Markets Enter Consolidative Mode Ahead of Weekend

Neither the terrorist attack in Paris nor the strong eurozone flash PMI has managed to shake
Judging from the social media, many suspect that the
terrorist attack plays into Le Pen’s hands, but investors do not seem
particularly concerned.  The French interest rate premium over Germany has
narrowed, and gold is flat.   UK
retail sales fell sharply, yet sterling is
holding on to the bulk of this week’s gains, which are the most here in

The US 10-year yield is holding on to the lion’s share of its gains as
  It had bottomed on Tuesday near 2.16% and rose to 2.25%
yesterday and is at 2.24% now.  Treasury Secretary Mnuchin’s claim that
tax reform will be passed by the end of
the year seems to be more a statement of intent than a reliable
forecast.   As President Trump’s 100th day in office approaches, the
legislative agenda still seems to be tied up between the different wings of the
Republican Party.  Indeed, the attempt by the Republicans to forge a
majority instead of reach across the aisle to some Democrats is proving more
difficult and frustrating than many

Although it is too late to have much impact on the French election, the
flash PMI reading for April was impressive as it pulls further ahead of
Germany, if such comparisons are valid.
  French manufacturing rose to
55.1 from 53.3, and the service reading
rose to 57.7 from 57.3.  This lead to the composite
rising to 57.4 from 56.8.  All were above expectations.

The German manufacturing edged to 58.2 from 58.3, and the service PMI fell to 54.7 from 55.6.  The latter
was weaker than expected.  The composite stands at 56.3 from

The flash EMU composite of 56.7 represents a new six-year high.  The chief caveat is that survey data has
been running ahead of real sector data.  The US and UK report Q1 GDP next
week, but Europe’s estimates are in the first week in May.  Next week’s
highlights will include the flash CPI readings, with a small uptick expected,
and the ECB policy meeting.  There is room to adjust the securities
lending program to relieve strain in the repo market.  

The most market friendly French election result would likely be a
Macron-Fillon run-off in the second round, assuming that it is unrealistic than
any candidate garners more than 50% of the vote. 
Many suggest that
the euro could rally on a Macron-Le Pen second round, given the tradition of
forging a united front against the National Front.  Yet this would seem to be the least surprising
result.  Nearly every poll suggests
this is the most likely scenario.  And as we have noted, investors are
relative calm.  

The relative calm in the face of geopolitical uncertainty is also evident
in Korea. 
The strongest currency in Asia this week, gaining
0.5%.  This snaps a two-week slide.  Korean stocks gain 0.75% today, which is about half of the
weekly advance.  The Kospi and KOSDAQ are among the best-performing equity markets in Asia this
week.  The MSCI Asia Pacific Index is up 0.7% on the day, which is enough
to push the index higher in the week to
break the four-week down leg.  Chinese shares posted their worst week of
the year with the Shanghai Composite off 2.25%.  Regulators have tightened
up their enforcement and also seem to be attempting to curb

The UK provided the biggest surprise of the day with a poor retail sales
  The BRC report had already warned that UK consumers pulled
back, but the 1.5%  decline in retail sales (excluding petrol) was three
times more than expected.  The small upward revision in the February
series was not sufficient to ease the shock.   Sales were off
broadly, including clothing, footwear, household goods and food.  The
quarterly decline was the largest in seven years.  The main culprit
appears to be rising prices, but the
March decline may have been aggravated by the Easter holiday, which was earlier
this month rather than in March as in 2016.    UK GDP expanded
by 0.7% in Q4 16 and is expected to have slowed to 0.4% in Q1 17.  

Sterling was fairly resilient to
the retail sales shock.
  It eased on the news but remains within yesterday’s ranges, which was within
Wednesday’s range.  After rallying strongly (we suspect mostly on short
covering) in response to the surprise call for a snap election, sterling
appears to be forming a continuation pattern (flag, pennant, or
triangle).  Initial support is seen
near $1.2770.  Many have their sights set on the $1.30 area.  

Sterling’s gains are the FTSE 100’s losses.  This index that
tracks many UK multinationals has fallen over 3% this week, which is its worst
performance since early last November.    More broadly, the Dow
Jones Stoxx 600 is off about 0.2% today, and unless there is a strong recovery
in the next few hours, it will post its second consecutive losing week and its largest weekly loss since late

 Comments by the Fed Governor Powell were in line with most other
Fed officials; recognizing that full employment is at hand.
comments, however, are noteworthy because they illustrate a point we have made
about the Fed and the upcoming appointments by Trump.  Powell is the lone
Republican nominee among the Governors.  His
analysis does not differ much from the other governors.  The point is that
a new member will see the same set of facts.  The Fed is close to its
mandates.  A gradual removal of accommodation is not an ideological
position, but a technocrat judgment about the prudent course.  

US data today includes the Markit flash PMI and existing home
Barring a significant surprise, the former does not typically
elicit much of a market reaction.  Existing home sales are expected to
rebound from the 3.7% decline posted in February.  There may be some risk
of a disappointment given the weather.
   Canada’s reports March CPI.  Although the month-over-month
rate may tick up, the year-over-year rate may ease to 1.8% from 2.0%.  The
new core rate is expected to be unchanged at 1.3%.   DBRS, the last
of the key credit raters (from the ECB’s point of view) to recognize Portugal
as an investment credit is due to release its review today.  With growth appearing more solid, it would be a
surprise to investors if it cut the rating.


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