there remain plenty of headwinds and downside risks that can impede our progress." However, he's "optimistic that we have appropriate policies in place to help the economy achieve escape velocity by 2014."

Looking ahead, PMI data will be the main focus in European session, including the Swiss SVME PMI, the Eurozone PMI manufacturing final and the UK PMI manufacturing data. The Eurozone will release the February CPI flash and unemployment rate. Canada will release the GDP, which could trigger a steeper rally in USD/CAD should it disappoint. The US will release personal income and spending data, as well as ISM manufacturing index.