Inflation Readings Due As Markets Bet Further On No Stimulus Withdrawal

Markets in Asia have moved higher overnight as market participants were happier to bet on an FOMC meeting that would see no movement in stimulus. The Fed begins its 2 day meeting today with the question on everyone’s lips being: do they finally believe that the US economy is strong enough to consider reducing stimulus?

We are looking forward to the inevitable withdrawal of stimulus as it allows us to stop banging on about the will-they-won’t-they battle that influences the market. That will continue for a fair few months though in our eyes as the US economy remains just not quite good enough to be sure as we head into 2014.

The rally in risk allowed those currencies that started the week poorly to fight back yesterday. Euro pushed on better than most following another mixed bag of preliminary PMI data. French manufacturing again contracted according to the ‘flash’ measurement of the sector, falling from 48.4 to 47.1 while the services sector contracted to 47.4 from 48.0. Following the recent publication of Q3 GDP in negative territory, it seems that France will be the main issue as we head into 2014 from a macro standpoint. German manufacturing PMI rose to 54.2 in December from 52.7, while services PMI fell to 54.0 from 55.7.

The overall European measure was higher however and Euro pushed onward. The divergence does make the use of Euro-wide data very problematic; the numbers do lie in this case.

A speech by Mario Draghi that he used to prod Eurozone Finance Ministers to bring about a deal on a banking union also helped the single currency. German ZEW due at 10am could continue the drive higher for EUR assets if it confirms a story of a strong economy in Germany.

News from Australia overnight has continued the negativity around the Australian economy moving into 2014. A country that has prided itself on fiscal surpluses through the past decade will now fall into deficit, it seems, as the new government delivered its latest budget. The economy will not be able to quickly fill the hole that the fall-off in Chinese demand for raw materials has caused and spending cuts will be used to reduce the extent of lower taxes from mining operations.

Separately, the Reserve Bank of Australia released the minutes of its latest meeting. Despite the minutes emphasising that the Bank is unlikely to cut rates from current levels in the short term, the tone was very dovish and continued the recent run of downward pressure on AUD. We still maintain that a rate cut from the RBA in 2014 may take place as the slowing of the Australian economy continues and forms part of our outlook for a much lower AUD next year.

Sterling has come into the day stronger on the expectation that CPI here in the UK has not continued to decline. Last month’s reading of 2.2% was a 14 month low and with deflation and disinflation bouncing around European and US policy makers’ language in recent weeks, some recent sterling weakness could easily be attributed to these fears as well. The market is looking for CPI to remain at 2.2% when the figure is due at 09.30am. Eurozone CPI is due at 10am and we look to see whether the MoM figure remains in deflationary territory. US CPI is expected to push back above 0.0% on the month following a negative figure in October.