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–Repeats; Accommodative Monetary Policy Appropriate At Present
–Long Way To Go; Premature To Assume Accommodatve Pol Reversal Imminent
–Will Be Looking Out For Improvement In Employment Markets

By Brai Odion-Esene

WASHINGTON (MNI) – Atlanta Federal Reserve Bank President Dennis
Lockhart Wednesday warned of the possibility that the central bank could
face circumstances that warrant the start of monetary policy tightening
“well before” the rate of unemployment is at a satisfactory level.

Labor market trends appear to be moving in the right direction,
Lockhart said, but added it’s quite possible the recovery could be well
advanced before any significant reduction of unemployment materializes.

“It’s also quite possible circumstances justifying the start of a
cycle of policy tightening will develop well before the unemployment
rate has found a satisfactory level,” he said.

In remarks prepared for a business leaders luncheon in Hartford,
Connecticut, Lockhart repeated his opinion that a highly accommodative
monetary policy is appropriate at present, cautioning that as the U.S.
still has a long way to go, “I believe it is premature to assume an
imminent reversal of the Fed’s accommodative policy.”

Speculation has been rife in the market about the exact meaning of
“extended period” from the Federal Open Market Committee’s policy
statement, but Lockhart said he believes it is not appropriate to talk
in terms of a specific timeframe or number of meetings.

“As long as inflation remains subdued and inflation expectations
anchored, a key factor for me is improvement of employment markets,” he
said.

Most economists expected Friday’s U.S. nonfarm payrolls report to
show an increase in employment for March of about 200,000 jobs, and
Lockhart said, “Going forward, I will be looking for signs that
employment gains are likely to repeat, accumulate and, once achieved,
are likely to be durable.”

He said such signs would include an indication that job indication
is improving, a decline in the measured rate of underemployment, and a
string of employment gains large enough to “appreciably’ move the
unemployment rate down over time.

Lockhart blamed the current slow pace of job gains on the slow pace
of job creation, as opposed to high layoff rates. “I view unemployment
as a daunting economic challenge — and very likely a dominant political
issue — of the period ahead,” he said, but added, “Despite the weak
state of labor markets, there are signs that the worst may be behind
us.”

Casting his eye over the overall U.S. economy, he noted the strong
5.6% growth rate seen in the fourth quarter of last year as proof of
recovery, but cautioned that growth of that strength will not repeat
itself in the first quarter of this year.

“For the first quarter, I expect a more moderate growth rate, a
little below 3 percent,” Lockhart said.

Improvements in consumer and business spending are helping to
offset softer housing and commercial construction, Lockhart said, but
warned that continued stabilization of the housing sector — especially
home prices — “is likely a precondition for sustained economic
recovery.”

As a result, the U.S. economy remains in a transitional phase from
a period that depended on support of public sector programs to a period
of resumed growth based on private spending, he said.

** Market News International Washington Bureau: 202-371-2121 **

[TOPICS: M$U$$$,MMUFE$,MGU$$$,MFU$$$,MT$$$$,M$$CR$,MAUDS$]

Cailloux believes it will take time for the markets to
swallow its doubts, but the sheer volume of debt which Greece still
needs to put out there is another factor:

“Another element is that the country will have to access the
markets quite a lot from here until the end of the year. So, with still
huge amount of issuance still to be done, the market is still not ready
to jump on the paper because it knows that there is still quite a lot of
paper supply which is coming in”.

Sabuco believes some investors have decided to shift into less
risky paper:

“I think that there are investors who have chosen to sell their
Greek bonds. They likely consider that, despite the support mechanism
announced, the investment in Greek paper is too risky and would thus
switch to another country’s bonds”.

Cailloux says that some euro zone banks seem to have put strict
limits on how much they are prepared to invest in Greek bonds:

“It looks like the banking system in Europe has restrictions in
terms of total size of exposure to Greece which has been put in place
while the crisis was unfolding which is limiting somewhat the potential
purchase of Greek paper at this stage.’

Fortis Analyst Nick Kounis says that there is a more fundamental
flaw in the Greek backstop plan:

“This European/IMF plan – certainly the European part was not aimed
at reducing Greece’s high debt service burden. They will provide funds
which will be probably above market rates”.

He continues:

“They would want to give Greece an incentive to go back to the
markets as quickly as possible and would only step in if market
financing was unavailable. This agreement does not really improve the
outlook for Greek debt”.

EU leaders had obviously bet on the idea that the plan by itself
would provoke a positive market reaction, but that did not materialise,
Kounis noted.

