Key News

• Prices paid to Australian producers unexpectedly fell last quarter for the first time in almost six years, increasing the central bank's scope to cut interest rates. (Bloomberg)
• Lending at the biggest U.S. banks has fallen more sharply than realized, despite government efforts to pump billions of dollars into the financial sector.  According to a Wall Street Journal analysis of Treasury Department data, the biggest recipients of taxpayer aid made or refinanced 23% less in new loans in February, the latest available data, than in October, the month the Treasury kicked off the Troubled Asset Relief Program. (WSJ)
• This year's most profitable foreign-exchange trade is signaling increased optimism that the first global recession since World War II is easing. (Bloomberg)
• Hungary's new prime minister said Sunday that the country's economy would contract by as much as 6 percent this year. (AP)
• The Russian government may cut planned expenditures by as much as 30 percent next year as the world's biggest energy exporter runs through its cash reserves, Deputy Finance Minister Tatyana Nesterenko said. (Bloomberg)

Key Reports (WSJ):
10:00 a.m. Mar Conference Board Leading Indicators: Expected: -0.1%. Previous: -0.4%.

Quotable

"But by making a principled case for free markets, international trade, and individual rights, Friedman actually helped create the opposite of global misery. Millions of people continue to be lifted out of poverty worldwide based on these principles. If more politicians had listened to Friedman's warnings about loose money and ill-conceived interventions in the economy, we might have avoided the latest round of economic misery as well."

                              Damon Root, Reason Magazine

FX Trading - Aussie Deflation?
The Aussie is getting hammered this morning on news producer prices unexpectedly fell 0.4% last quarter; consensus estimates were a 0.6% gain.   

AUDUSD Daily:

It may be too early to forecast deflation is settling over the Australian economy.  Analysts cite the relative decline in Aussie from its perch near US dollar parity back in July of last year, and suspect this may keep import costs inflated.  But once again, we continue to believe it all comes back to China. 

China demand drives commodities demand for Aussie stuff.  And though we are surprised by how well China is holding, given our misgivings about the veracity of economic numbers conjured up by the politburo, we remain wide open to a major disappointment.  Australia now being the veritable canary in the coal mind for Chinese demand, we watch with interest.  For if China is fine, any decent Aussie move lower might be a gift (key word there is might). 

The optimistic story for China we thought was summed up very well by Morgan Stanley recently (a very plausible one indeed):

"[U]nder this ideal recovery scenario, we envisage the Chinese authorities taking a rather unorthodox approach in managing the economic downturn: boosting the real economy through reflating the stock market first. The goldilocks recovery scenario would therefore feature a series of positive catalysts, such: 1) a technical rebound in growth as destocking runs its course and trade finance normalizes somewhat in 1Q09; 2) on the back of a policy-induced, liquidity-driven stock market rally (despite weakening fundamentals), the confidence of consumers and private investors is boosted despite job loss and slower sales/income growth, thus preventing too rapid a slowdown in consumption and private investment in late 1Q and 2Q09; 3) the effect of fiscal stimulus starts to show in a major pick-up in public investment growth in late 2Q or early 3Q09; and 4) the G3 economies bottom and stage a tepid recovery in 4Q09, improving external demand and further boosting confidence."

"Although we had attached a low probability to this 'everything-goes-exactly-right' scenario at the time, it is looking increasingly probable that this scenario is playing out. In particular, it has become evident that the Chinese authorities, who still have a powerful and pervasive influence over the business community (including in particular the banking sector), are determined to leverage the 'strong balance sheet' of the economy for a 'decent-looking income statement' of the economy in the next couple of years."

China Index Daily:

So far so good on the Chinese stock market reflation front.

Stay tuned.