Investors Turned Cautious On Fiscal Cliff

Now that Greece is temporarily off investors' mind, focus has turned back to the $600b fiscal cliff in US. US president Obama and political leaders have just a month to finish the negotiation before the so called Bush cuts expire. There were reports that the Democrats are still insistent on raising taxes for the wealthiest Americans but softened the stance on savings to healthcare programs.

Meanwhile, Republicans are still pushing to extend the low tax rates for wealthy people but are willing to consider new revenue increases. But so far, little progress was made and markets see no clarity on the ultimate solution yet. Indeed, Senate Democratic leader Harry Reid expressed his disappointment that "little progress was made and urged that they "only have a couple weeks to get something done."

The OECD warned yesterday that "if the fiscal cliff is not avoided, a large negative shock could bring the U.S. and the global economy into recession." And there would be a "significant drop in activity in 2013." Also, OECD said that "reducing the large federal budget deficit is necessary to restore fiscal sustainability, but this should be done gradually and in the context of a well-identified medium-term consolidation plan." It said that "pace of consolidation should be gradual so as not to derail the already weak recovery."

Chicago Fed Evans said that the 7% threshold for unemployment rate is "too conservative." And he urged that Fed should keep rates near zero until unemployment rate falls below 6.5%. Meanwhile, Evans noted that the 3% inflation threshold could make "many people anxious" and Fed might use 2.5% as threshold instead. Evans also said that Fed has the "ability to go even further in reassuring financial markets and the general public that policy will stay appropriately accommodative and that such steps would provide the stimulus to growth."

Dallas Fed Fisher said that the Fed should announce a "limit" on the acquisition of treasuries and mortgage-backed securities, up to a point where the balance sheet reach that level. And he said it's his preference to "do it sooner than later, perhaps at the next meeting." He warned that there is "no such thing as QE infinity" and that will "gets you into trouble." Also, he expressed that he was "not in favor of operation twist from the beginning." Fisher also said that Fed should announce an employment target. but that could be more difficult as "monetary policy is not as much of a controlling variable for employment as it is for price stability."

On the data front, eurozone M3 is expected to rise 2.8% yoy in October. German CPI is expected to be unchanged at 2.0% yoy in November. US new home sales is expected to drop slightly to 387k in October. The US will also release the Beige Book economic report.