“Greek bond yields, they have actually, on balance, risen since the
announcement. Markets are not convinced and the reason is that it does
not really offer Greece real help. It just says, ‘OK, if the market’s
not there, we’ll step in. But you will pay. We will not subsidize
you.’”.

But, as Kounis points out, the markets believe that what Greece
needs is an outright and explicit subsidy. Greece is committed to an
austerity plan which will take 10% of GDP out of the budget deficit –
historically unprecedented. To achieve that, the country needs real help
from the EU but is not receiving it.

“The general sense is that Greece is in quite a big hole and
is trying to get out. Europe isn’t offering real help at the moment.
They hope that they can help by improving market confidence, but this is
proving to be not enough.”

Goldman Sachs’ Dirk Schumacher says that Greece’s real problem is
stabilising its economy and achieving growth rather than its funding
concerns:

“Growth is needed, they are still stuck in a recession and we will
see whether they can get out of that” – “Borrowing costs/debt
sustainability is not as crucial as stabilising the economy”.

Kounis’s criticism of the EU rescue plan does not apply to the
International Monetary Fund’s role. But the rumour is that, while the
IMF would provide funds at a lower rate, it would not cover a large
quantity of funds.

“The lower interest rate that the IMF would provide would probably
not be over such a large amount of funds that it would materially change
the picture in terms of Greece’s debt dynamic”.

Kounis says that the fact is that the EU plan is not really aimed
at helping Greece so much as preventing a euro zone default and so
protecting the rest of the euro zone from the dreaded contagion fear.

The more sanguine Green believes that the markets have calmed down
to some degree but he concedes that Greece needs funds – “sooner rather
than later”.

“We look for Greece to do at least another two more big syndicated
sales — in April & May”.

Orlando Green rejects ideas that Greece will face default and that
they will go to the IMF/EU for help. But there are certainly dangers
ahead, he agrees:

“A default isn’t our central scenario. We think Greece will
continue raising funds in the market, they still have access to the
markets and don’t see them going to the IMF/EU for help. But there is a
risk of this, there is no doubt about that”.

Goldman’s Schumacher agrees that Greece will get the funds it needs
from the markets – “one way or another in the next couple of months”.

But, he continues – “…that does not mean they are not out of the
woods. There is a lot of debt coming due in the next 2 years and it is
not clear whether they can achieve reduction in deficit that they intend
to do”.

But Schumacher says that it can’t be ruled out that the present
EU/IMF deal is the best help Greece can get – “given that the euro zone
government said that there won’t be a subsidy”.

For the immediate future, Schumacher says, “Greece has to implement
what they said they are going to do and we think they will. We will then
see how effective this is in raising revenues and then whether we see a
stabilization of growth or not”.

Greek 10-year spreads are currently trading at +343bp. This is
roughly 44bp above Friday’s level when the EU/IMF bailout plan was
welcomed by the markets. The spread hit its recent peak on Jan. 28 at
+398bps, a level which has otherwise not been seen while Greece has been
in the euro. Greece attempted euro entry in 1999 but failed to meet the
entry criteria. It joined later in 2001.

–London Bureau/Frankfurt Bureau; emails:
nshamim@marketnews.com/twailoo@marketnews.com/dthomas@marketnews.com;
Tel: +442078627492

[TOPICS: M$X$$$,MT$$$$,MGX$$$,MFX$$$,MFXBO$,M$$FI$]

–But Some See Risks As Greece Seeks To Tap Markets In Next Months
–Some Wonder If EU/IMF Plan Really Helps Solve Greece Funding Problem
–Analysts: Markets Need To See Results On Austerity Effort

LONDON (MNI) – Greek government bond spreads rewidened Wednesday
amid market concerns that the country needed to pay a hefty premium for
its recent 7-year GGB issue but analysts by and large are still
confident that the country does not face a major risk of default.

But analysts still see risks for the country as it seeks to tap the
markets for to fund forthcoming redemption payments due in the next few
months.

The more pessimistic analysts see a real flaw in the EU/IMF rescue
plan and all agree that Greece needs to show results on its efforts to
reduce its deficit and stabilise its economy.

Greece’s latest new benchmark syndicated 7-year issue was
priced Monday for E5.0 billion, at mid-swaps +310 basis points. That
equates to a spread of +334.30 basis points over Jan 2017 Bund issue.
This amounts to a hefty premium for a country which is attempting to
slash its budget deficit.

