Overview & economic commentary

The BRC reported earlier this morning that UK annual like-for-like sales fell 1.2% in March, marking a ninth drop in the last ten months. The figures corroborate with the weak March CBI distributive trades survey and suggest official retail sales could disappoint in March, despite anecdotal reports of strong business conditions at specialist discount stores. Euro zone data are this morning forecast to confirm that annual CPI fell below 1% to 0.6% in March. Industrial output is forecast to have dropped in February by about 17% y/y. Signs that frictions are intensifying at the ECB as we approach the May governing council meeting emerged again yesterday when Mr Weber said that a cut in the key rate below 1% could 'paralyse the money market', referring to the fact that extremely low rates and a narrowing in the spread with the deposit rate would remove an incentive for banks to lend to one another. His comments are in contrast to Mr Orphanides who earlier in the week said rates could still fall below 1%. US March housing starts and building permits are due this afternoon. The data comes after both the Fed and the US administration voiced their optimism that the contraction in economic activity has started to ease. This was not reflected in the March retail sales data on Tuesday or industrial output/capacity use data yesterday. A weak report today could cause some confusion about the timing of the comments. Weekly initial claims are also due and may underscore the weak state of the US labour market.The Fed Beige book yesterday reported that the pace of decline in economic activity moderated in five of the twelve Districts, with several regions reporting that activity in some sectors was stabilising at a low level. The UK DMO will auction £4bn of conventional 2014 gilts. The previous 2014 auction held in March was covered only 1.45 times and tailed 9.8bp

Currency commentary

Q1 earnings results from JPM and US housing data are likely to prove pivotal for global asset markets today. Government bonds have been outperforming equities this week and the case for being long fixed income was aided yesterday by weaker than expected US CPI data, with the treasury curve experiencing bullish flattening. The dearth of supply may add to the short term bid in bonds. In fx, sterling attracted decent support overnight despite the BRC report of a 1.6% decline in March like-for-like retail sales. £/$ continues to flirt with 1.50, and sterling bulls could push for a decisive move higher if US data disappoint this afternoon. The failure of €/£ to re-establish its position above 0.89 has fuelled some doubts and suggests we could see more downside in the near term as frictions escalate at the ECB about lowering interest rates below 1%. €/£ fell below 0.88 and could drift towards 0.8750 if weak euro zone CPI and industrial output data this morning pile more pressure on the ECB to lower the key refi rate to 1% in May

Major data and events today

• UK BRC Retail sales monitor (00:01)
  Feb Y-O-Y -1.8%
  Mar (actual) Y-O-Y -1.2%
• EU-16 CPI (10:00) (final)
  Feb +0.4% Y-O-Y +1.2%
  Mar (f'cast) +0.4% Y-O-Y +0.6%
  Median +0.4% Range +0.3%:+0.5%
• EU-16 industrial production (sa) (10:00)
  Jan -3.5% Y-O-Y -17.3%
  Feb (f'cast) -1.5% Y-O-Y -16.8%
  Median -2.4% Range -4.0%:+1.4%
• US Housing starts (sa) (13:30)
  Feb 0.583mn
  Mar (f'cast) 0.570mn
  Median 0.550mn Range 0.505mn:0.620mn
• US Building permits (13:30)
  Feb 0.564mn
  Mar (f'cast) 0.550mn
  Median 0.550mn Range 0.500mn:0.590mn
• US Initial claims (w/e 11/4) (13:30)
  Previous 654K
  Forecast 660K
  Median 665K Range 635K:675K
• Philadelphia Fed Survey (15:00)
  Mar -35.0
  Apr (f'cast) -33.0
  Median -32.0 Range -40.0:-29.0
• Canada manufacturing shipments (13:30)
  Jan -5.4%
  Feb (f'cast) -4.0%
• ECB member Liikanen speaks in Helsinki (07:00)
• UK DMO to auction £4bn of 2.25% of bonds due 2014 (10:30)
• France to auction €1.5bn of index linked bonds due 2015 (14:00)
• France to auction €8bn of bonds and notes (14:00)
• US Treasury to buy back TIPS notes (amount tbc) (18:00)
• US Fed member Lockhart speaks in New York (18:00)

Lloyds TSB Bank
http://www.lloydstsbfinancialmarkets.com

Disclaimer: Any documentation, reports, correspondence or other material or information in whatever form be it electronic, textual or otherwise is based on sources believed to be reliable, however neither the Bank nor its directors, officers or employees warrant accuracy, completeness or otherwise, or accept responsibility for any error, omission or other inaccuracy, or for any consequences arising from any reliance upon such information. The facts and data contained are not, and should under no circumstances be treated as an offer or solicitation to offer, to buy or sell any product, nor are they intended to be a substitute for commercial judgement or professional or legal advice, and you should not act in reliance upon any of the facts and data contained, without first obtaining professional advice relevant to your circumstances. Expressions of opinion may be subject to change without notice. Although warrants and/or derivative instruments can be utilised for the management of investment risk, some of these products are unsuitable for many investors. The facts and data contained are therefore not intended for the use of private customers (as defined by the FSA Handbook) of Lloyds TSB Bank plc. Lloyds TSB Bank plc is authorised and regulated by the Financial Services Authority and is a signatory to the Banking Codes, and represents only the Scottish Widows and Lloyds TSB Marketing Group for life assurance, pension and investment business.