Fundamental Morning Wrap: Sequester fears soothed as GBP takes a running jump

This mornings institutional research sees a smorgasbord of focus, spread thinly across regions. The main focus has been the impending US sequester, but following Bernanke´s soothing rhetoric over the past week, market instability looks to have calmed. Further, the first signs of progress in Abenomics are being noted while UK PMI numbers jump off a cliff and Chinese PMI slow.

USD

Marc Chandler of Brown Brothers Harriman notes that the US political paralysis means that the $1.2 trillion in spending cuts are set to go into effect with an $85 bln in cuts during the remainder of the current fiscal year. He writes, “Assuming that ever dollar cut in spending reduces GDP by a dollar, the sequester will shave US growth by around 0.5% this year.” Kit Juckes of SocGen comments that the prospect of spending cuts coming into force tonight unless a last-minute deal can be reached between Democrats and Republicans is probably enough to keep risk appetite subdued. Gareth Barry and Geoffrey Yu of UBS comments that last ditch attempts to avert the onset of automatic spending cuts failed in the US Senate overnight. Two bills (one Republican-sponsored, the other from the Democrats) failed to secure enough support and US equities responded by weakening into the close.

JPY

Raymond Van der Putten of BNP Paribas notes that Abenomics looks to be having an effect on the Japanese job market, commenting that the unemployment rate inched down to 4.2% as 340k jobs were created mainly in the services sector. He adds. “Employment conditions are set to improve further in the coming months, in line with the strengthening of the economy. The unemployment rate is expected to fall below the 4% mark in Q2.” Meanwhile, Danske Bank analysts note that in Japan the CPI data shows deflation is very real, as consumer prices declined for the third month and the market expects more stimulus from BoJ.

GBP

ING economist James Knightley feels that today's very weak PMI reading indicates that the BoE is likely to initiate a further bout of QE, especially with the significant bloc within the MPC who are in favour of action already. Jane Foley of Rabobank comments that regardless of PMI results, she feels that the BoE was always likely to take further easing action in the coming period.

Macro

Both Lee Hardman of BTMU and Zhiwei Zhang of Nomura note that the latest leading PMI surveys from China for February have signalled that the pace of economic recovery appears to have slowed early this year supporting our view that the Chinese economy will rebound only modestly in 2013.