Markets Remain Unhinged

Whatever order there was in the global capital markets has broken down. They did not stabilize in Asia, but there is an attempt underway in Europe. Asian shares were mostly lower, with the MSCI Asia-Pacific Index off more 1.1%, though China's Shanghai Composite recouped much of yesterday's loss rising almost 3% today. European stocks are higher. The Dow Jones STOXX 600 is up about 0.5% near midday in London.

Interest rates mostly fell in Asia-Pacific catching up with yesterday's moves in North America. In Europe, peripheral bond yields are higher, and the heightened political uncertainty in Greece continues to push yields higher. Oil prices are around $1 lower today. For its part, the US dollar is consolidating yesterday's losses. The dollar is well within yesterday's broad range against the yen, but conditions remain choppy. The greenback was capped in front of JPY120. Support was seen in Asia near JPY118.70. The euro has been back and forth in about a third of a cent range below $1.24.

Two key events this week remain ahead of the market. The ECB's second TLTRO and US retail sales are both tomorrow. We look at these two events to put the dollar on surer footing again. A low take-down of the TLTRO would increase speculation of a sovereign bond buying program, while a stronger participation would not exclude it. At the same time, the strength of US consumption, without much use of credit cards, when allowances are made for the drop in energy prices, should underpin speculation that the Federal Reserve will drop or dilute the "considerable period" forward guidance.

In addition, the Reserve Bank of New Zealand meeting results will be announced later today. Norway's central bank meets tomorrow. Earlier today Norway reported a tick down in CPI as expected to 2.4% in November from 2.5%. The core rate eased to 1.9% from 2.0%. Norges Bank is concerned about the non-oil economy. The market has moved to discount a good part of a rate cut in the first part of 2015. For its part, the RBNZ has already toned down its signals of additional rate hikes in its mini-tightening cycle.

There are three economic reports of note today, besides Norway's inflation. First, China's CPI slipped to a five-year low of 1.4% in November. Food prices eased to 2.3% from 2.5% and non-food prices are up 1.0% from 2.0% in October. The deflation in producer prices accelerated to -2.7% from -2.2%. The PBOC continued to fix the yuan stronger. In recent days, this has not prevented the market from selling off the yuan. However, today, the yuan finished higher for a third day of relatively wide ranges.

Second, France disappointed with a 0.8% decline in October industrial production. The Bloomberg consensus called for a 0.2% increase. Manufacturing fell by 0.2%, but the September series was cut from a 0.6% gain to 0.3%. The French economy grew by 0.3% in Q3, outpacing the slowing German locomotive, but it is hard to be optimistic. France also announced a revision to Q3 payrolls. They fell by 0.3% rather than by 0.2%. They have fallen in two of the last three quarters. Payrolls have fallen in seven of the past ten quarters and were flat in the other three. The contours of the EMU’s problems are in part shaped by this persistent under-performance of Spain.

Third, the UK reported October trade figures. The UK reported a GBP2.024 bln trade deficit. It was nearly 20% smaller than expected, and is the smallest shortfall since March. The UK runs a large deficit in goods (~GBP9.6 bln). It runs a large, but not as large, surplus on services (~GBP7.6 bln).

Sterling is flat on the day. It has largely traded in a quarter cent range on either side of $1.5675. For the better part of the past two week, sterling has flirted with the 20-day moving average, but has failed to closed above it. It is found at the mid-point of today’s range.

The only feature in the North American session today is the EIA weekly estimate of US oil and gas inventories and refinery utilization. Earlier API reported a 4.4 mln barrel build in crude stocks and a smaller build in products. EIA is expected to report a small fall in crude, but a2.5 mln rise in gasoline stocks.