The March PMI data-cycle kicked off this morning with the publication of the
(relatively minor) Dallas Fed Activity Index. This came in at a better than
expected 7.2% (0 is neutral for this index), beating consensus estimates of
5.2%. Strong gains were seen in New Orders (10.9% versus -6.0% in February),
Production (8.7% versus 2.3% in February and strongest reading since March
2008). Perhaps most interestingly this increase in Production appeared to
finally be enough to have an effect of Cap Utilization (see attached chart)
with that index rising to 14.9% from 0% in February. This is the highest
reading since May 2007 and while we would not rely greatly on this particular
data set (it is quite erratic on a month-to-month basis) we would expect to see
a continued rise in the level of production start to require a meaningful
change in use of plant going forward. Today's release is the first hint that
this is starting to occur. - dfedmar10.gif

February's Personal Consumption data mirrored the retail sales number's
released earlier this month (these two series do not always correlate as
closely as one might imagine) and suggests that consumer expenditure is
growing acceptably at this point in the recovery. February 2010 was 0.34%
higher than January (which was revised down 0.1% from the initial reading)
and reached a new all time high of $10,352 bln. This keeps the 12 month RoC
growing at 3.4%, a level slightly exceeded by the 3 month RoC on an
annualized basis. Improvements in sales data is the key to our bullish
thesis since they require further increases in production which will in
turn require re-employment of workers. This virtuous circle (assuming
re-employment results in further increases in consumption) has the
potential to accelerate growth going forward, replacing the monetary and
fiscal stimuli that seem likely to be scaled back. With February's sales
data now in the history books we await the start of the March data cycle on
Thursday with the key ISM report and New Orders in particular. Although
Friday's Non-Farm payroll number will garner the headlines (for those of us
who switch on our terminals since this will be Good Friday) employment
data is really the "tail" that is wagged by the ales data "dog" at this point
in the cycle. Therefore even if March's number disappoints the consensus of
182K it simply makes it more likely that April's will not, provided sales
continue to improve.


(See attached file: M-PCE_CUR$_Index.gif) - M-PCE_CUR_Index.gif

Monetary policy continues to tighten globally via a series of baby steps
that show the difficulty that many central banks are finding in fitting
their monetary policy to the competing needs of the domestic and
international portions of their economy. Of course, from our perspective
these difficulties are caused by a flawed assumption that the US, Japan and
Europe are undergoing only modest recoveries rather that the more powerful
and sustained gains that we anticipate over the coming months. Israel
continues to be an excellent example of this dilemma with a white hot real
estate market (complete with auctions for the right to buy new homes and
"buying syndicates" scooping up blocks of apartments in new developments)
requiring substantially higher rates than the current 1.25% and an export
driven (technology centered) economy whose activity remains well below its
2007/8 level but is showing distinct signs of improvement. Last night saw
a moderate adjustment higher with the rate pushed up to 1.5% (to come into
effect on April 1). A move of this size will of course do little to cool
the overheated portions of the local economy and still keeps rates well
below the levels prevailing prior to the crisis. Later moves (provided we
are correct about the US economy in particular) are likely to be
considerably larger but the management of this policy will be considerably
complicated by the fact that local money supply is already falling as we
highlighted 2 weeks ago. In the end it seems unlikely that this conundrum
will be solved without inflicting significant pain somewhere along the way


(See attached file: D-ISBRATE_Index.gif) - D-ISBRATE_Index.gif

Back in the crisis days of 2008 we spent a great deal of time monitoring the
Swaps curve (and the 5 year swap in particular) since it proved to be an
accurate indication of the massive financial stress that built up building up
to the BSC and and LEH crisis (see orange line for swap curve from 2 years ago,
1 week after BSC was rescued). In recent days the Swaps curve has been
indicating a very different kind of stress is building up within financial
markets with spreads from 7 through 30 years moving into NEGATIVE territory
(see green line for current swap curve). The 30 year swap has in fact been
negative since January 2009 but this has hitherto been dismissed as a marginal
event (caused by forcible swap unwinds primarily by municipal borrowers). It
had been claimed that the super-liquid 7-10 year portion of the curve could not
move into negative territory and the fact that it now has indicates a
significant degree of duress has built up in this area.
.
This stress looks to be of the "old fashioned" variety rather than anything of
the scale of 2008 but these markets are dominated by residential mortgage
duration hedgers (including the GSEs) and those playing the yield curve for
both steepening and flattening trades (HF's and Commercial Banks). No doubt
there will be a "naming and shaming" of those caught out soon enough and the
losses may indeed be considerable. One other point we would make is that the
Treasury curve has been unusually quiet in recent months. We have commented on
this both in the Weekly Speculator and our Speculator Extra "Zone of
Indifference". Periods of extreme quiet in financial markets are generally
followed by by some frenetic activity (in part because prolonged quiet always
attracts volatility selling which is then forcibly unwound and the range breaks
down). This would seem to now be occuring in the Treasury and Swap market and
one outcome may be a curve which is substantially more economically sensitive
(or less "indifferent") than has been the case in recent months. -
swapscurvemar24.gif

Last night's release of Japanese trade data showed a continued improvement in
Japan's export economy. Overall exports rose 45% from February 2009 (Y3,526
Bln) to reach Y5,128. To give a sense of scale this is slightly higher than
February 2005 export activity (2009 data was equivalent to 1999 activity).
While most of the commentary ascribes this significant improvement to Japanese
exports to China this has been less true in recent months than it was in mid
2009. As chart 2 shows the repair of Japan-US exports is fast becoming the most
significant source of renewed activity. Prior to the collapse of global trade
in 2008 the US had always been Japan's largest export market but was usurped by
China at the start of 2009 as China's industrial recovery started several
quarters ahead of the US. Since February 2009 Japan exports to China have on
average been Y126 bln greater than exports to US, the spread reaching Y238 bln
in December. For February 2010 the spread narrowed to Y65.4 bln as exports to
the US have started to grow once more. Any normalizing of US economic activity
would see exports to the US move sharply higher (they are currently
approximately 60% of their level pre-crisis) and would see this spread move
back strongly into positive territory. We would make two points, first the
Japanese economy continues to recover steadily and secondly that the US in once
more moving to center stage as the motor of global growth. This has always
struck us as a necessary condition for a lasting global recovery since although
China's growth spurt in 2009 was welcome it was unlikely to be (a) sustained or
(b) sufficient to carry the world through an expansionary cycle. -
japexptotfeb10.gif - japexpfeb10.gif

