Mixed China Inflation Data Leaves the Path

All eyes were on China’s CPI and PPI data for December during the Asian session, but in the end the reports provided little direction for markets. CPI was a marginal disappointment, coming in at 4.1 percent y/y compared to a 4.0 percent consensus but still edging lower from November’s 4.2 percent. The breakdown showed non-food inflation rising 1.9 percent y/y but food inflation still high at 9.1 percent y/y. PPI showed a more positive improvement with at 1.7 percent y/y print (1.8 percent forecasts and 2.7 percent in November). The initial reaction was to push AUD down a few ticks and mark risk markets lower as the data was unclear whether it would ensure further easing measures from the Chinese authorities but those losses were soon recovered.
 
Any kind of positive news appears to be having less and less impact on the EUR as the single currency slid to fresh 2012 lows versus the greenback on the back of downgrade rumours and downbeat macro comments. Yesterday's comments from Fitch that France’s AAA rating was safe for this year had little impact but today’s rumours of further French downgrades gave the green light for further EUR losses. In addition, Europe’s three leading forecasting organisations – IFO, INSEE and INSTAT – all foresaw the Eurozone tipping into mild recession already though the EU’s Von Rompuy was less pessimistic suggesting the EU would enter a period of stagnation but tried to paint a rosier outlook citing the trade benefits of a weaker EUR (hasn’t noticeably helped the UK recently though!).

Meanwhile Fitch warned that the European Central Bank needs to take a more active role to avoid a EUR collapse, adding that the debt crisis was “clearly systemic”. Headlines also emerged that an EU Parliament group may object to the new draft of the EU fiscal treaty. Thisdid not help sentiment either. Risk rallied off the lows following an article in Germany’s Handelsblatt that the US may add to IMF resources to help the EU situation.

It was interesting to note that the doom and gloom surrounding the EUR increased as bond markets improved. The German bond auction saw record demand (safe-haven, no doubt) which in turn helped Spanish and Italian yields to retreat. That barometer of EUR stress appears to have been forgotten for the time-being.

The Federal Reserve’s Beige Book had nothing exciting for markets – simply reiterating that growth was “modest to moderate”. Consumer spending picked up strongly for the holidays and manufacturing maintained its expansion. However, it was noted that permanent hiring had been limited. New York and Chicago were the only two districts to report an explicit pick-up in growth.