Danske Daily

Stocks close unchanged in US, slightly lower in Asia. Yields fall.
Chinese inflation falls less than expected.
Fed’s Beige Book shows moderate expansion.
Monti and Merkel focus on growth initiatives.
Focus today turns to ECB meeting, Spanish bond auction and US retail sales. Sweden releases CPI.

Markets Overnight
Chinese inflation  fell a little less than expected in December to 4.1% (consensus 4.0%) from 4.2% in November. Food inflation stayed high at 9.1%, but this may be related to seasonal  effects due to the upcoming Chinese Lunar New Year holidays  – see MarketWatch. We still expect Chinese inflation to fall below 3% during the coming quarters.

Fed’s Beige Book released overnight painted a picture of an improving but still far from strong economy. The report said that “economic activity expanded at a modest to moderate pace during the reporting period of late November through late December” and stated that most districts highlighted more favourable conditions than identified in earlier reports. The report pointed to strengthening consumer spending, but still sluggish activity in the commercial real estate market. On the labour market the Beige Book pointed to limited permanent hiring.

Equity markets traded in red in most of the US session yesterday but recouped the losses towards the end and closed unchanged. Home builders gained as the large home builder Lennar Corp said that revenue and margins had improved despite reporting a drop in fourth quarter earnings.  Asian markets  are seeing small losses following the slightly disappointing Chinese CPI, which is denting expectations  of more aggressive policy stimulus.

US 10-year bond yields fell throughout the day and continued lower after the European close to trade close to 1.90% this morning. Italian yields fell yesterday with the 10-year yield falling from 7.1% to just below 7% despite rating agency Fitch expressing concern over the euro crisis saying ECB must do more to prevent  a “cataclysmic” euro collapse.

Italian  Prime  Minister Mario  Monti and German  Bundeskanzler Angela Merkel met yesterday and stated that the upcoming EU Summit on 30 January should focus on how to promote growth on top of aiming to close the fiscal compact to implement more binding rules on fiscal budgets – see WSJ.

In FX markets EUR/USD is broadly unchanged from yesterday while EUR/NOK and EUR/SEK traded higher late in the day. Oil prices are unchanged at USD113 per barrel.

Japan plans cut in oil imports from Iran after meeting with US Treasury Secretary Geithner.

Global Daily

Focus today:  As macro data have stopped deteriorating and market sentiment has improved, we expect ECB to adopt a wait-and-see approach and keep the refi-rate unchanged at 1%  in connection with today’s ECB meeting, see ECB preview: ECB on hold as the economy gradually improves. We do not expect any new non-standard measures to be announced, as ECB needs more time to evaluate the impact from the 36-month LTRO introduced at the last meeting. Before ECB announces it decision, attention in the euro area will be on the outcome of Spain's bond auctions and  Italy’s sales of  a 364-day bill. We expect Bank of England to leave its target for asset purchases unchanged at GBP275bn in connection with today’s monetary meeting, but we suspect that  the target for asset purchases will eventually be raised in February, see  Flash Comment  - BoE preview:  Wait until February for more QE. The Hungarian chief negotiator Fellegi continues his discussions with IMF about conditions for reopening aidtalks and is scheduled to meet IMF Managing Director Lagarde in Washington today. In the data calendar today’s most important events are retail sales and the weekly claims data in the US.

Fixed income markets: We believe that the risk for the rate markets going into the ECB meeting is asymmetric toward lower rates, as the market is priced for no action. Hence, if ECB delivers a surprise cut there is room for lower rates  – in particular in the 1y1y segment of the EUR swap curve. This would lead to a curve steepening. If ECB stays on hold (our forecast), the impact should be limited. However, there might be a risk of disappointment in terms of risk appetite, if Mario turns out to be too hawkish, which could lead to some curve flattening. Generally, we think that risk reward is for lower rates going into the meeting. Note, that there are some interesting auctions in Spain, which is selling 2015 and 2016 bonds. In the US USD 13bn 30-year bonds are being offered.

FX markets: In  line with consensus we look for the ECB to keep rates unchanged at 1.0%. Hence, the policy decision should have little impact on the euro and attention will be on any forward looking comments at the press conference. The sentiment is currently very euro negative as the market among other things fears that France is about to face a downgrade by S&P. We doubt the ECB meeting will change the sentiment and if anything there is a risk of a more dovish ECB, which could push EUR/USD well below 1.27. The BoE decision is not expected to affect Sterling. This morning we published FX Crossroads.

Scandi Daily
Swedish CPI data for December  will be released today. Despite the fact that the
Riksbank actually cut the repo rate, higher short-term mortgage rates are in fact expected to add to the CPI. This illustrates that the transmission mechanism (just like in Euroland) is somewhat disturbed by effects of higher short term funding costs for banks, which also translate to lending rates. However, higher mortgage rates – and some seasonal increases in food prices – are expected to be partially offset by lower clothing prices. In total we expect a 0.4% m/m increase in the CPI while the y/y rate drops from 2.8% to 2.5%. In general we expect the inflation rate to continue to decline in the coming month.