Brazil's budget data continues to suggest that the multi-month slowdown in the economy has had a marked effect on the country's fiscal balance. Brazil's Primary Balance (which excludes debt service) moved back into surplus at 3.5 bln BRL but this was somewhat lower than expectations of a 5.02 bln BRL surplus.

Over the last 12 months the Primary Surplus has totaled 89 bln BRL compared to the cycle peak of 150 bln recorded in July 2011, but once debt service is included this amounts to a deficit of 127 bln BRL or -2.8% of GDP over the last 12 months. In this regard the substantial drop of interest rates has been a major help, with the 12 month Interest Payments dropping from a peak of 237 bln in January 2012 to 217 bln BRL today, shaving approximately 0.3% from the Nominal Deficit in the process.

Although this deficit currently remains within the bounds of the acceptable our concern is that the trend continues to deteriorate. Although we doubt that Brazil faces a genuine fiscal crisis the budgetary data suggests that the overall picture remains worse than most observers realize.

The overall Conference Board Consumer Sentiment report for April revealed little about the state of the consumer mind-set since although the headline reading of 68 comfortably beat expectations of 61 it kept the index in the well defined range between roughly 60 and 70 that has contained all readings since January 2013. In other words it suggests a slow and stead improving of confidence which remains well below the historic average of around 90 but well above the depression reading of 25.30 seen in February 2009.

Looking through the rest of the report there was little to note apart from in the sub-indexes regarding the expected future performance of the equity market. Here we noted that the "Stocks to Increase" index rose to 38.60% of respondents, the best reading since May 2007 while respondents predicting "Stocks to Decrease" fell sharply to 27.80%, the lowest reading since February 2011. This created a positive spread of 10.8%, the largest since January 2011.

It is perhaps unsurprising that with the equity market registering a new all time high in April respondents feel better about the market, but we are still a long way away from the +30 positive readings that were seen at the peak of the dot-com bubble or even the +20 readings seen at the start of the sub-prime crisis in February 2007. Thus it could be argued that the spread suggests we have finally reached the time in which retail investors are prepared to embrace the 4 year old bull market, which would have obvious bullish implications for the equity market. On the other hand the spring time peaks of 2010 and 2011 saw positive spreads close to the current level and were followed by sharp declines by both the equity market and retail sentiment.

Thus the data could be used to support both those looking for another "spring swoon" or others who believe that the equity market could manage to build on April's gains and leave the 1550 level well behind on the current rally. Although we would not rely on this data to make a choice either way we are increasingly on the side of the bulls, particularly if this week's employment data shows the March report to have been just another blip on the road to recovery.

We continue to follow Japan's data for signs that the recent radical shift in monetary policy has started to influence actual economic activity. In particular we are following the domestic real estate market which is currently mired in an activity draw-down that reminds us of the US market 18-24 months ago.

Recent reports have suggested a slow recovery in activity is taking place and March's Housing Start data just about kept this improving run intact if one allows for the natural monthly volatility of the data. Headline starts (which are seasonally adjusted) were 904K annualized, which is a small drop from February's 944K report but a little higher than consensus. This takes the 12 month ma of starts up to 895K, the highest reading since August 2009. This level of activity compares to a pre-crisis reading of 1200K and late 1980's boom readings of 1800K.

The NSA report shows a similar improvement, with 71.4K starts estimated, the best March report since 2008. We note a similar lack of seasonality in Japanese starts in recent years to that which took place in US data prior to the current spring selling season. This again suggests that Japan's housing cycle is at least 18 months behind that of the US. In summary the report keeps some hope alive for the future while failing to prove that a recovery of note will indeed take place. This is really all we would expect in the early stages of monetary stimulus and we will continue to follow the data closely in the months ahead.

The NAR Pending Home Sales report continued the recent trend of US housing data in which flattish headline reports disguise a definite surge in the non-seasonally adjusted data, suggesting that we are currently witnessing the strongest spring selling season for 6 or 7 years.

This "normalizing" of the seasonal pattern of the US house market has very important ramifications for the overall housing market since it reveals the increasing role that home-occupiers (as opposed to financial buyers) are playing in the housing market. This would seem to particularly favor the New Home portion of the market, which remains dominated by actual home owners rather than financial purchasers.

Regarding the data headline, Pending Sales rose from 104.1 to 105.7 in March. Excluding the tax credit boost to 2009 and 2010 activity this was the strongest reading since February 2007 (at the end of which sub-prime origination collapsed). It is also equivalent to the level of activity seen in early 2003 at the start of the great housing boom.

However, the really interesting data was supplied by the NSA report, which surged to 122. This is the strongest March reading since 2006 at the start of the great housing collapse and suggests that a meaningful pick up in housing sales can be anticipated in the next two or three months. This is likely to take a significant toll on inventories which were already extremely tight in March. We continue to expect to see a shortage of homes in a number of key regional markets, and for this to lead to a marked response by the construction industry later in 2013.

European Union consumer confidence continued its slow rehabilitation in April, with the overall index rising to -22.3, up from -23.5 in March for the strongest reading since last July. This of course keeps sentiment at a deep recessionary level, but the steady improvement in tone does perhaps suggest that behind the gloomy headlines some progress is being made.

This can also be seen in the country-by-country data, a selection of which we have included on the current chart. This is a useful reminder that behind the notion of a single European entity are a number of individual economies at different stages of an economic cycle. Confidence ranged from +12.2 in Sweden (pink), a country which has consistently polled above average over the last 15 years, to Greece at -71.8 (black) which unsurprisingly has the worst confidence on the continent (Cyprus is not shown but registered -64.4 in April). Other "problem" countries such as Italy (light blue) +2.2 to -34, and Spain (yellow) +3.1 to -28.8 saw some improvement, while Ireland (dark green) dropped back -3 to -23.6. Perhaps most surprisingly France (red) remains weak at -29.2, but it is important to realize that the polls are subject to the inevitable national bias of the subjects polled. Less surprising is the relative robustness of German responses (green) which are close to neutral at -4.9, suggesting little or no deterioration in conditions has been noted by participants in the poll.

Brazil continues to post significant deficits in its Current Account, with March generating a monthly deficit of -$6.88 bln, rather more than the -$6.3 bln which had been anticipated. This brings the cumulative deficit for the last 12 months to a record -$67 bln, by far the largest nominal deficit on record (see chart). Measured against GDP the deficit is now -2.93%, which is the widest since August 2002 and although this is still a manageable level it is not a healthy one for Brazil.

We have also reached the point at which the Current Account deficit has started to outstrip FDI. Over the last 12 months the Current Account deficit has outstripped FDI for the first time since November 2010 (see chart). Although FDI has remained robust, increasing to $5.74 bln in March ahead of expectations for $4.25 bln, it is unlikely to rise substantially higher given the state of Brazil's economy. Indeed there must be a risk of a slowdown or reversal in portions of FDI. In particular we note that equity flows, were 2.7 bln in March and have averaged $3.98 bln over the last 12 months despite poor nominal and awful relative returns. A multi month period of capital withdrawal would come as no surprise should Brazil's market take another leg lower.

Overall therefore we view Brazil as being somewhat closer to a genuine funding problem than many observers realize. Although we doubt that the Current Account will approach the -5% of GDP seen in the late 1990's, we do think it can become a disruptive force in the months ahead with clear negative implications for the Brazilian Real.