Most of the widening occurred after reports that the issue had
been alloted mainly to banks, with local investors taking the
lion’s share, according to a press release obtained by Market News
International.

Banks took 42% of the sale, Fund Managers 32%, Insurance & Pension
Funds 18% and central banks/Official Institutions 8%. In terms of
geographical breakdown Greek investors took 43%, UK & Ireland 15%,
France 8%, Scandinavia 6%, Asia 5%, Austria/Germany 5%, Benelux 5%,
Italy 3%, Iberia 3%, Switzerland 2%, and Others 5%.

Confirmation that the final order book closed at E6.25 billion
provided fresh disappointment and was seen as rather lacklustre compared
to the previous 5- and 10-year benchmark issues sold earlier this year.

GGB spreads also widened after Greece only accepted E390 million
for the 5.90% Oct 2022 GGB issue at extraordinary auction conducted
Tuesday, out of the E1.0 billion on offer.

The Greek debt agency at the time said that this extraordinary
“operation [was] to address the technical dislocation of that point on
the GGB curve”, but the lower allocation contradicted that claim.

Further spread widened was also noted after PDMA chief Petros
Christodoulou said Wednesday that its funding needs for May would amount
to E11.6 billion, higher than markets expected given Greece has E8.44
billion worth of redemptions and E1.8 billion deficit financing needs to
fund by the end of May.

Christodoulou also added that Greece will soon do a roadshow in
Asia and the U.S. Soon after that, at the end of April or the very
beginning of May, “we could be in the market with a global bond deal in
dollars”, he said.

The debt chief said that beyond May PDMA needs to do a further E32
billion funding for the year, which equates roughly to the E54.0 billion
target given that E23.44 billion has already been sold so far in 2010.

Orlando Green – strategist at Credit Agricole – believes that it
was the 7-year maturity of the recent GGB issue which had put his
customers off:

“The 7-year sale was a bit of flop, which was more to do with the
maturity on offer. Our clients didn’t like the maturity, which was too
long for them and instead preferred a shorter issue, i.e. 3-year, which
is considered a better fit”.

Green says that this ‘flop’ was the most likely reason for the
extraordinary auction:

“We didn’t expect them to do the extraordinary auction, and this
was probably because they didn’t sell enough in the 7-year sale.”

The new Greek funding difficulties have provoked a new sense of
pessimism among euro zone analysts.

Jacques Cailloux, chief euro area economist at RBS, blames the
markets’ persisting lack of confidence in Greece:

“There is still a lack of confidence from the markets about the
Greek efforts on the consolidation front. The fiscal data for January
and February show that the underlying trend is better, but the market is
not buying into this”.

Nor has the EU’s backstop facility for Greece convinced the
markets, says Cailloux.

“The markets are not convinced with the backstop facility and
especially about coordination issues that remain unanswered”.

Philip Sabuco, economist at BNP Paribas, cites the same factors for
the new widening in spreads. Sabuco says that Greece needs to show some
concrete results to bring spreads down.

“We saw that the precision of an assistance mechanism was not
enough to bring down sufficiently the spread. It is still quite high.
Greek finances are still poor and markets are waiting for the first
signs of improvement since the austerity measures were announced. Thus,
for the moment, spreads will remain wide until initial results are
seen”. MORE

–London Bureau/Frankfurt Bureau; emails:
nshamim@marketnews.com/twailoo@marketnews.com/dthomas@marketnews.com;
Tel: +442078627492

[TOPICS: M$X$$$,MT$$$$,MGX$$$,MFX$$$,MFXBO$,M$$FI$]

• Worst may be nehind labor market, long way to go
• Recovery may be well advanced before significant reduction in unemployment
• It would be wrong to aim monetary policy for pre-recession employment levels
• Premature to assume a reversal of Fed’s accommodating policy
• Not appropriate to link “extended period” to any specific time frame

Bottom line: Strong payrolls or not this Friday, the Fed’s in no hurry to hike. That’s good for risky assets, if the market reverts to full-fledged carry trade mode.

FRANKFURT (MNI) – The European Central Bank should welcome the low
uptake on it final six month loans as a sign that banks are coping well
with the gradual withdrawal of liquidity support measures as the economy
continues to recover.

At E17.876 billion, demand for the six months refis was far below
the E70 billion median forecast.

Limited demand points to an ongoing improvement in the banking
sector. It also indicates that the ECB’s commitment to continue weekly
MROs at fixed-rate, full-allotment until October — coupled with
declining interest rate expectations — have given banks confidence that
they will enjoy continued access to cheap funds in the months ahead.