Overall Existing Home Sales as expected were virtually unchanged from January's
level coming in at 5.02mm units. The more important Single Family data was also
flat at 4.37mm units (see attached chart) which keeps sales roughly in line
with where they were at the end of the 1990's. This is a reasonably healthy
pace of sales but apparently is not sufficient to stop a moderate rise in
Inventories. We would not categorize this as a problem at present since
Inventory data is very noisy (see attached) but we would still want to see
Existing Sales recover closer to a 5mm pace by the end of the Spring housing
season. Even so Existing Sales continue to contrast with the very depressed New
Home data which remains below its 1970 level at a time that Existing Sales were
less than 1.65mm units. - existhomefeb10.gif - existinfeb10.gif

Despite the wholly negative tone of this article this sort of retail flight out
of Japan is actually a very bullish signal for their equity market. One of the
factors that makes Japan attractive right now is its non (or even inverse)
correlation with most investment flows at present. Of course without an
economic recovery this would be less interesting, but, as we have outlined
before, the recent data out of Japan has been very encouraging.

A large popular IPO failing to hold syndicate even after being scaled back is a
classic sign of supply overwhelming demand in a crowded market. Brazil
therefore continues to emit clear warning signals that its recovery rally is in
danger of faltering. The IBOV Index (see attached chart) is up 0.5% for the
year but down 2.8% in USD terms. This is hardly disastrous performance in
nominal terms but is certainly very disspointing for those who rushed in
towards the end of 2009. Furthermore its technical picture continues to weaken.
The index has so far failed to record a new recovery high since the January
sell off (suggesting it no longer represents global leadership) and today
bounced off support at the 50 day ma. A break below the 50 day would see
support at 65,000 become a short term target. Our advice continues to be to
sell Brazil into strength.

+------------------------------------------------------------------------------+

Batista’s OSX Brasil Declines in First Day Trading (Update1)
2010-03-22 14:08:51.468 GMT


(Adds investor comment in fourth paragraph.)

By Alexander Ragir
March 22 (Bloomberg) -- OSX Brasil SA, billionaire Eike
Batista’s oil-services and shipbuilding company, fell as much as
10 percent in its first day of trading after slashing the size
of its initial public offering to lure investors.
OSX dropped 8.9 percent to 729 reais in Sao Paulo trading
at 10:04 a.m. New York time.
The newest company in Batista’s oil, energy and mining
holdings, OSX cut its IPO by 67 percent last week. The company
originally estimated it would raise as much as 9.9 billion reais
($5.5 billion) by selling as many as 7.4 million shares for
1,000 reais to 1,333.33 reais. OSX is raising as much as 2.8
billion reais after pricing 3.06 million shares at 800 reais
each and saying it may sell another 490,000, according to a
filing with Brazil’s securities regulator.
“People got a bit scared” after the company priced its
offering beneath the low end of its estimated range, said Felipe
Casotti, who helps manage the equivalent of $346 million in
assets at Maxima Asset Management in Rio de Janeiro. “The
lowered price is attractive, but there’s the psychological
question about why they had so much trouble pricing it.”
While OSX’s sale was the biggest IPO in Brazil this year,
it would have been the largest in the world if it priced at the
high end of the company’s estimated range.
Rio de Janeiro-based OSX has never reported a profit and
its main assets are 3.2 million square meters of oceanfront
property in the Brazilian state of Santa Catarina and the
guarantee of orders from Batista’s oil company, OGX Petroleo &
Gas Participacoes SA.
Batista, 53, has more than tripled his wealth in the past
year and rose to the top 10 of Forbes magazine’s billionaires
list for the first time this month.

For Related News and Information:
Top stories from Latin America: TOPL <GO>
Top stories in emerging markets: TOP EM <GO>
Stories on Latin American stocks: TNI LATAM STK <GO>
World equity index futures: WEIF <GO>
Bovespa market map: IBOV <Index> IMAP <GO>
Brazilian stock movers: TNI BZS MOV <GO>

--Editor: Eric Martin

To contact the reporter on this story:
Alexander Ragir in Sao Paulo at +55-21-2125-2533 or
[email protected]

To contact the editor responsible for this story:
David Papadopoulos at +1-212-617-5105 or
[email protected]
- ibov.gif

India Raises Interest Rates for First Time Since 2008 (Update2)

As we have written many times in recent weeks 2010 is going to be a year of
transition from ultra-loose to considerably tighter monetary policy. Those
economies whose recovery started earlier, and whose expansionary cycles that
commenced in 2002 remain intact (if interrupted in 2008) would seem to be the
most at risk in this regard. India certainly belongs in that group and today's
interest rate hike is only a "surprise" in terms of its precise timing.
<>

Evidence continues to mount that Japan's recovery is both rapid and
accelerating. The All Industrial Activity Index which is calculated by the
(once venerated) MITI estimates activity in Tertiary (63.2%), Manufacturing
(18.3%), Government (11.4%) and Construction (5.7%) Industries on a monthly
basis and January's release suggests that this month saw the fastest single
month positive change in activity since this series started in the early
1990's. As the chart shows this measure hit 3.8%, high enough to take the 6
month ma (red) up to 0.9%, an annualized growth rate of
6.4%.
In addition to the official MITI data last night also
saw publication of the Electricity Consumption report for February (see graph
attached) this shows a continued surge in Idustrial consumption since the
trough of February 2009 (note the data is highly seasonal so the 12 month RoC
is the best guide for understanding usage). Usage is now back to roughly where
it was in 2005 and currently growing by 17.66% on a 12 month basis. Of course
this still represents a repair of the collapse in activity seen in 2008/9 but
this type of rapid "V" shaped recovery has been widely assumed to be impossible
to occur in Japan's economy. - japallindjan10.gif - japelecfeb10.gif

There is nothing worse for a popular crowded trade than for demand to "get back
to normal". The same positive spin was put on demand for technology stocks and
equipment in late 2000 and for US real estate in late 2006. Of course the
Austrian coin market alone is not necessarily indicative of entire global
demand for gold but it has always seemed likely to us that a return to
normality (or rather the recognition of such) would be unkind to this metal's
progress.