The Weekly MBA Mortgage Purchase Index continues to provide evidence of a genuine springtime surge in property purchases. This week's data showed the headline seasonally adjusted index reaching a new 3 year high of 218.50, bringing the trailing 10 week ma up to its own 3 year high of 205.25. While this is in itself encouraging, the real story is shown by the NSA data, which has broken out to 252.60, its highest level since the expiration of house purchase tax credits in May 2010. The NSA index is running 17.8% higher than it was in the equivalent week of 2012 and may continue to make further progress over the next few weeks (pre-crisis applications typically peaked sometime between May and August).

This is clearly an important development, since it indicates that the recovery in existing and new home sales is being driven by more than an influx of financial purchasers. If the trend is sustained going forwards it would have also have very positive implications for homebuilders and also regional banks operating in some of the hotter residential markets.

Regarding the latter it is striking how tilted towards refinancing mortgage activity has been in recent years. Pre-crisis Purchase applications ranged from 20-30% of Refinancing activity (governed mostly by the fluctuations in the latter) whereas post crisis this ratio has been between 5-10%, with the last two years seeing the ratio pinned at the low end of the range, partly due to surging Refinancing (the index has now been above 4000 for nearly an entire year) but largely due to depressed Purchase activity (see chart). We would expect to see this ratio pick up considerably in the weeks ahead, suggesting that it is time for lenders to ramp up their Purchase Mortgage origination operations.

The March Census Bureau report for New Home sales is a solid set of data which underlines the fact that we are currently seeing the first meaningful pick up in spring-time construction and sales activity for 5 years. Overall sales were estimated at 417K almost exactly matching expectations, while February's data was unchanged.

Although this may seem to be unexciting, the headline data masks a considerable improvement in NSA sales, which were estimated to have risen to 40K in March, the best March data since 2008. Of this total 13K were for "Homes Not Started", the highest number for this category since April 2008, suggesting more aggressive purchase habits by home buyers are starting to emerge. It is hard to overstate how important this re-appearance of spring selling is to the housing market, and there is evidence that it is leading to a greater willingness to anticipate further demand through construction.

This can be seen in the Inventory data which rose modestly to 151K from 149K, which is the largest Inventory since November 2011. More importantly this increase is being driven by the "Homes not Started" which now represent 27K (up from 23K), the highest number since late 2010 and indicating that modest creation of "spec housing" has started to take place. Overall this is an encouraging report, as can be seen by the strong response of homebuilding equities which rose over 5% in the aftermath of the release.

The ECB continues to shrink its overall balance sheet at a rapid pace, with this week's data showing a drop in assets (ex-gold) of -€17.2 bln to €2,182 bln, the lowest level since mid December 2011.

Once more the bulk of this decline could be traced to the Deposit Facility, which dropped €14.31 bln to €105.59 bln, the smallest level since August 2011. Thus we would conclude that the bulk of this week's shrinkage comes from voluntary repayment of LTRO funds from Eurozone banks. This can therefore be taken as evidence of growing confidence by local banks who are increasingly willing to repay unused funds previously borrowed from the ECB.

Nevertheless this sizable withdrawal of aggregate liquidity is not without risks. One of our worries has been that an overly rapid repayment of funds could come at the expense of peripheral capital markets, but in fact these have generally strengthened in recent weeks. Overall Eurozone Financial Conditions have also remained benign, with the BFCIEU index bouncing around the "normal" level in recent weeks having deteriorated quite rapidly during February (see chart). We would still like to see the ECB's balance sheet stabilize, and would expect this to take place once the Deposit Facility gets down to somewhere in the range of $75 bln, but overall financial conditions in Europe have remained benign despite the large repayment of emergency funds, and this should be counted as a "win" for the ECB's decision to act as a "lender of last resort" rather than following the Bernanke Doctrine to its logical conclusion.

Italy would appear to finally be putting its election debacle into some kind of order, reminding us in the process that the country's political system has always incorporated a great deal of dysfunctional chaos into its operation. As we argued in the immediate aftermath of the result, the "black and white" picture of the result was a gross simplification of how things were likely to play out in the weeks ahead.

The local equity market remained tolerably calm during the post election furor as did the sovereign bond market. In recent days the latter has rallied strongly, taking the short end of the curve down to record territory and the 10 year yield below 4.00%, potentially targeting the October 2010 low of 3.72%. Meanwhile the equity market has enjoyed more modest success, with the FTSEMIB index retaking the ground above 16,000 and its 50 day ma (see chart) meaning that the index is back to its position on election day.

There are perhaps signs that this improvement in capital markets has moved the sentiment of Italian consumers, since although April consumer confidence remaining very low at 86.3 this is the best reading since last July. Since confidence generally follows markets we would expect to see further improvement in May's data, with a reading anywhere above 88 indicating a genuine shift in sentiment is taking place.

We have commented many times on the difference between growth and profitability in China's economy and the attached article, which describes the rapid build up of credit card debt, is a good reminder that this dichotomy is as relevant to the private sector as to misbegotten public works. The article also highlights the extent to which credit growth has become central to China's consumer economy in recent years, while the build-up of delinquencies at a time of strong economic growth is reminiscent of what took place in Brazil a couple of years ago.

Link to story:

Interview includes comments on Italy, emerging markets and commodities.

http://www.bloomberg.com/video/marketfield-s-shaoul-on-strategy-markets-6w9G7B4z
R~Se7HgYCQCrUA.html

Interview concentrates on gold with comments later on US and Chinese industrial demand and home sales data.

http://watch.bnn.ca/#clip910236

Although the initial reaction of the equity market has been to treat the March 2013 Existing Home Sales report as a "miss" this overall is a decent set of data that suggests that the Spring selling season has started to show a true acceleration of demand.

Overall sales were estimated at 4.92mm, which was less than the 5.00mm consensus forecast, while February sales were notched lower to 4.95mm from 4.98mm. This is well within the error tolerance of the data and so even at the headline level this represents an "in line" report. However, it should be remembered that there is a big seasonal pick up in sales between February and March, and flat headline sales mask an increase in the NSA single month data of 82K (26%) between February (304K) and March (386K), making this the best March since 2008. In other words, the positive winter data (when demand tends to be very depressed) has translated into a traditional pick up in actual spring time sales. Should this trend persist throughout the rest of the peak season (which runs from March to September) then this would represent genuine progress.

Perhaps more importantly there is clear evidence that sales would have been higher if it were not for a shortage of inventory (particularly on the low end) in a number of key markets (something the NAR specifically commented on). This can be seen in the national inventory data, which rose only slightly to 1.69mm and has shown much less of a spring-time surge in new listings than would have been expected. Indeed this is the lowest March reading since 2000, when the housing market was a backwater had ceded the limelight to the peaking equity market.

The substantial rise in average prices underlines the shortage of inventory, with March's $223.60 being 9.92% higher than that of a year ago. This is a very fast pace of growth that compares with the rate of HPI seen in the 2001-5 housing boom. However, as noted above the constriction of lower price inventory has probably helped nudge the average a little higher than would otherwise have been the case and therefore true HPI is probably mid to high single digits, which is still a very healthy rate of increase.

One of the most regularly voiced complaints regarding the expansion of central bank balance sheets is that it fails to create true credit creation or stable monetary growth in a financial system. This criticism to our eyes makes the mistake of ignoring the time it takes for a financial system to heal after a cycle of great excess, and for organic demand for new credit from the local corporate and retail sectors to make itself felt.

