Germany Surprises, Euro Ticks Up

The US dollar has begun the holiday-shortened week on a firm note, but the stronger than expected German IFO report helped steady the euro near $1.2400. Although Japanese markets were closed earlier today, the dollar rebounded toward JPY118.40, as participants recognize official jawboning as more about the pace of the yen's decline than the level.

The German flash PMI was disappointing, but the ZEW survey was considerable better. The German IFO followed the ZEW lead, not the PMI. The IFO improved for the first time since April.

The measure of the business climate rose to 104.7 from 103.2. The market had expected a decline. The assessment of current conditions rose to 110. from 108.4. The consensus was for 108. The expectations component rose to 99.7 from 98.3. The consensus had called for an increase to 98.5. Recall that in Q3, the fastest growing eurozone members were Greece and Spain. German nudged up by 0.1% after contracting by 0.1% in Q2.

The focus in the euro area is squarely on next week's ECB meeting. Some investors believe that last week's comments by Draghi point to an announcement on sovereign bond purchases. Peripheral bonds have rallied, new record lows in the Spanish and Italian benchmark 10-year yields. The short-end of the coupon curve (2-year bonds) have also rallied, but at 0.44% and 0.33% Italian and Spanish yields remain above record lows (0.23% and 0.14% respectively). Core bond yields are a 1-2 bp firmer.

European shares are building on the surge seen at the end of last week. The Dow Jones STOXX 600 is about 0.35% higher near midday in London, lifted by the nearly 1% gain among the financials. Before the weekend, the benchmark was up a little more than 2%. Now it is at two-month highs.

Meanwhile, Chinese investors got to respond to late last week's unexpected rate cut. The Shanghai Composite rose 1.9%, while Chinese shares that trade in Hong Kong rose the most in a year (3.8%). Financials, especially real estate companies and securities houses, and the material sector led the way. There was nearly record volume in Shanghai. Meanwhile, through the HK-link, Chinese investors from the mainland appeared to have been net sellers of HK shares today, based on preliminary data. The HK take-up of Shanghai shares reached the daily limit on only the first day of the launch last week.

Data from the Swiss National Bank suggests that it likely intervened last week. There were rumors of such in the market. The evidence is the increase in sight deposits. They rose to by about CHF2.7 bln to CHF370.8 bln in the week ending November 21. It appears to be the largest increase in sight deposits in about two years.

Oil prices are a bit firmer today amid reports that Iran may propose a substantial (1 mln barrel) cut in OPEC's output target at the November 27 meeting. The push below $80 a barrel for Brent apparently is spurring the talk of action. A Bloomberg survey found its respondents were evenly divided between those expecting a cut and those who do not. We suspect a small cut to bring output to the 30 mln barrel a day target, which would be around 250k barrels is about the most thaat can be reasonably expected. Separately, but related, nuclear negotiations with Iran look to have insufficient progress for an agreement. An extension may be announced shortly.

The North American session features the Markit preliminary PMI readings, but barring a big surprise, it's unlikely this will have much impact. The market prefers the ISM reports, which have a longer history. The Dallas Fed manufacturing index for November is also of passing interest. Of note, Dallas Fed president Fisher intimated that the divergence of opinion at the Federal Reserve had narrowed. He was quoted in the Financial Times saying," Right now it's really a question of when [to begin to raise rates]. Even I wouldn't advocate moving today."

The first thing in Tokyo early Tuesday will be the Cabinet Office monthly economic report for November. It will most likely reflect the dismal Q3 GDP report. In addition, the minutes from the controversial BOJ meeting on October 31 will be released. Recall that the BOJ decision to boost QQE was reach by a 5-4 vote. While there is much more interest in the divergence of opinion at the ECB, the fact of the matter is that in these unprecedented times, nearly all major central banks have seen dissents of various kinds. However, the Bundesbank's willingness to be a party to a lawsuit against majority decisions at the ECB clearly stands out.