As we await the latest EU news on Greece, the market is fairly quiet after last week’s big moves higher in the euro and lower in the yen. There’s plenty to focus on in the near future, particularly from the US.
The JPY traded a bit firmer overnight as bond markets rallied and risk appetite finally cooled a bit, but the BoJ minutes revealed that two of the newer BoJ members are in favour of more aggressive monetary easing measures and voted for a more aggressive statement on reaching the 1% inflation target that the BoJ introduced way back in February.
The thinking goes that these two members will find a sympathetic ear in the shape of whoever the new governor proves to be in April when it is likely that current LDP opposition leader Shinzo Abe will be Prime Minister and looking to appoint a new BoJ head sympathetic to his aggressive views on weakening the JPY.
Otherwise, it has been a typical quiet Monday for developments as we await the outcome of the EU finance ministers’ protracted meeting on Greece and the approach that will be taken on it reaching a sustainable debt load (which is far below the “120 per cent by 2020” numbers that have been thrown around – Greece will need to see dramatic debt forgiveness if it wants to regain a sustainable footing in the context of keeping its membership in the EMU.
Looking ahead
UK Chancellor Osborne will be making a statement shortly on the BoE governor as he is likely to reveal his nomination for that position ahead of or at his December 5 “Autumn Statement” to parliament. The leading candidate is current deputy governor Paul Tucker. See Bloomberg article for more. King’s term as BoE governor will run until next June.
For the rest of this week, look out for the direction in risk appetite, whether gold holds its gains (means the game remains about relative competitive devaluation considerations above all else). But more specifically, look for the latest on the fiscal cliff negotiations. There are perhaps three possible outcomes in addition to the strong assumption we can make based on rhetoric from both sides that most of the severity of the “sequester” (spending) portion of the fiscal cliff will not be realized.
- A deal is imminent, even on the tax cut side of things, that will result in expiry of the payroll tax and portions of the Bush era tax cuts. This is the “rosy for risk, bad for the US dollar” scenario and what has been priced in during the quiet period of last week’s Thanksgiving holiday.
- A deal is delayed until the new Congress is in session – probably an extension of a decision on the order of six months. While this actually sees an avoidance of the cliff in the near term, it also drags out the uncertainty and possibly means a more aggressive Fed. It is more market-neutral to somewhat negative for risk.
- Tensions rise again and no deal is at all in place on the tax cut portion of the cliff for some time and we only see ongoing gridlock until perhaps a combination of minor changes in portions of the tax cut expiries combined with a delay on outstanding issues materializes in the 11th hour. This is the most negative likely scenario and is perhaps also an underappreciated risk.
I doubt there is a fourth scenario that would be a full fall off the tax cut expiry cliff, but let’s see. One would think that the Republicans’ have learned that their strategy of total obstructionism has failed them during this last election cycle, and they might be looking for a new way of getting their point made across over the coming 23 months until the next mid-term elections are upon us.
The other major event between now and the New Year is the FOMC meeting and Bernanke press conference on December 12, at which we should be looking for a strong hint or a clear outline of how the FOMC will treat the expiry of the second round of Operation Twist and what assets the Fed will look to buy to replace that programme. Bernanke’s speech two weeks ago failed to give us a clear picture on that matter.
Economic Data Highlights
- Italy November Consumer Confidence out at 84.8 vs. 86.3 expected and 86.2 in October
- Germany December GfK Consumer Confidence out at 5.9 vs. 6.2 expected and 6.1 in November
- US October Chicago Fed National Activity Index out at -0.56 vs. 0.00 in September
- US Dallas Fed Manufacturing Activity (1530)
- New Zealand October Trade Balance (2145)
- Japan October Corporate Service Prices Index (2350)
- Japan November Small Business Confidence (0300)