Eurozone Inflation Issues Remain Front And Centre

The lack of inflation remains an issue in the Eurozone with the most recent readings further pressurising the ECB into action to stimulate both growth and prices. Yesterday’s Eurozone wide inflation measure matched expectations at 0.8%, however, the core CPI – without volatile fuel and food prices – fell to 0.7%, the lowest on record. When the falls were an energy led issue, policymakers may have been able to ignore it, but that time is no longer available. The issue that surrounds this, however, is the ECB’s already low expectations. They’ve set themselves expectations of CPI and growth of around 1% for the next year and so it may take a really poor undershoot of either or both to cause the ECB to pull its finger out. The next meeting is tomorrow and no policy movement is expected.

The main market story yesterday was the movement in Irish debt markets following a syndicated deal to sell EUR3.5bn of debt; the country’s first sale since entering a bailout plan 2 years ago. Orders totalled over EUR13bn, however, as traders wanted to get their hands on the paper following some encouraging economic signs in recent months from the country and the emergence from that bailout programme in December. Yields on Irish 10yr debt are 3.53%; below that of Spain (3.812%) and Italy (3.88%) who avoided bailouts, and very close on the UK’s (2.950%) and US’s (2.959%).

Herein lies the issue with bond yields; Ireland still sits with no currency sovereignty, a recessionary economy & crippling debt. I had hoped the Irish authorities would fill the full book and go for a beer having signed off a load of the country’s funding needs for the year. They instead took EUR3.75bn and the euro was unaffected. As the inflation picture in the Eurozone continues to look flat we will hear a lot more about peripheral bond yields falling. God forbid the newsflow if and when UK or US debt yields rise above those of the periphery…

Yesterday was once again characterised by good news from the United States in the lead-up to the latest round of Fed minutes later today. A huge fall in oil imports into the US brought the country’s trade balance down by 12.9% in November as the benefits of advances in domestic production, in particular the use of shale oil and gas industries, shone through. Exports were also higher with industrial chemicals and aircraft the main leaders; another sign of an increasing global growth appetite. This will have a strong positive impact on US GDP in Q4 with estimates around the 0.7-0.8% level as a result.

The Fed minutes tonight are unlikely to show us too much in our opinion; a lot may have been given away by Bernanke at the press conference on Dec 18th following the Federal Reserve’s decision to taper its asset purchase programme by $10bn starting this month. There is the obvious possibility for a dovish USD surprise – the Fed will want to emphasise that, in its eyes, tapering is not tightening of monetary policy and rates are staying very low for a lot longer. The minutes are out at 7pm GMT.

CAD remains wounded and has fallen to 3yr lows overnight against its US counterpart. Inflation is once again one of the issues, with constant undershoots prompting fears of rate cuts soon, while the Canadian Ivey PMI fell to the lowest since May 2009.

In the run-up to Friday’s payrolls announcement we get ADP jobs data at 13.15 GMT with the market looking for another figure above 200,000. This will be the first chance to see if any bad weather in December affected hiring and firing in the US. We also get European unemployment at 10am which is expected to remain at 12.1%, close to record highs.