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Fundamental Morning Wrap: Draghi plays chicken for structural reform as NFP climb expected

This mornings institutional reports have an understandable dual focus on both yesterday´s ECB meet and today´s NFP numbers. The feeling is that in Europe, policy is in a limbo while the Bank remains more focused on encouraging structural reforms through a lack of easing. In the US, the feeling is that today´s numbers will be encouraging, although a slither of caution can be found, warning against expecting too much just yet.


Derek Halpenny of BTMU notes that ECB President Draghi revealed a weaker inflation profile in updated forecasts with a 1.3% projection for 2014 which he feels is surely inconsistent with the ECB’s inflation mandate. he writes, “Clearly, any weakness from here will warrant a rate cut something we still expect possibly in June. The euro may bounce from here – but only modestly.” meanwhile Danske Bank analysts feel that Draghi has reduced one of the Euro´s downside risks by seeming to rule out a deposit rate cut or the even the prospect of negative rates. They conclude that while the data is soft, Draghi is not. Jim Reid of Deutsche Bank notes that the house view there is that the ECB is in policy limbo and content for now just to ride in the Fed´s slip stream, rather than having a proactive set of tools at their disposal. Further, he picks up on the contradictory downgrade of growth forecasts but expectation of recovery in H2. James Knightley of ING comments that the focus for the ECB looks to be more focused upon structural reform, rather than numerical targeting.


Derek Halpenny of BTMU notes that NFPs are understandably the key event today and a view based on other incoming employment data suggests the labour market is certainly improving. Aside from weather distortions, he expects the picture to be positive and hence be supportive for the dollar. Jim Reid of Deutsche Bank notes that yesterday´s Stress Test positive results. Moving to the NFP headline event, he notes that DB is expecting a 180k gain and 7.7% unemployment. Jane Foley of Rabobank notes that while consensus views are of a 165k gain, the surprising dip registered in yesterday’s weekly initial unemployment claims data, plus a solid gain in this week’s ADP private sector payrolls release, has boosted enthusiasm ahead of this release. Gareth Barry and Geoffrey Yu of UBS are expecting a print well below 200k mainly because when examining the employment component of the key purchasing managers reports for February, which incidentally held at high levels, markets are now looking at labour markets in second derivative terms and the perception maybe that merely holding up top is not enough.


ANZ analysts note that looking at Asia, China’s equity inflows recovered to USD184m from net outflows of USD636m in the prior week while Korea’s equity inflows fell by nearly half from the previous week's level, but still remains large compared with the rest of the region. Jim Reid of Deutsche Bank notes that the lunar new year may have distorted Chinese data and reports that China’s commerce minister said that the country will seek to stabilise exports and expand imports in a bid to seek balance trade development.

Meanwhile, Ilan Solot of Brown Brothers Harriman notes that the central banks of Brazil and Mexico share something in common, namely that both may be set to wait longer to move than markets are currently expecting. He feels that tightening measures and a rate cut respectively have been priced in by the market but suspects that the banks may choose to wait a bit longer to take action before.

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