Some useful evidence for our argument can be found in Switzerland, where a massive expansion of the SNB's balance sheet has taken place over the last two years as part of a currency stabilization plan rather than as an emergency injection of liquidity. In Switzerland's case this has been matched by a very robust increase in money supply measures all the way out to M3, which grew in March by 9.90% compared to its level of a year ago. Nor is this month's data a fluke, since the 12 month ma of M3 growth has now reached 8.73%, its highest reading since 1989, when the SNB was in the midst of hurriedly slamming on the brakes following the build up of a multi-year housing bubble (see M3 chart).

Clearly Swiss money supply data suggests the SNB is running the risk of building substantial asset price inflation (primarily in housing) in the domestic economy, but it should also be taken as a warning that a continued reliance on QE in other developed nations is increasingly likely to lead to rapid money supply growth (and all its attendant problems) later on this cycle.

Of course on the way to excess one must pass through a period of benign acceleration first, but while this phase would be expected to favor equities, we believe that we are approaching the point at which a continued use of QE against a backdrop of improving economic and corporate data policies may actually start to unnerve bond markets.

Spanish Export and Trade Balance data continues to show a remarkable buoyancy of the Export sector and a consequent rapid contraction of what has historically been a wide Trade Deficit. The latter was -€1.184 bln in FeFebruarythe smallest deficit since April 1998 and this took the trailing 12 month ma up to -€2.335, the smallest reading since mid 1999. The main factor behind this sharp reduction has been a steady increase in export activity, which in February hit €18.4 bln EUR, a record for any February reading and an increase of 2.4% over last years reading (which was itself a record). The 12 month ma has also moved up to a new record of €18.7 bln, compared to a level just below -€18 bln a year ago. This is a useful reminder that despite the continued recession and obvious need for internal restructuring there are portions of the Spanish economy that continue to function well, and this is particularly true of the corporate sector which outside of real estate and finance had not been following a path of excess during the prior economic cycle.

China has announced a willingness to allow the CNY trading band against the USD to widen, a move that can be anticipated to extend the recent run of gains for the currency against the USD. This strikes us as an important development since this comes at a time that the USD itself has been in a gradual but steady strengthening trend against global currencies.

Attached is a long term chart of CNY cross rates against the USD (black), JPY (red), EUR (blue), KRW (pink) and MXN (green), all of which have been normalized so that their value at 12/31/05 = 100. Note that the CNY is not convertible against most of these currencies and so the "spot" rate is derived from a combination the CNY/USD rate and the currencies sport rate with the USD.

As can be seen from the chart since the CNY's peg was loosened in July 2005 there have been two broad periods of appreciation, 2005 to 2008 and 2010 to the present day. During the first period the USD remained in the midst of its 8 year bear market and thus the CNY actually weakened against the EUR and KRW, whilst only gaining modestly against the KRW and USD. The currency was also historically cheap, having marched down in value with the USD over the prior five years, making Chinese exports extremely competitive with other nations.

The more recent period of CNY appreciation is another matter, since it has had the effect of compounding the decent gains the USD has had against other global currencies. This is particularly noticeable against a range of emerging market currencies with the CNY now having gained 50% against Mexico's MXN and 45% against Korea's KRW, both of which are as a result very competitive on price with China.

The EUR has also endured a gradual but substantial weakening in recent years moving from a historically expensive 87 in early 2008 to 120 today (using our rebased scale). However, the really dramatic change in recent weeks has been the collapse of the JPY against the CNY which has moved from 85 to 111 (approximately 12 to 16 in the actual exchange rate) since late November 2012. This represents a dramatic change in the relative competitiveness of these two currencies.

At a time that China's export sector has shown signs of strain (particularly if one disregards the suspicious surge in exports to Hong Kong) the steady appreciation of the CNY has probably already cost Chinese companies some order flow. An acceleration of this trend, particularly if it is combined with further USD strengthening against other currencies (something we expect to take place) runs the risk of creating a substantially overvalued currency, at least as far as the export sector is concerned.

One of the first signs that the BOJ's dramatic change in policy may be having an effect of actual activity was delivered by the March report on Tokyo Condominium Sales. This showed a total of 5139 sales, an increase of 48% over the level of a year ago and the highest level of March activity since activity collapsed in 2007. It should be noted that March is typically one of the more important months for sales (which are always dominated by the December reports) but the typical seasonal swing had been absent in all reports since 2007, suggesting that an important inflexion point may have been reached.

This still keeps the trailing 12 month ma depressed at 3896, but we would be hopeful that this metric forces through 4,000 before too long and continues climbing thereafter. As we have seen in the US and other real estate cycles elsewhere real estate cycles feed off changes in confidence (in both directions), and the sudden burst of sales activity bodes well for future reports.

This week's Initial Claims report saw Claims rise modestly to 352K, in line with expectations of 350K while last week's report was revised up by 2K to 348K. This really confirms that the surge in late March Claims was a seasonal blip caused by holiday distortion. The trailing 10 week ma of Claims (we are using a longer average to dilute the effect of the Easter week report) remains just above the key 350K level at 353K.

This means that we are yet to experience a seasonal rise in Claims in the post Easter period and if Claims do not experience the sort of Q2 rise that we saw in 2011 and 2012 this would represent a useful piece of evidence that some positive changes have taken place over the last 12 months. The key period to watch will be the next six to eight weeks and we would view flat data over this period as something of an accomplishment given the experience of the last couple of years.

After several months of dismal trade reports India released strong data in March, with exports helped by a number of fiscal incentives rising 7% YoY and imports dropping slightly. As a result the Trade Deficit narrowed markedly from almost $15 bln in February to $10.3 bln in March.

As welcome as this respite is it should be noted that March is typically by far the strongest month for reported exports (we assume this is because it marks the end of the fiscal year) and is typically followed by a sharp pullback in activity in April (we would also note that the deficit was still approximately twice the March average for the last 10 years). We therefore doubt whether this data represents a significant uptick in export activity and will continue to do so unless it is conformed by subsequent reports. On the import side of the ledger March's data was skewed by a very sharp drop in Crude Oil imports, which fell -16.6% YoY. Since this came before the sharp drop in Brent Crude prices in April this would seem to have been caused by a random fluctuation in the monthly quantity (February's oil imports were unusually high) rather than a true reversal and Non-Oil imports actually rose by 5.4% YoY. Of course if the recent drop in Brent Crude prices remain in place this will give some relief to the Indian Trade Balance, but we would expect the deficit to remain at an unhealthfully wide level.

In this regard we note that the recent sharp decline of gold's price has seen significant bullish commentary attached to India. Simultaneously Indian retail demand is seen to be a buying force capable of reversing the decline while the lower price of the metal is expected to lead to a narrower deficit (clearly both of these cannot be true). Absent is a discussion of the "wealth effect" caused by the plummeting in price of a country's favorite store of value, or the degree of credit currently backed by gold in the Indian economy. Our view is that a prolonged period of depressed gold prices would be unambiguously negative for the Indian economy, although we recognize that it may take a while for the local equity market to fully digest its ramifications.

In what we view as a key policy error the Bank of Brazil has elected to raise the SELIC Target rate to 7.50%. Viewing this decision we are reminded of the decision of the ECB to raise the refinance rate in June 2008 to 4.25%, a tightening which was hurriedly reversed in October, the two ECB rate hikes of April and July 2011 (also quickly reversed), and the determination of the FRB to drain liquidity by liquidating over $200 bln of its treasury holdings (over 30% of the total) between the day Bear Stearns failed in March 2008 and Lehman followed suit six months later, which was of course followed by massive quantative easing.

