European Outlook: Asian stock markets were mixed overnight, after U.S. and European shares closed in the red Thursday. Japan and mainland China bourses managed to move higher (Chinese GDP beat expectations at 6.8%), but investors are cautious ahead of the inauguration of President elect Donald Trump. Bund futures managed to move up from lows yesterday, after Draghi re-affirmed the central bank’s commitment to further QE and kept the easing bias in place, despite the jump in inflation, but yields still moved higher and the DAX closed in negative territory yesterday. Gilts and FTSE 100 underperformed. Today’s European calendar is pretty quiet, with only German PPI at the start of the session and U.K. retail sales, which will leave the focus firmly on the U.S.
German PPI inflation jumped to 1.0% y/y in December from 0.1% y/y in the previous month. Not a total surprise considering the sharp acceleration in import price inflation previously and the pick up in HICP that month. Still, the numbers serve to highlight that the rebound in inflation is well and truly underway, even if producer prices remain the main driving factor so far. Indeed, the breakdown showed that energy prices were up 0.2% y/y, after falling -1.7% in the previous month, while non-durable goods prices jumped 2.1% y/y, after 1.5% y/y in November. With growth continuing strong, however, and the labour market looking very tight, while house price inflation is also picking up sharply, the risk of second round inflation effects are rising at least in Germany, although for now that doesn’t seem to impress Draghi too much, who yesterday confirmed the ECB expansionary course for the year.
FX Update: The dollar has settled moderately lower, by about 0.2% versus the other majors, as markets brace for Trump’s inauguration later today, hungry for further detail on his plans for fiscal and trade policies. USD-JPY has ebbed back under 115.00 after rallying strongly over the previous two days. Resistance is marked at 115.31, which marks the present situation of the 50-day moving average. The 20-day average is at 115.65. EURUSD has recouped to the upper 1.06s, about a big figure up on yesterday’s low at 1.0589. Cable has settled around 1.2350, also about a big figure higher relative to yesterday’s low while remaining below the week’s high at 1.2616 and the 50-day moving average, at 1.2400.
BOC: Fed Chair Yellen: She was less hawkish yesterday and toned down her earlier policy stance. “Gradual monetary adjustments were prudent”, although she warned against letting the economy run hot. Yet on Wednesday she had cautioned that waiting too long to raise rates could lead to “too much inflation, financial instability, or both,” amid comments by other Fed officials that also favoured faster hikes.
Main Macro Events Today
- UK Retail Sales – Expectations are for a YoY to increase to 7.3% with a flat December at 0.2%.
- Canada CPI – Expectations are for unchanged (0.0%) in December versus November, contrasting with what is usually a sizable pull-back in this not seasonally adjusted index during December. Our projection for the steady reading on December month comparable CPI is due to the collision of the typical seasonal decline with a hefty increase in gasoline prices. Total CPI is seen accelerating to a 1.7% y/y pace in December from 1.2% in November.
- President Trump Speech – 14:00 GMT – Expect the unexpected.
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