Markets Steady After EU EcoFin Meeting Failed EUR 200b Target

EU finance ministers agreed on boosting IMF resources by EUR 150b after a three-hour conference call yesterday. The joint statement said that the fund could be provided through "bilateral loans" to IMF's general resources account. Germany will be the largest contributor providing EUR 41.5b while France will provide EUR 31.4b. Italy and Spain will contribute EUR 23.5b and EUR 14.9b respectively. The three countries that are under help from the EUR/IMF bailout, Greece, Ireland and Portugal, are not required to contribute. Four non-Eurozone EU states, Czech Republic, Denmark, Poland and Sweden also agreed to contribute to the fund. However, UK decided not to commit at this point as EU said UK would "define its contribution" in early 2012 in the framework of G20. And without UK, EU should fall short of their target of EUR 200b. The next step is for the countries to take the plan back for parliamentary approvals.

Talking to European Parliament in Brussels yesterday, ECB President Draghi assured that he has "no doubt about the euro" and "the one currency is irreversible". Though, he noted that "the pressure that bond markets will be experience is very difficult if not unprecedented". He also warned that "financial market tensions are continuing to dampen economic growth" and "substantial downside risks to the economic outlook" remain. Draghi pledged to "ensure banks continue to have access to stable funding also at longer maturities". But he also emphasized that the treaty specifies ECB's remit to "ensure price stability" and "forbids monetary financing".

Richmond Fed Lacker said yesterday that "the doubling of inflation this year, despite unemployment averaging 9 percent, undercuts the hoary notion that 'slack' in the labor market can be counted on to keep inflation contained". And he argued that "inflation can accelerate despite elevated levels of unemployment." He expects growth to be at 2-2.5% next year and urged that no additional monetary stimulus is needed.

The RBA minutes for the December meeting indicated that the rate cut in the month was mainly driven by the dire situation in the Eurozone (in November, the rate cut was due to weaker-than-expected inflation). Domestic economic situation has softened but it has not weakened to an extent that a reduction in interest rate was needed. Indeed, policymakers continued to believe that growth would be close to trend in coming few years. The central bank did not give any hint of monetary policy outlook. However, given the highly uncertain global economic outlook, especially in the Eurozone, and the moderation in inflation, further easing is likely to be seen in as soon as early 2012. More in RBA Cut Rates In December As Situation In Eurozone Deteriorated Sharply.

Japan Finance Ministry will raise the foreign exchange intervention war chest by JPY 30T to prepare for acting at any time. That's the second largest increase on record. It's estimated that the Finance Ministry could raise as much as JPY 67T in the finance markets through short term debt issuance. The total amount would then be roughly 10 times Japan's trade surplus in 2010.

On the data front, Australia conference board leading indicator rose 0.6% in October, UK nationwide consumer confidence improved to 40 in November. Japan all industrial activity index rose 0.8% mom in October. German Gfk sentiment, IFO, PPI, Swiss trade balance, UK CBI reported sales will be released in European session. Canadian CPI and US new residential construction will be the main focus in US session.