SCOREBOARD: Japan dread

Risk was taken off the table in our session yesterday after concerns over Japan's nuclear disaster spiralled. The Japanese nuclear agency upgraded the disaster to a level 7, which apparently puts it on par with Chernobyl. That said, many organisations, such as WHO, said they haven't detected any notable deterioration and that the Fukushima disaster is nothing like Chernobyl. Moreover, it has been noted that the amount of nuclear material given off by the reactors is about 10 per cent of what was seen in Chernobyl. Nevertheless our markets were certainly smashed and that action flowed through to Europe and the US – stocks have been belted. With stocks down 1.4 per cent to 1.7 per cent in Europe, the S&P500 then closed down 0.8 per cent (1314) with energy (-2 per cent), basic materials (-2 per cent) and tech stocks the key underperformers (although most sectors were down).
 
That fall in energy stocks largely related to a decent drop off in crude, which fell 3.4 per cent on WTI ($106.2) and 2.4 per cent on Brent ($121). Apart from general risk aversion a couple of other factors weighed on the crude market, including a broker downgrade and also comments from the IEA that higher oil prices are bad for global growth – which is in turn bad for oil prices. In other commodities news, copper was down 1.7 per cent and gold fell about $4 to $1453. Other than that, on Wall Street, the Dow was then off 117 points to 12263, the Nasdaq fell 0.96 per cent (2744) while the SPI lost another 0.5 per cent (4893).
 
This was all bond bulls needed and we've seen a fairly decent rally across the globe – with the 10-year gilts off 11bps to 3.69 per cent and bunds down 5bps to 3.44 per cent. Treasuries were already showing reluctance to sell off following comments from the Fed's core (Dudley and Yellen) that exceptionally loose policy was here to stay. Recall that the Fed is the single largest holder of US debt. So the threshold for a further rally was low and that's what we got last night. At the close, the yield on the 2-year was down 6bps to 0.75 per cent, the 5-year fell 7bps to 2.2 per cent and the 10-year is also 6bps lower at 3.5 per cent (from 1600). Aussie futures were up 2-3 ticks with the 3s at 94.84 and the 10s at 94.39.
 
One of the more interesting price moves last night was sterling – which was down about 46 pips (1.6255) after inflation fell to 4 per cent year-on-year to March. Now the view expressed by newswires and the press (that I've read) is that this fall in inflation, from 4.4 per cent to 4 per cent, somehow justifies the BoE's decision to keep rates steady. I'm not seeing that myself. Four per cent is still well and truly above the target and even excluding the VAT, the ONS estimate inflation would be above 3 per cent (the target being 2 per cent).
 
Indeed, on a monthly basis, CPI rose by 0.3 per cent or 3.6 per cent annualised. There is not a lot to be relaxed about here. And all the excitement I'm seeing – the view that somehow this result vindicates the BoE – is delusion at its worst. I still expect a near-term hike from the bank. I base that view on the fact that deflation is no longer a threat and that the economy is no longer facing a depression. With inflation well above the band the decision for an inflation targeting bank is simple. Rates should not be at a record low. The fact the MPC is undecided about this suggests that the BoE may have dropped its inflation target. We'll see.
 
As for currencies elsewhere, the Australian dollar is little changed; up about 9 pips to 1.0436, the euro is up 72 pips to 1.4477, while yen is at 83.6 from 83.9.
 
Not much else that was really exciting. The US trade deficit narrowed to $45.8 billion in February from $47 billion in January, with exports falling 1.4 per cent and imports falling 1.7 per cent. Just note that these falls come off strong gains in January (2.6 per cent and 5 per cent respectively) and that imports of consumer goods were strong in the month.  The weakness in imports was largely petroleum and cars. Import prices then surged 2.7 per cent in March on the back of a sharp gain in food prices ( 4 per cent for the month). Annually, import prices are 9.7 per cent higher. Finally, the BoE held rates at 1 per cent overnight, as expected, with little indication they are entertaining a near-term hike.
 
Data today includes Westpac's consumer confidence measure out at 1030 AEST. It's April data and following on from disaster related falls over the past few months we may get a bounce back this month. Jobs growth and a rebound in equities would certainly support such a move. At 1100 AEST we then see DEWR's skilled vacancies index. Tonight it's worth watching for US retail sales (March and 0.5 per cent expected), business inventories, the Beige Book and a speech from the RBA governor (0300 AEST).

Adam Carr is senior economist at ICAP Australia. See Business Spectator's glossary for definitions of technical terms used in SCOREBOARD articles.