BOJ Doubles Lending Program to Combat Deflation (Update1)

One of the reasons that Japan is on our list of favored countries at present is
that its monetary policy is out of phase with the rest of the world. At at a
time that other Central Banks are commencing tightening measures by raising
rates, reserve requirements and stopping asset purchase programs (or a
combination of these) Japan is still stepping up its liquidity expansion which
only began in earnest in the fall of 2009. Given that we believe that
tightening monetary policy is one of the greatest risks to asset markets in
2010 this makes Japan something of a "safe haven", at least as far as this
specific risk is concerned. Moreover these measures are also likely to
accelerate a recovery that is already arguably more powerful than most people
appreciate. Ownership of Japanese economically sensitive equities therefore
makes sense to us at the current time.
<>

We pointed out last week that the 6 month t-bill had finally started to
converge on the FDTR (as would be the case in a normal economy). This process
has continued this week and as the attached chart shows the 6 month t-bill
yield is now just under 1bp below the FDTR target rate. The FRB has therefore
been successful in its attempt to bring some order to the ultra-short portion
of the yield curve, although the 3 month t-bill still yields only 15 bp. Even
so this represents the first potential signs of monetary tightening this cycle.
- 6montht-billspread.gif

Even though we spend a fair amount of time in Tel Aviv visiting clients (and
are in the middle of a trip at present) we do not normally suggest that the
Israeli economy is of general interest to global investors. However, at present
Israel represents one of the leading indicators of the global tightening cycle
and the fact that its Central Bank is led by Stanley Fischer who was Ben
Bernanke's doctoral supervisor makes its policy doubly interesting. Thus far
the BOI has been the first central bank to raise rates but has satisfied itself
by moving from 0.50% to 1.25%, however this only tells half the story. Monetary
growth has stopped exploding (M1 was growing at over 50% YoY last summer) and
has actually started rapidly contracting. M1 shrank 1.58% in February 2010, the
3rd consecutive shrinkage (the first time this has happened since November
2002). This has pulled the 3 month RoC down to -3.91% (an anualized shrinkage
of 17%), which is the most rapid shrinkage since December 1994. This is partly
a reflection of Central Bank tightening and also the willingness of Israeli
individuals and corporations to put low yielding cash to work (Israel's local
real estate market is extremely robust). Should this process be sustained
investment risks in liquid assets would rise considerably, notwithstanding
their currently excellent fundamentals. Following the explosion of monetary
creation in 2008 there is still an abundance of liquidity but the increase in
the market cap of investments (both equity and property markets) and currently
rapid trend of monetary contraction certainly represent a growing threat at at
the current time. We do not expect Israel to be the only economy facing these
risks in the months ahead. - israelm1feb10.gif

Despite some recent positive comments by a number of public homebuilders
regarding a pickup in activity since the start of February no such improvement
was reported in the March 2010 data. Overall the index fell to 15 leaving it
mired firmly in the "depression box" that has contained this data since late
2007. In terms of the sub-indexes Traffic remained very week at 10 (down from
12 last month) while Future sales fell to 24 (27). The one point we would make
is that the survey is based on 477 builder respondents and thus is very
weighted towards sentiment at smaller homebuilders rather than the large public
homebuilders. The latter are in a very different (and much more positive)
position regarding access to capital and cost of land. They are therefore able
to offer deals that may be attractive enough to actually stimulate demand for
New Homes (and a number of them claim to be doing so). At this point in the
cycle we would be far more sensitive towards actual corporate statements from
the public homebuilders than towards a broad sentiment index such as the NAHB
data. - nahbmar10.gif

As we were just saying at this point in the cycle it is really all about Sales
data rather the metrics following Production since while the decision to
produce more can be delayed it cannot be avoided if sales continue to rise.
February's data showed (estimated) Industrial Production to be flat although
the individual industries saw a range of experience from Motor Vehicles at
-4.4% to Textiles at 1.5% and Defense at 1.3%. In any case we already know that
no great pick-up in employment took place in February, but we also know that
retail sales were strong and would look for the upcoming regional and national
PMI data to confirm this for the Industrial sector. Given the above a flat IP
data-point is more than acceptable while the Capacity Utilization rate of 72.7%
(up from 72.5% last month) suggests that once the decision to ramp up
production is made their is sufficient slack to all this to be much more rapid
than normal at this stage of a recovery. - ipfeb10.gif - caputilfeb10.gif

As we have argued repeatedly in recent weeks the only metrics that really
matters at the current point in the cycle are those concerning New Orders (or
other demand such as retail sales). This is because given the current depleted
inventories if New Orders continue to climb then Production will need to follow
leading to a significant wave of re-hiring. This morning's publication of
Empire State Manufacturing PMI data is therefore encouraging since the New
Order sub-index recovered very strongly to 25.53 (from 8.78 last month) pulling
the 6 month ma up to a very positive 17.42. Equally encouragingly this data is
starting to hint at stronger employment growth with the Employment index also
rising to 12.35, the strongest reading since October 2007. - emprienomar10.gif
- emprireempmar10.gif

Further evidence of mounting inflationary pressures in emerging markets and the
BRIC complex in particular can be seen in today's release of the Indian
Wholesale Price Index. This continues to climb steadily higher surpassing
estimates of 9.69% to come in at 9.98%, the highest level since October 2008.
although the last 2 months had seen a considerable moderation in the pace of
increase for the index (though not in the 12 month RoC) February's single month
increase of 0.64% must come as some concern to the local authorities. Our
viewpoint remains that monetary conditions are currently innapropriately loose
in a large proportion of emerging markets and their trading partners and that
2010 will therefore be a year of transition from ultra-loose to considerably
tighter policy. - indianwpifeb10.gif

