05 března 2009

5/3 Could the China stimulus package only last 24 hours?

China to the rescue! Hopefully. And that’s all it appears to be at the moment, HOPE. Talk that China would add another $586 bln to its stimulus plans was the main driver of activity and direction in FX markets overnight, with risk appetite staging a comeback on hopes that it will help drive demand both internally and hence in the global economy. As yet there has been no official confirmation or announcement that such a plan exists as the Chinese legislature sits for its annual session, with Premier Wen Jiabao making no mention in his speech to the annual Party congress. That may become a bit of a worry later on if nothing definitive is forthcoming and force a reversal out of the “risk trades”. Indeed, the early signs of such an outcome were evident late in the Asian session.

During his report to the annual congress, Premier Wen admitted that the country is facing unprecedented difficulties and challenges with the economic slowdown becoming a major problem. However, he reaffirmed the 2009 growth target of 8% (worth noting that in China circles the number 8 is regarded as an auspicious number). The Finance Minister announced that, amid declining government revenues and increased government spending, the 2009 total national budget deficit is projected to be 950 bln Yuan (less than 3% of GDP), which will be offset by bond issues. This compares with a deficit of 180 bln Yuan in 2008.

While talking about kick-starting economies, the European stage features central bank meetings in the UK and EU with both expected to announce 50bp rate cuts. The BOE looks certain to reveal some quantitative easing, having laid the ground work earlier, though the exact nature and extent of the policy implementation is still a bit vague.
Full details are expected to be released along with the publication of correspondence between UK Chancellor Darling and BOE Gov King. The ECB on the other hand appears to be far away from this kind of approach, still sticking with “straight-forward” rate cuts (granted they have a lot more leeway than other central banks given their delay and reticence in cutting earlier. The post-meeting press conference will either confirm or dash hopes for further easing at the May meeting and may contain reference to thoughts on “non-conventional” policy measures.

The run in to Friday's US non-farm payrolls continues with the relase of the weekly jobless claims data. Following on from yesterday's ADP employment report, which recorded its worst reading of the current cycle, market projections are for a marginally lower figure from last week's 667k. Median forecasts are for 650k but a higher number may already be discounted in the current environment. However, the return of risk appetite that featured yesterday may have been built on a fragile base and risks a sharp reversal into the end of the week.

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