- ECB closed the door on further rate cuts, sending EUR/USD lower and yields higher.
- Japan's Prime Minister Abe unveiled a significant fiscal stimulus plan this morning.
- Chinese inflation surged on extremely cold weather in December. Markets Overnight
Japan’s Prime Minister Abe delivered on some of his promises this morning and unveiled a significant fiscal stimulus plan of JPY10.3trn. The plan, approved by the Abe cabinet on Friday, will focus on measures to rebuild the Tohoku area devastated by the earthquake and tsunami of 11 March 2011, bolster disaster prevention, strengthen social security and revitalise regional economies. JPY weakened on the announcement and focus now turns to the Bank of Japan meeting later this month. In China, inflation surged to 2.5% in December, slightly above the 2.4% consensus expectation. An extraordinarily cold winter is currently pushing up food prices and we expect this to continue in the coming months. The government’s inflation target for 2013 is 3.5% and hence inflation remains well within the government’s comfort zone and we are unlikely to see a move towards a tightening bias as long as inflation remains below 3% y/y.
U.S equity markets closed higher yesterday with banks taking the lead. In Asian trading the Nikkei got support from Abe’s stimulus plan and the continued weakening of JPY. The rise in Chinese inflation did however put a dampener on the optimism elsewhere, as investors worry that higher inflation will push Chinese policy tightening forward.
In Europe the ECB closed the door for further rate cuts (see Flash Comment: ECB meeting - no more rate cuts), 10 January 2013, which led to a re-pricing of the ECB rate outlook and sent core bond yields higher with the two-year German yield up 2bp. Peripheral spreads continued to tighten as the auction in Spain was very well received. U.S. bond yields followed the German yields higher with the two-year yield up 0.5bp and the 10-year yield up 4bp.
In the FX markets a sidelined ECB and general positive risk sentiment in the market triggered heavy euro buying yesterday and EUR/USD is back near 1.33. JPY weakened further on Abe’s announcement of fiscal stimulus, which upped expectations that the Bank of Japan will also deliver significant easing measures at its policy meeting later this month.
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