Keystone Financial Ltd.
MACROECONOMICS
US consumer price data for April – up 0.5% m/m total and +0.3% ex food and energy – gave the Federal Reserve little reason to adopt a more aggressive stance on interest rates. Although the number was higher than consensus expectations, much of the apparent pick-up was due to a 6.5% rise in tobacco and a 10% jump in petrol prices. If anything, core inflation seems to be drifting lower. Elsewhere, industrial production data for April gave no clues to the strength of the recovery, with capacity usage remaining quite low at 75.5% - investment growth usually emerges when this reading exceeds 80%. Among today’s data out of the US is the Philadelphia Fed index for May – a rise could provide proof of a strengthening recovery, although consensus is looking for a largely unchanged reading from last month’s 12.3.

STOCK MARKETS
Japanese stocks were moderately higher at the open but the gains were limited, with some computer-related stocks losing some of their recent upward momentum. With yesterday’s US data giving no clear signal that the economic recovery is picking up pace, the recent gains in tech-related stocks may now fully reflect prospects for final demand in the US, the largest export market for many Japanese and other Asian companies. Korean equities, widely regarded as the bellwether for the global tech sector, were also weaker at the open, with the Kospi index down 0.2% to 862.42 in early trading. In Australia the S&P/ASX 200 index was led higher by AMP (AMP.AX-A$17.15) after management said it expected profits to rise at least 10% in 2002 due to stronger equity markets in the second half of the year combined with cost-cutting initiatives, according to a Bloomberg report. The index was up 9.1 points (0.3%) to 3385.20 in early trading.

FX MARKETS
The USD reversed its recent strength overnight in New York, trading in a weaker 0.9024-0.9127 range against the EUR, 1.4495-1.4607 against the GBP, 1.5942-1.6128 against the CHF and 127.57-128.36 against the JPY. The weakness came as stocks were unable to follow through on this week’s rallies and as US CPI came out on the upside for April at 0.5%m/m. Conversely, the EUR was helped by news that IG Metall was calling off its strike action in Germany while German Finance Minister Eichel commented that the EUR had the potential to rise based on fundamentals. In addition, the JPY was helped by evidence that Japanese investors were repatriating the proceeds of maturing US Treasury coupons.

FIXED INCOME
Australian bonds opened firmer this morning, after the wage cost index (WCI) report released yesterday showed that wages were rising more slowly than the market had forecast (+0.7% for the March quarter versus consensus +0.9%). This signalled to the market that pay increases pose little threat of boosting inflation, fuelling expectations that the Reserve Bank may not have to raise interest rates as soon as previously thought. The yield on both the three- and 10-year benchmark bonds fell 2bp in early trading, to 5.89% and 6.33%, respectively. The gains at the front end of the curve were reversed later in the morning, however, after the AWOTE weekly wage data – a different measure to yesterday’s WCI index – showed a 1.5% gain in the first quarter, increasing inflationary fears. While the market may take this as a signal of renewed inflationary pressure, the RBA is more likely to focus more on yesterday’s WCI wage data, which painted a more benign inflationary picture.
Japanese bonds were little changed from yesterday, but there is a firm underpin to the market after Moody’s yesterday decided to delay the conclusion of its review of Japan’s credit rating. The rating agency had been widely expected to cut the nation’s sovereign rating by two notches to A2 this week. Yesterday’s sale of 30-year bonds drew the highest number of bids since the auction of the series began in 1999, according to Bloomberg, which could be a sign that investors are more comfor with Japan’s credit standing – even though Japan now has the lowest sovereign rating among the G7 nations following yesterday’s upgrade of Italy’s rating to Aa2 by Moody’s (Japan is currently rated Aa3).