In other words there is a pattern of central banks failing to understand the seriousness of a down cycle, particularly when inflationary pressures are felt to be present (it should be remembered in 2008 the ECB and FRB were nervous about a surge in commodity prices even as they watched their financial sector fall apart). At least back in 2008 the rate hikes were made at a time that local equity markets were signaling optimism that the worst was behind them, suggesting that market participants were no more clued in than central banks as to the dangers that lay ahead.

In Brazil's case the decision to raise rates has been made at a time the IBOV index is testing its 2012 low and as local credit markets are starting to price in the potential default of one of the key entities of the recent boom. In other words the market has been making a clear plea for help that has apparently gone unheard by the central bank.

As with the other policy errors described above we would expect to see a hurried reversal of policy take place later in 2013, and still view a SELIC below 7.00% (perhaps well below) as a fairly likely terminus for the current rate cycle. Unfortunately this is likely to be combined with weak equity and currency prices, and corporate spreads that are substantially wider than exist at present. The decision to prioritize inflation over growing economic distress only makes this outcome more likely.

Brazil's equity market has continued to suffer a difficult 2013 with the IBOV index down by almost exactly -13% since the start of the year making it one of 5 worst performing markets in local currency terms (Ukraine tops the list down -16.15%). It is therefore unfortunate that the Bank of Brazil is apparently considering a boost to the SELIC rate tonight to combat the still persistent inflationary threat to the economy, a decision we will comment on more fully after it is announced.

One portion of the economy that has suffered a marked deterioration is pace of job creation and Brazil's CAGED index (the local equivalent of the Non Farm Payroll report) has fallen consistently in recent months. Set against this dismal trend March's data was somewhat of a relief with the 112K report matching expectations and almost identical to the level of a year ago. On the other hand this is still below the average pace of job creation in MArch over the last 5 years (See chart) and does nothing to reverse the longer term trend, and the 12 month ma of this metric has slipped from a peak of 189K in mid-2010 to just over 66K today. Given the above the last thing the local economy needs is a hike in interest rates but we have seen central banks tighten during difficult periods in the past (the ECB in the summer of 2008 being a prime example) and so we would not be surprised to see the Bank of Brazil increase the SELIC this evening.

Recent housing data has been mixed (as has the performance of home-building equities) but clear evidence of a genuine spring time pick up in activity has been delivered this week by a surge in mortgage applications for home purchases. The seasonally adjusted MBA Purchase Index hit 217.80 this week, the highest reading since June 2010 when tax credits were artificially boosting the data.

Early to mid April typically sees the annual peak in Purchase applications, which then remain elevated through Spring and early Summer. This can be seen on the chart of the NSA data, which rose to 249.3 this week, again the highest reading since 2010. This is significant since it suggests that the housing market is starting to see a return of traditional home-buyers in addition to the financially motivated purchasers who have been soaking up inventory for rental. Activity remains well below normal (in 2000 and 2001 the index reached 366 and 376 at the annual peak) but the improvement is meaningful, particularly coming at the start of the key selling season. In our experience real estate cycles tend to feed off themselves and momentum continues to build in the housing recovery.

This morning's Housing Start and Permit data underlined the point we made yesterday about the declining relevance of the NAHB sentiment poll, which is excessively weighted towards small privately owned builders that are largely unable to benefit from the current housing recovery.

Despite a modest decline in the March and April NAHB polls the Census Bureau estimate of Housing Starts showed a significant surge in March activity 1036K starts (930K consensus) and a substantial upside revision for February from 917K to 968K. On the other hand the spike in activity was strongly weighted to the volatile multi-family statistic which rose to 417K, its highest level since January 2006. We suspect this is a considerable overshoot (or perhaps a catch up from some of the weaker recent reports) and doubt it will be repeated in May. The Single Family starts data was 619K, a modest drop from February's very strong 650K report, but still over 28% above the level of March 2012 and suggestive of a steady recovery in activity.

Permit data was a little less frothy with Total Permits estimated to be 902K, a little below expectations of 942K (within the error tolerance for this data series). Single Family Permits were 595K, close to the level seen in recent months meaning that a genuine pick-up in underlying activity has taken place in the key spring building season, with Permits 27.7% above their level of a year ago. Multi-Family Permits on the other hand dropped quite sharply from 341K to 307K, underlining the somewhat overstated nature of the Multi-Family Starts estimate.

Overall though this report is a decent set of data that does not suggest any weakening of the recovery in housing has taken place, making yesterday's -7% drop by the S15HOME index something of a buying opportunity.

When silver's price peaked just below $50 in April 2011 we drew a comparison between the metal's parabolic ascent and that of the Nasdaq Composite {CCMP index} in 1999/2000.

This proved to be an accurate historical guide for the next eight months as silver's rapid decline to $26 mirrored the collapse of the CCMP in the early stages of its three year bear market (see chart). From early 2012 onwards the paths of these two bear markets diverged, since although silver was unable to regain a foothold back above $25 its price respected very strong support at the $26 level. By comparison the CCMP fell below 1400 (or $14 on our rebased scale) during the steep decline which bookended the 9/11 attack. Thus we would argue that this week's steep decline for silver was somewhat overdue, and we were not surprised by its ferocity given how important the $26 level support had been over the last 18 months.

The message from the CCMP is that even after the recent losses the bear market can be expected to run for a number of months longer, although we doubt that the final degree of destruction will be quite as bad as that suffered by the CCMP, which eventually bottomed at just over $11, almost 80% below its peak. Although the metal can be expected to enjoy a relief rally the pressure to liquidate holdings on any bounce will now be intense.

In this regard it is worth noting that global ETF holdings of the metal remain close to an all time high, despite the fact that the metal has already lost more than 50% of its value over the last two years. Indeed the total number of ounces controlled by global ETFs are now almost 5% higher than they were at silver's peak (although the market cap of the ETFs are obviously approximately 50% lower). This patience has been ill-rewarded in recent weeks and ETF holdings now represent a large reservoir of willing sellers should the price mount a recovery rally in the days ahead.

The NAHB Homebuilder Sentiment Survey continues to throw off moderately disappointing data with the April index reading falling to 42 versus expectations of 45 and March's reading of 44. We are not too concerned about this modest decline since most of the anecdotal reports we have seen have remained very positive. We view the tailing off of the NAHB report as mostly being a function of its heavy weighting to smaller home-builders who are not in nearly as strong a position to take advantage of market conditions as the large public companies.

Regarding the data itself the clearest weakness continues to be in Traffic, which fell from 34 to 30. We suspect this is influenced by seasonal adjustments with less of a surge in activity than a typical springtime season would see. This is inevitable given that activity levels are still well below normal even in recovering markets and does not mean that a genuine deterioration has taken place. Present Sales held up better, but did decline to 45. Although this metric has dropped from its January high of 52 it has risen from the level of 25 a year ago, and again taking into account the seasonal headwinds this is a decent level to be at. Future Sales remain the standout series rising to 53 for the highest reading since May 2006. Although it is tempting to be cynical about wishful thinking we do believe that the resilience of this series probably reflects a genuine improvement in the quality of Traffic coming through at the current time. Thus although the market has acted poorly to this release there is reason to be patient with the homebuilding sector.