Today’s tender results should thus boost the ECB’s confidence to
continue their gradual retrenchment in tandem with improving conditions.

Latest data from the real economy show conditions should indeed
improve further, but today’s unexpected boost in headline inflation
should not expedite a tightening cycle. Diverging economic performances
across the Eurozone may yet complicate the monetary policy path ahead.

The European Commission survey, released Monday, showed business
confidence continued to recover in March, reenforcing positive signals
from last week’s PMIs. The sharper-than-expected rise took the index to
its highest level since June 2008.

German machine tool orders figures, published Wednesday, also
showed a fresh pick-up in demand. February’s orders were up a sharp 26%
on the year. The less volatile three-month comparison recorded a more
modest but still healthy 10% annual increase.

Meanwhile, unemployment continued to rise in February hitting a
near 12-year high at 10%. Nevertheless, monthly developments showed the
rise in unemployment decelerating to 61,000 from 105,000 in January,
raising hopes that the worst may be behind.

President Trichet said Wednesday that “on the level of the euro
area as a whole, (the projections point to) modest growth. Positive
growth but modest growth. I would say for next year, growth that will be
higher than this year.”

However, a closer look at the data reveal that country developments
are diverging and may further contribute to existing imbalances in the
Eurozone.

At a country level, the European Commission sentiment survey showed
the strongest improvement in Germany (+3.4 points) while developments in
Greece deteriorated again (-2.8 points), leaving the country at the
tail-end of the eurozone.

German machinery orders were once again driven by foreign demand
while unemployment levels remained propped up by what has been dubbed
the German labor market miracle. Indeed, national data showed
unemployment falling again unexpectedly in March.

The European Commission warned Wednesday that there is “need for
substantial adjustment of imbalances within the Eurozone.” Diverging
economic developments may not only make such adjustments increasingly
difficult but also complicate the monetary policy path ahead.

March’s unexpectedly sharp rise in Eurozone inflation, however,
should not expedite any rate move since it was likely driven by one-off
factors and still remains well below the ECB’s definition of price
stability.

The headline rate jumped to 1.5% y/y from 0.9%, far exceeding the
median forecast of 1.1%. While no breakdown was available, detailed data
from Germany suggest that almost half the increase was due directly to
energy prices. Governing Council member Ewald Nowotny on Monday
confirmed that maintaining price stability “should not be a real problem
because we do see…price stability over the medium term.”

“We never pre-commit at the ECB, but as President Trichet has
underlined on several occasions, we are for the time being discussing
exit strategies with regard to liquidity provision, and we do not have
any further discussions,” Nowotny said, summing up the central bank’s
current stance.

–Frankfurt newsroom +49 69 72 01 42; Email: jtreeck@marketnews.com

[TOPICS: MT$$$$,M$$EC$,M$X$$$,M$$CR$]

Alas, it is unlikely to be busier as traders withdraw to the sidelines at the end of the month.

Tomorrow, jobless claims and purchasing managers reports, which should make for active morning markets. The afternoon will likely be very quiet again tomorrow with many leaving for a long Easter break.

Markets are mostly shut on Friday, which will make payrolls even more tricky than usual to trade. Much of Europe will be out on Monday, so the impact of payrolls may play out in a multi-day time frame as traders drift back into the markets, rather than in a frantic 15 minute period, per usual.

The IMF released data on global forex reserves today. The dollar edged up to 62.1% of global reserve holdings from 61.5% in Q3.

The euro lost modest ground, slipping to 27.4% from 27.8%.

USD/JPY is off to the races after economic data, year-end, month, end and quarter-end are all out of the way. Momentum players are whipping and driving, making a run for the 93.77 highs posted in early January. 93.64 is the high so far, via EBS.

94.00 barriers are rumored if those highs are taken out, so there will likely be good-sized selling ahead of that level.

USD/JPY rocketed to 93.46 as the much-anticipated dollar selling for the fixing failed to materialize. Elsewhere, EUR/USD rallied to the low 1.3540s ahead of the fixing before settling back into the 1.3520s. EUR/JPY is a clear winner as the dust settles. Technically, higher levels look likely ahead.

Traders report a large barrier option is in play at the 1.4200 level in EUR/CHF. Nothing attracts price action like a big barrier. The owner of the option wants to protect his investment while the bank that sold the option wants to knock it out to erase its potential exposure.

1.4232 was the low for the move last week before back-up plan for Greece was unveiled.

Traders are increasingly daring the SNB to put their money where their mouth is…

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