Markets Await Earnings Season, Fed Lacker Warns Of Rising Inflation

Financial markets are relative quiet this week so far as investors are generally cautious ahead of earning sessions, as well as ECB meeting later in the week. Major US indices closed mildly lower overnight with the Dow down -0.41%, S&P 500 down -0.32%. Asian equities are mixed at the time of writing. In the currency markets, major pairs and crosses are stuck in tight range so far today with mild strength in dollar and mild weakness in yen.

Alcoa forecast demand to grow +7% in 2013, up from a +6% gain in 2012. The company's net income was USD 242M, or 21 cents/share, compared with a loss of USD 191M, or 3 cents/share the same period a year ago. Apollo, an education group, reported lower student sign-ups for the 3rd straight quarter and cut its operating profit forecast for 2013. Analysts expressed concerns that 4Q results might be disappointing overall.

In US, Richmond Fed Lacker warned again that "attempts to overstimulate real economic activity via monetary policy can instead run the risk of raising inflation: and the Fed's monetary policy stance "needs adjustment." He noted that there there are risks for Fed to fall behind the curve in 2014 and beyond. He warned that the use of 2.5% inflation forecast in the Fed's new threshold scheme risks seeing inflation pressures emerge while not "trip that inflation trigger."

It would be that "inflation expectations and our forecast lag behind actual inflation pressures." Lacker urged the Fed to shift from buying mortgage backed securities to long-term Treasury securities "as soon as possible" Also he reiterated that MBS purchase is a form of fiscal action and credit allocation and thus "disadvantages other classes or borrowers."

ECB meeting will be a major focus this week and while it's generally expected that the central bank would refrain from cutting rates this month, there are talks that it could eventually cut rates within this quarter. According to a poll by Reuters, more than a third believe ECB would cut rates to 0.50% by March. A major concern is that cut in main rate would either be accompanied by a cut in deposit rate, currently at zero, into negative territory, or narrow the spread.

ECB President Draghi has expressed that both are unpreferred options already. However, as weak eurozone economic data in Q4 suggests that recession could extend into Q1 even though it might not deepen. ECB could in the end be forced to do something to stimulate the economy despite opposition from core countries like Germany. Draghi's post ECB meeting press conference will be closely watched this week.

In Japan, it's reported that BoJ would consider additional stimulus at its January 21-22 meeting, and might even double the inflation target from 1% to 2%. Yen has been deeply sold off since the new Prime Minister Shinzo Abe's push for a 2% target. And, selling intensified as BoJ expressed it's intent to review that price goal. Also, Abe has been pushing for "bold" monetary easing to revitalize the Japanese economy and theses have been priced in the markets.

While the trend in yen in still bearish, it might take something really strong from BoJ to impressive the markets to accelerate the yen's selloff, like opened ended asset purchases, or eliminating the 0.1% interest rate floor on deposits held at BoJ by commercial banks.

On the data front, UK BRC shop price index rose 1.5% yoy in December. Australia retail sales dropped -0.1% mom in November. UK trade balance, Eurozone GDP final, German industrial production will be released in European session while Canadian housing starts will be featured in US session.