January's Manufacturing data mirrors that describing Wholesale Inventories (and
numerous PMI reports) in that it shows a consistent inability (or
unwillingness) of Manufacturers to boost production to the point that
Inventories are actually rebuilt. Of course this only matters because Sales
(both to retail and corporate clients) are showing a steady increase month in,
month out which is perhaps not too surprising given the fact that they have
been very depressed for over 15 months. The result is increased pressure on the
remaining inventory, best shown by the collapse in the Inventory/Sales ratio
(blue line on chart). This is approaching the record low recorded in January
2006. The clear danger for Manufacturers is that any increase in the pace of
Sales (a likelihood in our opinion) would lead to an actual shortage of goods
and an inability to complete existing and potential orders. Of course the
longer Sales stay positive the more willing Manufacturers will be to believe in
the persistence of this phenomenon and to address it by re-starting idled plant
and machinery and re-hiring workers. Either way the key metric to follow is
Sales (or New Orders) since if they continue to rise the pressure on the system
will complete the rest of the process. - mtibfeb10.gif

We have already commented this morning about accelerating Chinese Retail
Sales and the same picture can be seen in the closely linked Brazilian
economy. Here sales are currently increasing by 10.4% YoY (compared to
China's 17.5% increase) and this is the fastest rate of change for 18
months. Sales are at a new record high for January (seasonally the 2nd
quietest month of the year) and their rate of advance once more suggests
that local monetary policy is inappropriately loose at the current time. As
with China we expect this to be rectified later in 2010 with the same
attendant risks of matching the price and availability of capital to the
competing needs of industrial and financial activity.


(See attached file: M-BZRTRETA_Index.gif) - M-BZRTRETA_Index.gif

Last night saw the concentrated release of China's February Monetary and
Inflation data in addition to retail sales and production. The highlights
of this crowded release are as follows. Chinese loan issuance slowed
rapidly from the bloated January level but at 700 bln RMB these exceeded
consensus of 600 bln by some margin. This does not necessarily signal less
of a monetary tightening than is expected, since policy changes such as
increases in Reserve Requirements typically take several weeks to have
their full effect in loan transaction volume. New loans represented 3.0% of
total market cap of Chinese equity market (our favored metric for scaling)
with the 6 month ma stabilizing just below this level. We would therefore
characterize new loan issuance as being slightly below average compared to
the capitalization of available assets without yet being tight. This is
also reflected in the M2 data which shows the effects of January's
ballooning credit issuance. M2 grew 1.74% in February taking its 12 month
RoC down to 25.42 but bringing its 3 month RoC higher to 6.96%, an
annualized rate just over 30%. This effectively undoes much of the
tightening that had taken place towards the end of 2009 and suggests that
the authorities really have to work more aggressively if they are serious
about controlling the clear signs of excess building in the local economy.
.
This dangers of overheating are visible throughout the data. We have
attached a chart of retail sales which have soared by 17.54% over the last
year and now risk going parabolic (note that even at the height of the
crisis retail sales were still growing by over 10% per annum). Further
pressures are visible in inflationary statistics where both PPI (now 5.4%)
and CPI (2.7%) are once more growing rapidly. We have always found the
notion that the Chinese monetary authorities were somehow more capable than
the rest of the world to be questionable. It is starting to seem as if they
have followed an expansionary policy similar to that seen in the UK and the
US in the early 1970's, with massive monetary expansion (helped by the
collapse of Bretton Woods) fueling a remarkable investment boom. They now
face the difficult choice of gauging how aggressive policy changes should
be. The history of central banking has been that monetary policy that is
"too loose too long" is transformed into one which is "too tight" without
any clear signal being generated (or at least paid attention to). We would
expect China to undergo this painful process over the coming months.


(See attached file: D-CNMSM2_Index.gif)
(See attached file: M-.CHBOOM_Index.gif)

(See attached file: M-CNRSCONS_Index.gif)

(See attached file: D-CHEFTYOY.gif) - D-CNMSM2_Index.gif - M-.CHBOOM_Index.gif
- M-CNRSCONS_Index.gif - D-CHEFTYOY.gif

We would note 2 things - first February 4th obviously marked the end of the
February allocation process leaving gold vulnerable to a sharp daily fall, but
also (more significantly) at the time the SPX index was probing its eventually
low for the Jan/Feb correction. At the time gold and the SPX were positively
correlated, at the moment gold is weak while equity markets are trying to break
out to new recovery highs. This is an important distinction that is not in the
metal's favor when one considers its potential impact on future allocations
should gold continue to underperform the equity market.

As we explained last week the FRB has been working hard in recent days to
pull ultra-short interest rates back up to the level of the FDTR (25bp). By
primarily using the GSEs to drain liquidity they have taken the 3 month
T-bill up to 14.5 bp (still a remarkably low rate) and the 6 month T-Bill
up to 20.1 bp. This move higher by the latter has caused it to finally move
above its 200 day ma for the first time since the summer of 2007. We would
not make too much of this technical event in the shorter term but it may be
an accurate reflection that liquidity levels are finally starting to
tighten. Clearly a 5bp discount to the FDTR still indicates that market
participants are expressing absolutely no inclination towards FRB
tightening for the foreseeable future but when compared to the level that the
yield has come from in recent weeks it also probably reflects another
step away from the extraordinary crisis of 2008/9.
.
Should ultra-short rates "normalize" close to the FDTR we would then be
able to concentrate on the really interesting portion of the cycle, namely
the point at which short term interest rates actually respond to better
than expected economic data. Presuming that significantly better data is
delivered (which we are willing to do) the question is whether the FRB
moves ahead of the market (as it did in 1994) or the market moves ahead of
the FRB (as it did in 2004). Even though we generally see 1994 as the
better template to follow for 2010 (ie more disruption to popular,
over-owned asset classes than 2004 saw) we feel that the market will
probably start to respond to economic data a little earlier than the FRB
this cycle. In particular we would be watching the 2 year note very
carefully since its duration is just long enough to allow it to detach
itself from a stubborn FRB that remains inert in the face of stronger than
expected data.


