European Outlook: Asian stock markets were narrowly mixed, with Japan outperforming (closed up 0.5% at 19,250) as the Yen fell ahead of the FOMC announcement. The ASX closed down, and Chinese bourses managed to claw back some of yesterday’s losses, but the Hang Seng is also slightly in the red and funding concerns remain. A pick up in China retail sales and industrial production may indicate that there is still momentum in the economy, but pressure on Hong Kong’s money markets continues to build as funding costs rise to the highest level since 2009 as the Fed readies for a rate hike. And the squeeze has started to spill over into markets. U.S. and U.K. stock futures are moving higher though, and the FTSE 100 could claw back some of yesterday’s losses at the open. Oil prices have fallen back from yesterday’s highs and the front end WTI future is trading at USD 52.63, which could help bond futures to win back some lost ground and help yields to come off highs. The European calendar has German ZEW investor confidence and a host of December inflation data, with the final release from Germany at the start of the session, followed by inflation numbers from Sweden, the U.K. Spain and finally Portugal.
China data beats: Chinese Retail Sales were particularly strong and came in at 10.8% y/y well ahead of expectations at 10.2%. Industrial Production also beat expectations at 6.2% y/y (6.1%) expected. Both sets of figures suggest a much smoother end to 2016 for the Chinese economy than the first six months. Private investment remains weak, and government stimulus continues to support the economy. The housing market (a main driver of the economy this year and many view as overheating) is showing signs of cooling and therefore slowing potential growth next year.
German final Nov HICP was confirmed at 0.7% y/y, as expected, with the national rate confirmed at 0.8% y/y. both unchanged from the previous month. The uptrend in annual price declines for energy products was halted in November and prevented a further rise in the headline rate. Prices for household energy dropped -2.9% y/y, versus a decline of -2.3% y/y in the previous month, as declines in prices for gas and heating oil accelerated again. Petrol prices dropped -2.2% y/y, after rising 0.4% y/y in November and excluding household energy and petrol, the annual rate would have risen to 1.2% y/y from 1.1% y/y in the previous month. Clearly there are no signs of deflation risks and with rates excluding energy also far below the ECB’s upper limit for price stability, the numbers do seem to back the ECB’s argument that further stimulus is needed, despite gradually improving economic conditions.
FX Update: The dollar majors have been treading a narrow path. USDJPY has in the lower 115.0s after yesterday clocking a 10-month peak at 116.12, and EURUSD has settled in the low-to-mid 1.06s. Stronger than expected industrial production and retail sales data out of China had limited market impact, and directional ambition was largely absent during Tokyo trading today in forex markets. Wall Street closed mixed, off record highs, and the tone in Asia was generally negative until a PM-session bounce. The oil price rally has also come to pause, and market participants the world over are winding down into tomorrow’s Fed announcement and updated economic projections. A 25 bp rate hike at tomorrow’s announcement is all but certain, while there are no expectations for any major changes to the guidance of gradual tightening.
Main Macro Events Today
German ZEW Preview – It is expected to improve on ECB stimulus. A slight rise in German ZEW investor confidence to 14.3 from 13.8 in November after the ECB extended its stimulus package and confirmed that it will remain in the market at the very least until the end of next year and likely into 2018. Some disappointment over the scaled back monthly purchase volumes and the fact that Draghi didn’t opt for the more controversial measures, such as a foray into stock markets, or purchases of bank bonds, together with concerns about the rise of protectionist forces on the world stage may have limited the pick up in confidence, but the strong orders numbers may also go some way to underpin sentiment. As the ECB has effectively set out the policy parameters for next year already data releases at the moment will have less impact than usually, however.