Thinking over the weekend about the abrupt collapse in gold at the end of last week we remembered that US tax returns were due today (Monday) and wondered if the two were possibly related. If so this would not be the first time that tax filings determined the exact timing of an ugly sell off. Readers with a long memory may recall that the NDX index suffered a particularly ugly collapse on April 14th 2000, with the index falling -9.80% to 3,205 in one of the ugliest sessions of the entire 2000-2003 bear market bringing that week's losses to a massive -25.3% (see chart).

Clearly given the extent of the savage bear market the NDX would have suffered this point loss sooner or later, but the need to raise cash to pay substantial capital gains due at tax filing almost certainly created additional selling pressure in the days leading up to the due date. We therefore wonder if something similar took place in gold, since it seems fairly clear that Q4 2012 saw a fair degree of retail liquidation of the metal as holders sought to avoid a possble increase in capital gains tax in 2013. This will have created some significant capital gains tax liablity for long term holders of the metal. If these tax-payers only sold a portion of their gold holdings and then waited until the last possible moment to raise cash for their tax filings then this would have created the additional selling pressure that allowed the metal to finally break key support at the $1520 level. Once this break occurred a substantial wave of panicky selling was always likely to take place.

As with April 2000 it is only the precise data for the sell off which would have been determined by the IRS deadline. Gold had been exhibiting clear vulnerability for months and if anything we are surprised that this sell off did not take place a while ago. Although we would expect an oversold (and perhaps violent) bounce to take place sooner or later we would treat this as a selling opportunity of the first order.

China's Q1 GDP data and March activity report offers more evidence that the massive increase in credit issuance has led to rather less acceleration in activity than would have been expected. This is often the case with the latter stages of a credit bubble, since an ever increasing proportion of issuance is directed to servicing the interest and repayment of credit created earlier in the process rather than actually funding new activity.

The GDP report estimated growth at 7.7%, a slight decrease from Q4 2012 and below expectations of 8.0%. From our perspective the number itself is much less important that the activity that drives it and we would maintain that recent quarters have seen a much more substantial qualitative deterioration in economic activity than a quantative one as China has transitioned from a period of very rapid export driven industrial growth into what we have termed an "edifice economy".

March's activity data hints at this change, with Industrial Production growing by 8.9% YoY, well below expectations of 10.0% growth. Frankly we find even the published data to be highly suspect given te increasingly uncompetitive position that Chinese manufacturers find themselves in, but setting the "true"level aside the reduction of the published metric probably dies reflect a genuine deceleration. Retail Sales remained more buoyant at 12.4%, in line with last quarter and expectations, while Fixed Asset Investment remained high at 20.9%, but grew a little slower than Q4 2012 (21.2%) and expectations (21.3%).

The key point for us is not the data itself which shows a gentle deceleration but the fact that this is happening after a 12 month period in which total Social Funding has been $2.9 trln. The failure of massive credit issuance to fuel an acceleration of activity suggests that the ability of China's credit bubble to continue to feed on itself may be coming to an end.

Our warning that the USD price of gold seemed likely to test and break key support at $1,520 has proved to be timely with the metal suffering an ugly breakdown this morning which has taken its headline price down to $1,507 (and as low as $1,492.68 on an intra-day basis). As well as taking out key price support which had held in the face of numerous assaults since Q4 2011 the metal has also breached its 150 week ma and should it close below $1554 this afternoon (a likely bet at present) this will be the first weekly close below the 150 day ma since the long bull market got going in earnest (see chart).

In non-technical terms, this will mean that for the first time the average gold buyer over the prior three years will be nursing a loss in the metal. Of course actual buying volume was weighted more heavily to the surge in the metals price during the summers of 2011 and 2012 at much higher levels than the overall average, meaning that the number of gold holders now "in the hole" has grown to a considerable degree with the recent price break.

Our view is that unless the metal is able to establish immediate support around the $1,500 level (we would set the odds of this occurring around 50/50) the metal would be likely to travel a long way downwards before it finds the bottom of the current decline. Potential targets for a deep downside move would include $1,300, which would be a 50% retracement of the 2008-11 rally.

While this would be a significant blow to investors holding large positions in the metal (which include those who have elected to hold hedge fund positions in gold denomination) there are no obvious systemic implications in the US for an abrupt collapse in gold's price. Elsewhere this is less true, particularly in India where gold has been used as margin for a vast amount of local retail lending. We would therefore watch the price of gold in INR (see chart) very closely with the 80,000 INR level looking to be the key support level to watch and one of the big risks for gold bulls is a sudden wave of margin based selling emanating from the Indian banking and shadow-banking system.

This month's drop in the University of Michigan Consumer Confidence Survey (CONSSENT) underlined the divergence between consumer confidence and the strength of the US equity market which has been a notable factor during the entire length of the current bull market. The drop to 72.3 in April from 78.6 in March had not been predicted by consensus estimates (which were for an unchanged report) and the survey showed a dip in both Economic Conditions (down from 90.7 to 84.8) and Economic Outlook (from 70.8 to 64.2).

In itself this level of fluctuation is unremarkable, and is as likely to represent random fluctuations in polling as an actual change in sentiment. What is more interesting is the timing of this dip, which coincided with the US equity market (as measured by the SPX) finally exceeding its all time high. As a general rule market make their tops against a background of strong sentiment. The 2000 peak in equities was accompanied by a record CONSSENT reading (112 in January 2000) as retail investors reveled in the millennial gains of the equity market (fueled in part by the FRB's mistaken preparation for a Y2K bug that never materialized). The 2007 peak was a more muted affair, but the index remained in the mid 90's right up until the point that the mortgage market started to collapse in the summer of 2007.

This should be compared to the current cycle, when the index has only traded above 80 for 2 months (October and November 2012) and has averaged 71.4 during the course of the bull market, compared to a historical average of 85.2 for the index's 35 year time-frame. Although we doubt that sentiment will approach the levels of the late 1990's by the time this economic cycle and bull market are complete we would expect to see a multi-month run of sentiment readings above the historical average as a warning sign. The recalcitrance of sentiment therefore is a reason to be hopeful that we are still some distance away from the eventual peak of both economic conditions and equity market performance, although it tells us less about the immediate future of the market.

India's economic data continues to paint a worrying picture of sluggish growth combined with acute inflationary pressures and although both the Industrial Production data for February and CPI report for March were slightly better than consensus the minor variances should not disguise the fact that this is a very poor set of data.

Industrial Production was estimated to have grown by 0.6% on a YoY basis. This was somewhat better than the anticipated shrinkage of -1.3% but variances of this size are not uncommon in this series. What is more important is the deteriorating trend shown by the lagging 12 month ma, which fell to 0.6%, the lowest level since December 2009. We would not be surprised to see this metric fall into negative territory later in 2013.

India's CPI (a relatively new measure that was only created at the start of 2012) was estimated to be 10.39% for March, a modest drop from February's level of 10.91% and below expectations of 10.70%. This underlines the difficulties that the RBI faces in creating looser local monetary conditions, since the RBI currently has a Repurchase Rate set almost 300 bp below CPI.

Meanwhile foreign investors appear to be oblivious to the state of India's economy with YTD foreign purchase of Indian equities currently running at a record pace for the start to a year (see chart). Despite these flows the SENSEX index has fallen by -6.10% YTD, which suggests that local investors are taking a much less rosy view of the country's prospects.