(See attached file: D-USGG6M_Index.gif) - D-USGG6M_Index.gif

The January Wholesale Inventory data still shows the familiar pattern of
accelerating sales activity running ahead of production. This may come as a
surprise to many who anticipated that inventories would actually be growing
by this point (consensus was for a 0.2% build-up compared to the actual
drawdown of -0.2%) but as can be seen on the attached chart the reason for
this continued slump in inventories is the improvement in sales. This is
obviously a very positive situation since it simply increases pressure on
Manufacturers to kick their production lines into gear. Meanwhile
inventories are getting to be dangerously low with the overall
Inventory/Sales ratio (green line on first chart) falling to a record low
of 1.1. Looking at individual industries (chart 2) we can see that Apparel
(green line) in particular continues to see a sharp drawdown, a reflection
of the fact the US retail sales continue to recover faster than had been
estimated. We would also point to the Automobile sector (red line) and
computers (pink) as other industries starting to look very short on
inventory slack should demand continue to improve.


(See attached file: D-MWINTOT_Index.gif)

(See attached file: D-MWINTOT_Index.gif) - D-MWINTOT_Index.gif -
D-MWINTOT_Index.gif

China's rapid recovery of trade activity continued in February with the
Export sector showing the same sort of punchy acceleration that was
visible in import data several months ago. This is significant since it is
our (and most other observers') opinion that the recovery of export
activity is most likely to influence monetary policy decisions going
forward. February's exports were reported at $94.52 bln which is a record
for February, the prior peak being $87.37 bln in February 2008. Activity
last year was a mere $64.89 bln in February, meaning that the 12 month RoC
has soared to 45%. Import data also recorded a February record at $86.91
bln (prior record was $78.81 bln in 2008). Our opinion remains that Chinese
monetary policy will tighten significantly in the months ahead.

(See attached file: D-CNFREXP$_Index.gif) - D-CNFREXP_Index.gif

The NDX has just followed the Russell 2000 (RTY) Index in making a new
recovery high this morning. As with the RTY we would want to see the index
break 2% above the prior high on a closing basis in order to talk
comfortably about a new higher level being established and 1915 is the level to
watch in this regard. Participation in this rally has been very broad and 33 of
the 100 issues in the index have made new 52 week highs since the start of
March which suggests that this move has a reasonable chance of being extended.
Helpfully there is very little resistance above the current price until the
August 2008 high at 1973.56 which is approximately 3.7% above the current price.

(See attached file: D-NDX_Index.gif) - D-NDX_Index.gif

We continue to follow Japan's "silent" recovery with some interest. Last night
saw the publication of the January Leading Indicator Index which uses a range
of Industrial and Consumer sensitive metrics to estimate the pace of growth or
decline in the Japanese economy (the current index is rebased so 2005=100).
January's data came in somewhat stronger than estimated at 97.1, which
represents the best reading since July 2007. As important as the actual level
is the remarkable pace of recovery in recent months, January was a full 2.54
points ahead of December and the index has risen 20.9 points over the last
year. The attached chart shows the 3 month RoC (bottom chart) which is tracking
at an annualized rate of over 30%. Although it is always difficult to translate
LEI data directly into more familiar figures such as GDP the clear message from
this report is that the Japanese economy has the capacity to surprise even
those few observers paying attention at the present time. - japleifeb10.gif

The attached NY Times article was published over the weekend and is significant
since it represents one of the first examples of the "mainstream" financial
media describing the "normalcy" of the current recovery. It also quotes our
note on the Challenger employment survey and Abby Joseph Cohen's views on the
VIX (which mirror our own). Changes in position by influential journalists are
always key events in economic cycles and our sense is that resistance to the
notion that the US is experiencing a strong recovery is finally starting to
weaken.

http://www.nytimes.com/2010/03/06/business/economy/06charts.html

We have pointed out the excellent performance of the RTY Index a number of
times in recent weeks. With Friday's session drawing to a close the index
appears to have made a decisive move above very strong resistance at the
650 level. To remind readers this level acted as support on three separate
occasions during the 2008 collapse and marked the point of failure in
January 2010. At the current time the index is trading at 664.80, more than
2% above the breakout which is the margin of safety we like to use to
eliminate "false" signals. Even if the broad equity market were to suffer a
pullback the 650 level should now offer good support that would repel
anything other than a violent decline. Equally significantly the RTY has
achieved this breakout while the large cap SPX index remains 2% below its
own recovery high. This has taken the relative performance of the RTY
against the SPX (green line on attached chart) to a new 2 year high.
.
This suggests that leadership now resides within the small cap sector,
which ties in with our thesis that a strengthening US economy is starting
to positively impact corporate cash flows. While the large cap sector was
the primary beneficiary of cost cutting that drove "bottom line" earnings
ahead of consensus from mid-2009 onwards the small cap sector tends to be a
greater beneficiary of "top line" growth due to their greater operating
leverage.

(See attached file: D-RTY_Index.gif) - D-RTY_Index.gif

The Society for Human Resource Management (SHRM) publishes its Leading Index of
National Employment (LINE) report on the same day that the BLS publishes its
Non-Farm payroll report. The LINE report is a survey of 500 manufacturing and
500 service firms (representing 90% of national employees) that attempts to
look forward one month and indicates the likely trend in data in the
forthcoming BLS report. Thus today's LINE report is looking ahead to the
publication of the March non-farm payroll report on April 2nd.
.
Attached below is a link to the March 2010 report that makes very encouraging
reading. Crucially the survey shows a significant surge in the number of
Manufacturing firms anticipating hiring in March to a net 33.7% (45.8%
increasing, 12.1% decreasing employment). For the Service Sector a net 46.5%
intend to hire (51.7% increasing, 5.2% decreasing employment). Vacant positions
in both Manufacturing and Service Sectors increased (but remained low) while
the first hints of minor hiring difficulties were aso visible in the Service
Sector. Needless to say this is a dramatic change from the state of affairs in
MArch 2009 as the annual change index estimates. Although it is impossible to
quantify the ramifications of a survey like this in terms of ACTUAL jobs
created it is good anecdotal evidence that supports our thesis that the Spring
of 2010 will be the turning point in this employment cycle.

http://www.shrm.org/Research/MonthlyEmploymentIndices/line/Documents/LINE%20Marc
h%202010.pdf

This is quite an interesting development. Pushing the Fed Funds rate back up to
the target of 25bp (this is after all why the FDTR has its name) would at least
suggest that the FRB is wresting back some control over its policy rate. This
would need to be confirmed by a move in the 3 month T-Bill which is
significantly lower at 15bp but has been showing some intention of moving
higher in recent days (see attached). Although stabilizing the Fed Funds rate
near the FDTR would be a reasonable policy achievement it would still leave US
interest rates far lower than is appropriate for the current pace of recovery.


