Less Risk Aversion than Yesterday… Investors Await FOMC Statement

December 13, 2011

After difficult trading on Monday, European equities have recovered 0.8% in Germany, 0.5% in Great Britain and 0.2% in France.  Psychology got a boost from  better-than-expected data from the German ZEW Institute and Spain’s bill auction, which sold more paper than planned.

In earlier Pacific Rim trading, stocks fell by 2.3% in China, 1.9% in South Korea, 1.7% in Malaysia, 1.4% in Australia, and 1.2% in Japan.

The dollar has given back some of yesterday’s gains that were powered by safe haven inflows.  The greenback is down 0.6% against the Aussie dollar, 0.4% relative to the kiwi, 0.3% versus the euro and Swissie, 0.2% vis-a-vis the yen and loonie and and 0.1% against the yuan and sterling.  The declines pale in size to yesterday’s advances.

The yield on 10-year German bunds rose five basis points while that on Japanese JGBs slid by two bps.  Gilts are steady.

Oil and gold prices climbed 0.6% and 0.2% to $98.35 per barrel and $1671.0 per ounce.

A nine-month-long streak of deterioration in the ZEW expectations index, which measures investor sentiment toward Germany, was broken this month.  The latest reading of minus 53.8 was not as low as November’s score of minus 55.2.  The index stood at minus 48.3 in October and +5.1 last May.  The ZEW reading for current conditions dropped to 26.8 from 34.2 in November and 91.5 last May.

The ZEW Institute also looks at investor sentiment toward the whole euro area.  That expectations also rallied, recovering five points to minus 54.1.  However, current conditions weakened further to minus 44.1 in December from minus 39.8 in November and minus 31.7 in October.

Spain’s government sold EUR 4.9 billion of 12- and 18-month bills, having planned to do no more than EUR 4.25 billion of the stuff.  These auctions were successful in spite of the decision of Moody’s to place several Spanish financial institutions on review for a possible downgrade.

British inflation receded in November but no more so than anticipated.  The CPI went up 0.2% on month and 4.8% on year, down from 12-month advances of 5.0% in October and 5.2% in September.  Core CPI inflation of 3.4% was below October’s 3.5% reading but above August’s 3.0%.  Retail prices rose 0.2% from October and 5.2% from a year earlier.  Hopefully, inflation has crested.  But it remains uncomfortably high and has been such for the past five years.  Officials continue to predict a substantial decline of inflation next year.

The U.K. house price index compiled by the Royal Institute of Chartered Surveyors recorded a November reading of minus 17% after minus 24% in October.  That was a 16-month high.  The Department of Communities and Local Government released its housing market gauge, which showed a smaller price drop of 0.4% from a year earlier in October after a decline of 1.4% in the year to September.

Japan’s tertiary index of service-sector activity rose 0.6% in October, a bit more than forecast, and 0.5% from a year earlier.  The index was 0.4% stronger than the average 3Q level.

Australian housing starts dived 6.8% last quarter to a one-year low following a revised 4.1% drop in the second quarter.  Business conditions ticked up to +1 in November from minus 1 in October but was still lower than September’s reading of +2, according to the NAB measure.  Business confidence was unchanged at +2.

New Zealand food prices increased 0.2% last month and by 1.9% on year.

Hong Kong industrial output was merely 0.2% greater than a year earlier in 3Q11.  PPI inflation in the former British colony accelerated to 9.6% in the same quarter.  South Korean export prices and import prices were 5.4% and 11.8% greater than a year earlier in November. 

French consumer prices rose 0.3% on month and 2.5% on year in November.  Hungarian consumer prices advanced 0.7% and 4.3% from November 2010.  Swedish consumer prices edged up 0.2% and eased in on-year terms to a nine-month low of 2.8%.  Finnish retail sales were 5.4% higher in October than a year before, with a volume increase of 2.3%.  Wholesale turnover was 8.7% greater than in October 2010.  The Czech current account surplus narrowed 64% to CZK 1.3 billion in October but still outperformed expectations of a deficit.

The Federal Open Market Committee will unveil its latest thinking on monetary policy at 19:15 GMT today, but no Bernanke press conference is planned for afterward.  Press reports have been stressing that the policy-making committee is exploring enhanced communications.  One example of such would be to tie future policy changes to certain economic criteria.  The FOMC is not expected to initiate anything concrete just at this time.  U.S. data have for the most part been better than forecast since the last FOMC meeting, but the euro debt crisis still poses huge risks, as do U.S. plans to tighten fiscal policy.

Scheduled U.S. economic data today feature retail sales and include business inventories, the JOLTS index of hirings and job separations, the IBD/TIPP optimism index, and weekly chain store sales.  Mersch of the ECB and German Chancellor Merkel speak publicly today.

Copyright 2011, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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