Spanish House Transactions totaled 35.5K in February, a rise of 17.3% from their level of a year ago. This is still well below peak February activity of 61.8K transactions seen in 2007, or even the 6 year average of 43K but it is still a marked improvement from the torpor of 2012 and suggests that the stabilizing of Spanish credit markets has allowed some recovery in housing transactions to take place this. Indeed this is the 6th month out of the last 7 to show a YoY gain, a run of positive data which has caused the trailing 12 month ma to move up to -0.75%, its best level since activity collapsed in the Spring of 2011. This is consistent with our view that private sector economic activity in peripheral Europe continues to heal from its crisis level.

We were surprised that a Chinese customs official was willing to question the veracity of yesterday's export data. It would appear that the authorities were equally non-plussed and we trust that the gentleman's "re-education" does not prove to be too painful an experience.

Deriving conclusions from a single month's data is a risky business and this is even more so when the month in question includes a long national holiday, but Brazil's February retail sales data would still count as poor even after allowing for significant mis-measurement.

MoM sales (which are seasonally adjusted) were estimated to have fallen -0.4%, compared to expectations of a 1.5% gain, while the January data was trimmed down from 0.6 to 0.5%. This takes the trailing 12 month ma down to 0.3%, the lowest pace since May 2009 and well below the 0.7% average pace of a year ago.

The YoY metric (which is not seasonally adjusted) was even worse, with the metric falling into negative territory for the first time since the data commences in 2001 (see chart). Although we suspect that this is an exaggerated report we do believe that Brazil retail sales are finally starting to show clear signs of strain as weakness starts to spread broadly through the domestic economy.

China's pace of credit creation continued to accelerate in March with total Social Funding reaching 2.540 trln CNY (approximately $400 bln), well above expectations for 1.8 trln in growth and almost matching January's record pace. This represents a little more than 8% of the PBOC's balance sheet, underlining the very rapid buildup of credit obligations versus the monetary base of the country. The trailing 12 month ma of Social Funding rose to a new all time high of 1.5 trln CNY, which would equate to an annualized rate of 18 trln, or close to $2.90 trln, by far the fastest nominal annual credit growth of any country in history. The current data underlines the need for China's regulatory bodies to start to rein in credit, and the reason for the announced restrictions on wealth management products which have been a major provider of funds for speculative development in recent months.

However more orthodox bank credit also grew rapidly in March, rising by 1.060 trln CNY ($170 bln) or about 42% of total Social Funding. As may be expected this led to a continued rise in money supply with M2 growing by 15.7% YoY. M1 growth remains more sluggish at 11.9%, underlining that credit continues to expand significantly faster than base money. What is perhaps most troubling (but not surprising) is that the massive build-up of credit has had little effect on activity outside the narrow world of speculative real estate development. Moreover an increasing amount of issuance is now required simply to service the requirements of the debt that has been previously issued.

As a general rule the time to start worrying about a credit bubble imploding is a few months after the pace of issuance declines. We do suspect that March's data may reflect a final rush to launch some products before the new restrictions were announced (we assume that they were fairly well telegraphed) and that issuance will now tail off quite substantially but it will not be clear until April's data is published whether we are correct in this assumption.

See link to minutes:
www.federalreserve.gov/newsevents/press/monetary/20130410a.htm

The March minutes for the FOMC were rather more interesting than normal since the meeting's agenda broadened the discussion beyond a simple reportage of the state of the economy and financial markets. Regarding the economy, the FOMC did note broad improvement in most economic statistics but continues to worry about the sustainability of this improvement stating that:

"... the risks were viewed as skewed to the downside, reflecting in part the concerns about the situation in Europe and the possibility of a more severe tightening in U.S. fiscal policy than currently anticipated."

More interestingly this meeting represented the first time in recent months that the deterioration of activity within emerging market economies (EMEs to use the FOMC's acronym) was becoming an issue noting that "more recent indicators suggest that economic activity in China has slowed some and that "Although inflows into emerging market mutual funds continued, they slowed notably in recent weeks, and EME equity indexes were, on average, slightly lower. Some EME central banks cut interest rates, citing concerns about economic growth.".

Overall we saw little of surprise in the lengthy discussion of economic data and with financial markets behaving well the FOMC had little new to say about these either. Where the discussion got a little more interesting was the effect of the move into "unorthodox" monetary policy. The Committee admitted that

"In general, reflecting the limited experience with large-scale asset purchases, participants recognized that estimates of the economic effects were necessarily imprecise and covered a wide range." An admission that hasn't dampened the enthusiasm for these measures.

However, the FOMC did display some angst as to the danger to its credibility that the new policies posed, particularly should it decide to start to tighten policy at some point in the future. One of the problems is that the FRB has become substantially profitable in recent years (always a good thing for a public body) since it has bought trillions of dollars of securities that pay regular interest with funds that come without cost:

"One consequence of asset purchases has been the increase in the Federal Reserve's net income and its remittances to the Treasury, but those values were projected to decline, perhaps even to zero for a time, as the Committee eventually withdraws policy accommodation. Some participants were concerned that a substantial decline in remittances might lead to an adverse public reaction or potentially undermine Federal Reserve credibility or effectiveness."

This is a reminder of how far the FRB's role has changed since it first stepped into the role of asset buyer in late 2008. However although "a few participants already viewed the costs as likely outweighing the benefits" the overall tone remains supportive of the measures, and we would expect this to remain the case until the unintended consequences of these measures make themselves felt later on in this cycle.

In general we found the most persuasive portion of the minutes to be the lone dissenting position of Ester George, who stated that she:

"... continued to view monetary policy as too accommodative and therefore as posing risks to the achievement of the Committee's economic objectives in the long run. In particular, the current stance of policy could lead to financial imbalances, a mispricing of risk, and, over time, higher long-term inflation expectations. In her view, the Committee's asset purchases were providing relatively small benefits, and, given the risks that they posed as well as the improvement in the outlook for the labor market, she thought they should be wound down."

This strikes us as an accurate summary of the current situation, and a sensible appraisal of the risk and rewards behind current policy. It will be interesting to hear if other members of the FOMC start to be drawn to this stance in the months ahead, but we doubt that it will form a majority opinion until it is abundantly clear that the FOMC is significantly behind the curve.

It is interesting to note that at the same time that the SPX index recorded its new all time high this morning (we like to include intraday prices for historical levels) the level of the index moved above the price of gold as the latter declined by nearly 1% to $1570.95.

This takes the ratio of gold to the SPX back to where it was in 2010, although if dividends were included, the SPX index has now kept pace with gold since December 2008 (see total return chart). More importantly gold's performance over the last 5 years was heavily front loaded, enjoying powerful gains from late 2008 to mid 2011 and subsequently falling back into a long range bound malaise. The SPX on the other hand has enjoyed a much more balanced (if volatile) performance since bottoming in March 2009 and continues to enjoy a multi-month period of price appreciation.

This mismatch in timing means that after surging to a ratio of 1.68 to 1 in August 2011, gold has underperformed by a remarkable 68%. During most of this period investors heavily favored the metal over the US equity market, meaning they have fully participated in this relative under-performance (in nominal terms gold is down -17% from its August 2011 level and -18.2% from its September 2011 all time high). Should the SPX index continue to make further upward progress the pressure to reallocate out of gold is likely to to increase with the metal still dangerously close to key support at $1,520.