(See attached file: D-USGG3M_Index.gif)

+------------------------------------------------------------------------------+

Fed Funds Open at Highest Since August as Treasury Sales Rise
2010-03-05 15:34:05.254 GMT


By Liz Capo McCormick
March 5 (Bloomberg) -- Overnight lending rates began
trading at the highest level since August amid an influx of
government securities after the Treasury expanded a program that
sells bills on the behalf of the Federal Reserve.
Fed funds opened at 0.20 percent, the closest to the top of
the central bank’s target range for overnight funds of zero to
0.25 percent in seven months. Funds closed at 0.15 percent
yesterday after trading between 0.1 percent and 0.19 percent,
according to ICAP Plc, the world’s largest inter-dealer broker.
The Treasury expanded on Feb. 23 the Supplementary
Financing Program to $200 billion from $5 billion, where the
Treasury sells bills and places the proceeds in a Fed account.
The SFP is part of the Fed’s strategy for rolling back its
assistance to financial markets. Securities dealers use
repurchase agreements to finance holdings and increase leverage.
“The settlement of SFP bills yesterday has helped to put
pressure on bill yields and repo rates, as well as the funds
rate,” said Ward McCarthy, New York-based chief financial
economist at Jefferies & Co. Inc., one of 18 primary dealers
that trade with the central bank. “SFP collateral has now
increased by $50 billion over the last two weeks and the
cumulative effect of supply is lifting rates a little.”
The effective funds rate, or volume-weighted average of
rates on trades by major brokers published daily by the New York
Fed, was 0.16 percent yesterday, the highest since Sept. 18. The
average level of overnight general collateral repo rates traded
today through ICAP is 0.19 percent, the highest since December.

Repo Rates

“What is surprising, is that the increase in the supply of
collateral this week pushed overnight repo costs up as much as
it did,” wrote Lou Crandall, chief economist of Wrightson ICAP
in Jersey City, New Jersey, in a note to clients today. “The
resumption of the SFP bill sales may have tipped the balance in
the general collateral market more than we had anticipated. The
funds rate is likely to continue to be led by the repo rate,
with intra-monthly swings in funds moving in the same direction
as repo but with must smaller amplitudes.”
Bonds that can be borrowed at interest rates close to the
Fed’s target rate for overnight loans between banks are called
general collateral.

For Related News and Information:
Federal Reserve, repo stories: TNI FED MMK BN <GO>
Stories on money markets worldwide: NI MMK BN <GO>
Most-read news about the Fed: MNI FED <GO>

--Editor: Dave Liedtka, James Holloway

To contact the reporter on this story:
Liz Capo McCormick in New York at +1-212-617-7416 or
[email protected]

To contact the editor responsible for this story:
Dave Liedtka at +1-212-617-8988 or [email protected]
- D-USGG3M_Index.gif

Germany remains one of the key global Manufacturing centers and so the
publication of much stronger than expected January Factory Order data
should be regarded as significant. This was measured as increasing 4.3%
from December (data is seasonally adjusted) compared to a consensus of
1.3%. December's weak data was also revised upwards from -2.3% to -1.6%. As
can be seen on the attached chart this takes the 12 month RoC up to 19.7%
while the 3 month RoC is growing at 5.46%, an annualized pace of 23.6%. As
with most international measures a great deal of work needs to be done to
approach peak 2007-2008 activity levels but this also makes it far easier
for near to medium term improvement to be recorded. Just as the crisis and
collapse in manufacturing activity was global in scope the recovery in this
sector is increasingly synchronized in nature. While natural resource
producers (which dominate much of emerging market capitalization) were the
prime beneficiaries of the early part of the recovery leadership should be
expected to change to the heavier more sophisticated industrial sectors and
societies. The US, Germany and Japan stand out in this regard. In each of
these countries the formidable "macro" problems left as a legacy of this
crisis (or in Japan's case over 20 years of inept economic management) is
well understood but the more positive fundamental bottom up forces are far
less appreciated. This strikes us as a significant mistake since the latter
are far more likely to set equity values going forward.



(See attached file: M-GRIORTOT_Index.gif) - M-GRIORTOT_Index.gif

The February non-farm payroll report shows the employment cycle to be
exactly where we expected; an uneasy equilibrium between hiring and firing
has been established and the question remains as to how this will be
resolved. Today's data keeps overall payrolls essentially unchanged but
helpfully has allowed the 12 month RoC to make a decisive turn.
Historically this development has preceded a multi-month period of
substantial employment growth (see attached chart).
.
The consensus view that employment demand will grind slowly higher makes no
sense given the extraordinary pace of employment elimination that took
place during the panic of 2008/9. The notion that employers magically
trimmed their work-force to precisely the required levels would suggest
that they possessed an insight that was utterly lacking in all other
constituencies of US society where the response in retrospect massively
overshot the appropriate degree of activity.This process of overshoot and
repair seems likely to be most visible in Manufacturing and there are already
signs that the employment cycle in this sector has decisively changed. Although
February's Manufacturing job gains were trivial at 1K January's were revised
higher to 20K. This represents the first time two consecutive Manufacturing
employment numbers have been positive since April 2006 and confirms the
indications from recent PMI data that manufacturers have started to slowly
re-hire workers. As we have argued repeatedly once this decisive turn is
made the determining factor is new order growth. This is doubly true in a
cycle where inventory drawdown in many industries is has surpassed historic
records and idle plant capacity is considerable (we have been calling this
the "neutron cycle" in homage to Jack Welch's unpopular policy of
de-populating industrial plants in his early days at GE). Nothing in this
data changes our view that we are heading for a series of positive
employment data-shocks sometime between the spring and early summer of
2010.


(See attached file: D-NFP_T_Index.gif)
(See attached file: M-USMMMANU_Index.gif) - D-NFP_T_Index.gif -
M-USMMMANU_Index.gif

As we wrote earlier today nothing is more important than following new
order data and although the January Factory Order data just missed
consensus (1.8%) by coming in at 1.7% this was more than made up for by a
large revision of December's data up to 1.5% from the original 1.0%. As can
be seen from the attached chart New Orders are now growing by 9.34% on a 12
month RoC while the 3 month RoC is 4.24%, or 18% annualized. Even so New
Orders are still 16.8% below their July 2008 peak suggesting that
considerable future gains can be expected before any signs of overheating
would be indicated. It should also be recognized that January 2010 New
Orders are approximately the same as those recorded in February 2005
indicating once more how far labor metrics have overshot actual activity
decline during this cycle of collapse and recovery.

(See attached file: M-TMNOTOT_Index.gif)

Pending home sales delivered another weak housing metric for January
2010 and this would be a concern were it not for the fact that January is
an extremely queit month for housing activity and so a shortfall in this
month translates into relatively few "lost" transactions. We have also
heard a considerable amount of positive chatter from the housing industry
regarding February activity and so would be inclined to be patient until
some actual data either confirms or denies the veracity of these comments.
In terms of the current data, Pending Home sales fell -7.6% compared to
consensus of 1.0%. Consensus estimates are meaningless when dealing with
data as volatile as this but clearly we would be uncomfotable if the
activity level settled here during the busy spring and summer months.


(See attached file: D-USPHTOTL_Index.gif) - D-USPHTOTL_Index.gif

The final version of the 4th quarter productivity data shows the extent to
which employers continue to squeeze more output out of a shrunken labor
pool. Our focus continues to be on the Manufacturing portion of the economy
(which we expect to be the major source of early employment growth).
Manufacturing output (black line) grew by 1.39% in the 4th quarter (an
annualized growth rate of 5.6%) while Manufacturing Hours (red line)
continued to fall by 0.29%. The latter have now dropped by 16.7% since Q4
2007 while output has fallen by 12.9% over the same period. This has led to
a significant increase in Output per Man hour or Productivity (blue line,
lower chart), which reached a new record high of 190.4 (up from 182.3 Q4
2007). Our thesis remains the same. Growth in new orders require greater
production since inventories have already been depleted. Greater
production requires new hires since productivity gains have already
exceeded a sustainable level. Provided demand continues to grow in the US
corporate and consumer sectors it is simply a matter of time until a robust
re-employment cycle develops, and this time lag is probably far shorter
than most people estimate.


(See attached file: D-PRODMANO_Index.gif) - D-PRODMANO_Index.gif

The final version of the 4th quarter productivity data shows the extent to
which employers continue to squeeze more output out of a shrunken labor
pool. Our focus continues to be on the Manufacturing portion of the economy
(which we expect to be the major source of early employment growth).
Manufacturing output (black line) grew by 1.39% in the 4th quarter (an
annualized growth rate of 5.6%) while Manufacturing Hours (red line)
continued to fall by 0.29%. The latter have now dropped by 16.7% since Q4
2007 while output has fallen by 12.9% over the same period. This has led to
a significant increase in Output per Man hour or Productivity (blue line,
lower chart), which reached a new record high of 190.4 (up from 182.3 Q4
2007). Our thesis remains the same. Growth in new orders require greater
productions since inventories have already been replenished. Greater
production requires new hires since productivity gains have already
exceeded a sustainable level. Provided demand continues to grow in the US
corporate and consumer sectors it is simply a matter of time until a robust
re-employment cycle develops, and this time lag is probably far shorter
than most people estimate.


(See attached file: D-PRODMANO_Index.gif) - D-PRODMANO_Index.gif

See below for link to a radio interview of Michael Shaoul that was
carried live by Agencia Estado in Sao Paulo on March 2nd 2010.
Interview discusses our view on risks and opportunities in multiple
asset classes. Link should be copied and pasted into browser.
.
http://www2.ae.com.br/si/banco/som/2010/03/1.78.4.2010-03-02.1MichaelShaoul.asx

Petrobras Offering May Reach $40 Billion, BNDES Says (Update2)

It is hard to view the "largest equity offering ever" as a positive sign for
the Brazilian market (or emerging market equities in general). As a general
rule all popular asset classes eventually see excellent demand overrun by even
greater supply. The pace of emerging market debt and equity issuance certainly
threatens to do the same in 2010.
<>

Last month's poorer than consensus Non-Manufacturing ISM Index caused a great
deal more angst than it warranted since, as we pointed out at the time, this
data series is far more erratic than the senior (and far more useful) ISM
Manufacturing Index. Even so it is helpful to get a better reading this month
(if only to calm those who believe in the importance of this data) and that was
supplied by the headline index hitting 53 compared to consensus of 51. This is
enough to pull the 6 month ma (red line) up above the 50 level for the first
time since September 2008, indicating a steady period of expansion for the
service economy. The sub-indexes for this data are far less meaningful than for
the Manufacturing series but it is helpful to see New Orders stay strongly
positive at 55 (54.7 last month). Employment also improved to 48.6 (44.6 last
month) representing neglible firing but little hiring activity (see today's
comment on the Challenger Job Cuts Index). This is fine since we would expect a
recovery in Manufacturing employment to really be the key for any early
positive employment related data shock. - ismnonfeb10.gif

The February Challenger Job Cuts Index offers more support to the notion
that US employers have stopped aggressively firing workers. This month's
figure of 42,090 firings is the lowest since July 2006 but if looked at in
seasonal terms (see attached seasonal chart - 2009/10 is white line) this
is the lowest number of firings in February for at least 10 years.
Furthermore the 6 month ma has fallen to 55K, well below the historic
average of 91K since this data series started in 1999. Although there has
been an understandable lag between firings tailing off and new hirings
commencing (and this may be reflected in the February non-farm payroll data
this Friday) it really is just a matter of time before employers elect to
address the fact that their depleted workforces are insufficient to deal
with robust and growing order books. From our persepctive the longer the
gap between firings stopping and hirings starting the faster the eventual
ramp-up in employment is likely to be.