India's Car Sales finished fiscal year 2012/13 on a poor note with total sales of 181K representing a drop of -22% from March 2012. However, it should be noted that March 2012's level of activity was abnormally high and a better measure of the deterioration is the trailing 12 month ma of sales. This fell to 158K, the lowest level since November 2010, and has dropped by 14K since peaking at 172K in July 2012, suggesting annualized decline of around -8%. 2 wheel vehicle sales have held up a little better over this period, but there is no sign of growth over the last 12 months in this category after a few years in which sales grew by over 20%.

SIAM (which produces the data) continues to have an optimistic forecast for the new fiscal year, expecting car sales to grow by 5 to 7 percent. However, this forecast is based on the governments fairly rosy economic forecast and so represents the kind of feedback loop that we so often see at the end of long cycles. We ourselves are much less optimistic. Car sales are notoriously cyclical in nature and having made a clear change in direction we would expect more disappointing data in the months ahead.

The PBOC finally published the February update to its balance sheet last night (approximately 6 weeks later than would have been normally expected) and the data continues to show an extremely slow pace of increase in China's monetary base. Total Assets increased by 24.4 bln CNY, or 0.08% but it should be noted that February often sees the balance sheet shrink due to the timing of the Lunar New Year, and the removal of the very weak February 2012 data (-3.98%) means that the YoY change in the balance sheet actually increased to 5.26%. FX holdings increased by 1.26% in the month, meaning they have grown by 3.6% over the last year, which we would use as a reasonable proxy for the true level of export growth over this period (see today's note on China's trade data).

The PBOC's balance sheet therefore continues to grow at a rate far below GDP growth, let alone fixed asset investment or (more importantly) credit growth. Over the last 12 months the PBOC's balance sheet has grown by almost 1.5 trln CNY, while total Social Funding has grown by 1.45 trln CNY per MONTH. In other words credit growth is out-pacing liquidity growth by a factor of 12, which is clearly an unsustainable mismatch of credit growth and liquidity provision.

The ratio of the PBOC's balance sheet to Total Loans Outstanding has fallen to 0.461, the lowest ratio since April 2005. However, it should be noted that this measure now understates the draw-down in available liquidity, since non-bank loan sources of capital (which have started to dominate credit granting) are excluded from this metric. Effective liquidity has therefore deteriorated very substantially over the course of the last 15 months or so, which has important implications for the timing of the eventual unwinding of China's credit bubble.

China's trade data for March showed double digit annual growth in both imports (+14%) and and exports (+10%) but the massive surge in exports to Hong Kong continues to stand out as a reason to query the veracity of the data (a fact which was admitted in the press conference following the release of the data).

Regarding imports the increase of 14% is encouraging, but again must be seen in the context of the fact that February's activity was very depressed by the Lunar New Year. Given that the portion of the Chinese economy that seems to be holding up the best is speculative construction, which is quite import reliant, we would expect this data to be reasonably buoyant at the current time.

It is the export side of the ledger which gives pause for thought. Annual growth of 10% is in itself a credible number, coming somewhere between GDP and other metrics of growth, but the geographical breakdown of the data really undermines any confidence in the number. Once more exports to Hong Kong dominate, rising 92% YoY (see chart), and now represent over 26% of total exports from China. If one excludes Hong Kong exports from the data, Chinese exports for March were actually down 4.75% YoY (see chart).

Moreover, the 12 month ma of this metric has recently flat-lined at around $147 bln, meaning that little to no growth has been visible in non-Hong Kong exports over the last 15 months. This actually tallies closely to the build up of FX reserves on the PBOC's balance sheet (a subject of our next note), which have slowed dramatically in recent quarters. When one considers the recent dramatic devaluation of the JPY against the CNY (the cross rate is now over 16) the potential for further pressure on Chinese export growth is considerable in the months ahead, leading potentially to a YoY drop in the "non-Hong Kong" export data.

When we started querying the rapid build-up in Chinese exports to Hong Kong several months ago we were very much in the minority but after several months in which this pattern was repeated their is now a healthy skepticism amongst observers regarding this issue. This is another example of what we called "the point of recognition" in the summary of the last Weekly Speculator.

It is not necessarily that things are getting worse in a number of emerging market economies, more that the general appreciation of the situation is starting to move close to reality.

With Japan suddenly back in the limelight thanks to the BoJ's wholesale conversion to the "Bernanke Doctrine" the March Bankruptcy Filing report is a useful reminder of quite how different that nation's financial system is to that of other developed nations, particularly the US.

Total Filings were 929 which is the lowest March total since 1991 at the start of Japan's 23 year old economic malaise. This represents a drop of 232 filings (20%) from March 2012 which in itself is an encouraging sign that business conditions have been improving in recent quarters. On the other hand one cannot help but be struck at the paucity of filings, which is a sign of how restricted regulation and social stigma have made bankruptcy almost impossible to take place in Japan. Compare this to the US where total filings peaked at 1,596K to 2010 (1,538K non business) and were still 1,219K in 2012 (see link http://news.uscourts.gov/bankruptcy-filings-down-fiscal-year-2012) and one can get some idea as to how Japan can take over two decades to clear the excess of a massive asset bubble and mis-allocation of industrial resources while the US now sees the light at the end of the tunnel.

We do not claim that the US system is either fair or perfect but the recognition of loss and allowance of those who have failed to move on and participate in another economic cycle has been a crucial part of the healing process after each cycle of excess. The BoJ may have been justified to undertake its radical plan of monetary easing but their are other legal and social issues that also need to be addressed within Japan if a truly beneficial cycle is to be allowed to take hold.

Writing earlier this week we suggested that there was a greater chance of an upside report for Unemployment than Non Farm Payrolls, and the reduction of this rate to 7.6% proved this to be correct. On the other hand we would not have expected to see the headline Non Farm Payroll additions come in at 88K well below expectations of 190K, although this large miss was softened by yet another large upward revision of January and February reports which were raised by an aggregate of 61K.

Private Sector payrolls were estimate to have grown by 95K, versus 200K consensus (once more making a mockery of the ADP report's revised methodology), with revisions to prior months totalling +32K . This took the trailing 12 month ma of Private Sector additions down to 165K which is a healthy but unspectacular rate of growth equivalent to the early stages of the last two economic recoveries.

The Household Survey, which drives the Unemployment report came in surprisingly weak at -206K, but other adjustments to the model resulted in the rate falling to 7.6%. Given that this is the 4th consecutive Household report to come in much weaker than the Establishment report the odds of a blow out positive number in the next couple of months is quite high (the report tends to mean revert quite violently), which means that the official Unemployment rate will be likely to continue to decline in the coming months.

As ever we regard the data as much more meaningful for short term market action than actual economic activity (let alone that of the corporate sector). We doubt however that today's market will see past the headline disappointment and equities can be expected to come under pressure and treasuries to be strongly bid higher (although it is interesting to note gold has not enjoyed much of an initial bounce underlining how weak the metal is).

However, it should be remembered that other very weak monthly reports were subsequently revised substantially higher, or followed by very strong single months. For instance the May 2012 report was initially 82K but is now reported at 152K, June 2011 went from 57K to 177K and August 2011 from 17K to 129K (all Private Sector data). Although we doubt the final revision for March will top the original expectation of 200K we would expect it to be much closer than the current report. By then of course the market will have moved on and will be obsessing about the May report, which just shows how bizarre the monthly obsession with the BLS data has become.