(See attached file: D-CHALTOTL_Index.gif) - D-CHALTOTL_Index.gif -
challengerfeb10.gif

The RTY Index is currently testing key long term resistance at 650. This
level has had great technical significance since acting as support on
multiple occasions during the 2008 decline (see attached) and was the point
of failure in early January 2010 (649.15 was the actual high recorded on
January 19th). A successful assault on this level (we would require a move
and close to at least 2% above 650 to really be sure that a level of this
significance had been breached) should therefore see substantial
follow-through. Given the excellent relative performance of this index
during the recent sell off there must be a decent chance that this index
manages to accomplish this feat sooner rather than later. The lower chart
shows the RTY relative to the SPX and the shaded box its relative
performance during the recent sell off and recovery. It is highly unusual
for the RTY to suffer no loss in relative performance during a decline (though
less so during a subsequent recovery) and a break above 650 would almost
certainly see a period of further relative out-performance. From our
perspective the RTY's gains are a reflection of "bottom up" flows that seek
to purchase individual corporate equities overpowering negative "top down"
flows (the IWM ETF, which tracks the RTY Index is a favorite "portfolio hedge".
On February 12th this ETF had the highest short interest since August 2008). As
the US economic recovery broadens out and corporate news flow continues to run
ahead of consensus the small cap universe is likely to become a major
beneficiary of this process.

(See attached file: D-RTY_Index.gif) - D-RTY_Index.gif

More anecdotal evidence of "same old normal" behavior.

More positive data out of Japan in the form of a sharply lower unemployment
rate. January's data came in at 4.9%, a large drop from December's 5.2% and
comfortably ahead of consensus (5.1%). This data suggests that Japan's
unemployment peaked much earlier than other G-7 economies and this is
further confirmed by the turn in the 6 month ma. We do not deny that Japan
has some major fiscal imbalances, an aging population and an intractable
political system (unfortunately all three of these are increasingly common
although Japan's issues are more extreme) but there is still mounting
evidence of a decent economic recovery taking hold in this largely
forgotten nation. We would suggest that paying more attention and taking some
direct exposure to the local equity market make sense at the current time.


(See attached file: D-JNUE_Index.gif) - D-JNUE_Index.gif

Bernanke Makes Two-Year Treasury Notes Sweetest Spot (Update3)

This is an interesting read since it underlines the confidence typical when
markets enter what we call the "zone of indifference". We have no reason to
think that the article is anything other than an accurate reflection of the
confidence the vast majority of participants have in the idea that the short
end of the Treasury curve is tied to an FRB that will remain inert for many
months hence. This confidence continues to strike us as one of the most
significant risks currently embedded in global portfolios.
<>

The key February ISM Manufacturing Report is overall a solid set of data that
continues to support the notion of a rapid US Industrial recovery. The overall
index fell slightly to 56.5 (from 58.4) and therefore missed the consensus
estimate of 57.9. This slight drop is not a cause for concern, particularly
once the underlying sub-indexes is considered. New Orders fell to 59.5 from
65.9, but this still represents a very rapid pace of monthly improvement in
orders. Production showed a similar pattern falling to 58.4 from 66.2. This
kept the Inventory index near equilibrium at 47.3 again suggesting that
Manufacturers are matching Production to current New Orders to an unusually
high degree. Most excitingly the Employment index rose to 56.1, the best level
seen since January 2005 and very close to the level seen in Q1 2004 (when the
last employment cycle turned decisively). It is notable listening to the
(ongoing) ISM conference call that this data is starting to exceed their
original estimation of the recovery, although there are still certain
industries conspicuous by their non-participation. We would therefore describe
this as a broadly encouraging report. - ismfeb2010.gif

We continue to monitor the rapid deterioration of sterling with the GBP
rate spiking as low as $1.47.84 this morning before recovering to $1.49.28.
This is still a drop of 2.03% over a single session, the largest drop since
Mach 9th 2009. Although the GBP has support just below the current price at
$1.4855 (61.8% retracement of 2009 rally) a trip down to $1.40 or perhaps
the 2008 low at $1.35 looks to be an increasing possibility. While at
present the move in the GBP seems to be primarily driven by currency flows
the real danger at the current time is that further GBP weakness leads to a
flight out of the local Treasury market. Looking at the bechmark 10 year
gilt yield this spiked as high as 4.30% last Monday before falling back
very rapidly to 4.01% on Friday. The yield has since moved back up to 4.10%
keeping the 3 month trend of higher yield very much intact. We are still
some distance away from a panic (and may yet avoid one at the current time)
but this situation still needs to be watched closely in the sessions ahead.


(See attached file: D-GBP_Curncy.gif)
(See attached file: D-GUKG10_Index.gif) - D-GBP_Curncy.gif - D-GUKG10_Index.gif

At this point in the cycle all data regarding end user demand represents
the key to understanding the recovery's progress. As such this morning's
release of slightly better than expected Personal Expenditure data is to be
welcomed. Personal Expenditure rose 0.51% (consensus was 0.4%) to a new
record high of $10,322.90 bln while the December data was revised slightly
higher to 0.3%. This takes the 12 month RoC to 3.51% which is still
somewhat below historical trend, but most of this shortfall was created
last winter and springtime. The 3 month RoC is growing at an annualized
pace of over 6%, comfortably within the "normal normal" range.
.
Personal Income still lags the recovery in expenditure with the January
data showing an increase of only 0.1% (consensus was 0.4%) and a small
revision downwards for December to 0.3% from 0.4%. This suggests that
consumers are a little less income sensitive than many have expected (and
by extension that "true" consumer confidence, ie how consumers are actually
behaving, is a little higher than the official statistics reveal). Personal
Expenditure as a percentage of income has therefore risen to 84.82%,
although this is uncomfortably high this ratio tends to peak early in an
economic recovery since Income takes a little longer to repair. We would
therefore describe this report as being consistent with our notion that the
US recovery remains on track.



(See attached file: M-PCE_CUR$_Index.gif)

(See attached file: D-PCE_CUR$_Index.gif) - M-PCE_CUR_Index.gif -
D-PCE_CUR_Index.gif

Article contains quotes from us.