After stabilizing for 5 months around the 430 bln CHF mark reserves held by the Swiss National Bank climed by 1.9% in March to 438.3 bln. This build up of reserves is somewhat surprising since the CHF/EUR exchange rate never traded below 1.215, meaning that the SNB would not appear to have needed to intervene to weaken its currency. A likely explanation is that during the standoff over Cyprus the SNB took prophylactic action just in case matters deteriorated sharply. This would certainly fit with the template of the "Bernanke Doctrine", which prescribes aggressive action even before a clear problem has become possible rather than waiting until it has actually materialized

Whatever the cause it means that another sharp injection of liquidity into the Swiss monetary system took place in March, which further builds up the risk of asset price inflation within the local economy.

The dramatic change in the BoJ's monetary stance has led to a sharp devaluation of the JPY against other currencies but given the prolonged period of appreciation experienced against major currencies such as the USD and EUR the JPY is still on the expensive side of its historical range. For instance at 96.3 the JPY/USD rate is still well below the 1999-2013 average of 105.50, and over 40% below the historical peak of 135 (the JPY weakens as the rate rises) seen in early 2002. Against the EUR the current rate of 124.6 is close to the Euro-era average of 126.4, but well below the 2008 peak of 170. This means that while Japanese exporters have seen a sharp re-balancing of their competitive positions in recent weeks they have not yet been placed in a position of "competitive advantage" against European or US exporters.

The same is not true with regards to China. Since 1999 the CNY/JPY exchange rate has had a well defined range between roughly 12 and 16.5. At the lower band Chinese exports are very competitive with Japanese exports and at the higher band the opposite is true. As recently as last September the CNY/JPY was at 12.4, but the last 6 months have seen a dramatic move in the rate up to 15.5, meaning that Japanese exports are starting to become very competitive with Chinese. This strikes us as a key battle within currency markets, perhaps even more important for actual economic activity than the much more widely watched USD and EUR crosses (although the latter is still a very important indicator of risk appetite). China appears to be the big loser in Japan's sudden change of monetary tack. With political tensions already running high between these two nations we would expect the exchange rate to become a matter of considerable tension in the months ahead.

Those who remember how the brief surge caused by the "cash for clunkers" stimulus earlier this cycle was followed by months of sluggish US car sales will be unsurprised to see a similar pattern unfolding in Brazil. Last year's loosening of vehicle taxes did lead to an impressive increase in local vehicle sales but it is starting to look as if this will come at the expense of a 2013 hangover in activity.

March's sales were 248K units a -5.5% decrease on the activity of a year ago. It should be noted that March 2012 was a fairly undemanding comparison, since it came before the loosening of fiscal policy. We would therefore expect a much more substantial annual draw-down to be created as the late spring and early summer data is released, which should bring further downward pressure upon an industrial sector which is already shrinking at its fastest rate since the 2008/9 collapse.

This morning's ECB announcement and press conference created little surprise in the markets with ECB President Draghi performing his familiar role as a calmer of nervous temperaments without launching any additional initiatives to further loosen monetary policy.

He did however leave the door open to a future extension of the ECB's role should local conditions continue to deteriorate, which once again draws a parallel between the state of Europe and the ECB today and the US and FRB in 2010. The main distinction between these two scenarios is that while the FRB under Chairman Bernanke has been only too willing to launch new initiatives on the scantiest of evidence that they are required (particularly last year's QE3 policy), the ECB has generally been much more intransigent, waiting until matters come to a head before taking dramatic action to ease. To be fair most of this mismanagement took place under prior leadership, but the multi-national make up of the ECB does appear to make decisive action harder to take.

In the meantime perhaps the most important contribution the ECB could make would be to simply cease shrinking its balance sheet, which has contracted in recent months back to its size on the eve of the LTRO (although the LTRO itself still has €778 bln contained within it). We are therefore pleased that this week's report shows a modest increase in the balance sheet (ex-gold) of €8.8 bln which is the largest weekly increase since September 30th 2012.

This increase in assets was surpassed by a spike in the ECB's Deposit Facility from €126.75 to €144.65 bln, which perhaps suggests that the rapid draw-down in deposits has finally run its course and that banks are willing to retain the remaining sum as a buffer for future liquidity needs (although we would still expect to see some significant weekly volatility). This means that the size of the balance sheet ex-deposits still fell this week from €2,077 bln to €2,068 bln, which is the lowest reading since July 6th 2012.

Holiday periods tend to cause significant distortions in the weekly Initial Claims estimations and so this week's surge in Claims to 385K is more likely to be a statistical blip than a meaningful reversal in the improving trend. Even after this report the 4 week ma of Claims only moved higher to 354K, which still represents a level that typically would be associated with a higher rate of Non Farm Payroll gains than we have seen over the last 18 months.

Going forwards we do have some concerns that we are entering the least favorable period of the year for seasonal adjustments and it is possible that the 4 week ma will move a little higher as a result of this shift in the direction of adjustments. We are hopeful, however, that the increased participation of housing construction in the cycle will cause a little less statistical slippage than we have seen in the last three years.

It has been an ugly start to the quarter for gold, suggesting that quarterly flows may have finally turned against the metal. As far as the headline USD price is concerned at $1,553 the metal remains within its 18 month trading range, with key support coming into play around the $1,520 level.

However, it is worth noting that the AUD price of gold has recently breached its equivalent support level at $A1,510, and has continued to trade all the way down to $A1,485 this afternoon. This represents the lowest price seen since August 2011 when the metal started its rapid ascent up to its all time high of $1,921 ($1,822 in AUD). The breakdown of the AUD price of the metal is significant, since we believe that this price is often a better indicator of the true underlying strength of the metal than the headline USD price (which is often as much a product of the USD's own fluctuations). We would not yet call the breach definitive, but it is a clear warning sign that this time an assault on key USD support may prove to be successful.

The ADP Payroll report started the March Employment Data cycle off on a mixed note, with the headline number estimating that March additions to payroll were 158K, rather less than the 200K estimated. On the other hand the February report was revised strongly higher to 237K from 198K, which accounts for almost all of the shortfall in the March data and perhaps suggests that a positive revision to this report can be expected next month. It should be noted that February's ADP data is now in line with last month's BLS report, which estimated that 246K were added to Private Sector payrolls. The trailing 12 month ma rose slightly to 158K this month, indicating that employment growth continues to be steady but unspectacular.

We doubt that today's figures will have much market impact, since the ADP report has never really been the same since its methodology was updated last year to better track the BLS data, something it has conspicuously failed to do in recent months. Regarding Friday's report we are as clueless as ever, but we have noted a steady stream of upward revisions to the 2012 data (the state-by-state figures were ratcheted higher over the last week), which may encourage the BLS to start to take a more positive view of the data it is collecting. Consensus calls for 205K additions in Private Sector payrolls and it would take a number 50K above or below this figure to cause much of a stir.

Regarding the Unemployment report there is perhaps more reason for optimism, since the job creation measured by the Household Survey has really lagged the findings of the Establishment Survey in recent months. Since the start of the year the former has estimated job gains of 215K and the latter 574K indicating that some catch up in the Household data may be in order. This in itself would not guarantee a sharp drop in the Unemployment Rate (since other adjustments could be made to factors such as the "birth/death" model), but it would make it rather more likely. Our best guess therefore is that Friday sees an in-line Payroll report but a substantial upside report for Unemployment (expected to be be 7.7%), but we write this in the knowledge that predicting the BLS on a month by month basis is a fool's errand.