Attention on FOMC and Davos

January 25, 2012

The annual World Economic Forum in Davos opens today with a speech from German Chancellor Merkel.  A PSI agreement between Greece and holders of its debt still hasn’t been reached. 

The FOMC releases its policy statement at 17:30 GMT.  This will be followed by forecasts including the interest rate expectations of individual members, and Fed Chairman Bernanke’s press conference is scheduled to begin at 17:15 GMT.

The dollar strengthened overnight by 0.6% against the kiwi and euro, which once again slipped under the key $1.3000 level.  The dollar gained 0.5% relative to the Swiss franc, 0.4% versus the loonie, 0.3% against sterling and 0.1% versus the Aussie dollar.  Chinese markets remain shut.

Equities have faltered in Europe, with declines of 1.0% in Paris, 0.8% in Frankfurt, and 0.7% in London.  In the Pacific Rim, share prices climbed 1.1% in Australia and Japan, 1.5% in Singapore, and 0.5% in India, but such fell by 0.8% in Indonesia, 0.7% in Thailand, and 0.9% in The Philippines.

Commodity prices are lower.  Gold fell 0.6% to $1655.70 per ounce, while oil dropped 0.8% to $98.17 per barrel.

The yield on 10-year German bunds fell by four basis points, while that on British gilts ticked down a basis point.  JGBs were steady.

Japan posted its first calendar year customs trade deficit since 1980.  The shortfall of JPY 2.49 trillion followed surpluses of JPY 6.64 trillion in 2010 and JPY 10.80 trillion in 2007 before the Great Recession.  Exports fell by 2.7% in 2011, while imports rose 12.0%.  In December, a deficit of JPY 205 billion was recorded.  Export values and volumes were 8.0% and 6.6% lower than at the end of 2010.  The seasonally adjusted trade surplus last month widened 6.4% on month to JPY 568 billion.

Last night’s State of the Union address delivered by U.S. President Obama and the Republican response given by Indiana Governor Daniels presented diametrically opposed visions of America’s current circumstances and what government should be doing.

Australian quarterly consumer price data were released, showing no change between 3Q11 and 4Q11 and a lower on-year rate of 3.1% after 3.5%.  The deceleration was a bit greater than expected.  Both measures of core inflation were at 2.6% last quarter, which is within the Reserve Bank of Australia’s target range.  The central bank is perceived likely to reduce its 4.25% official cash rate further.  Australia’s index of leading economic indicators dipped another 0.2% in November, recording the smallest on-year advance since September 2009.

New Zealand’s manufacturing PMI improved 5.9 points to a 5-month high in December. 

The German IFO Institute provided more evidence that Euroland’s largest economy stabilized at the turn of the year.  The IFO business climate index rebounded a full point to 108.3 in January, exceeding forecasts by 1.4 points and reaching the strongest level in five months.  While current conditions slipped 0.4 points, expectations improved by 2.3 points to a six-month peak.  The greatest sectoral improvement was a 4.5-point rise in manufacturing, but retail did not share in the general trend, instead falling 6.1 points to a reading of minus 0.5.  The IFO service sector climate index rose 2.7 points to 22.3, best since last July.

Minutes from the Bank of England’s policy meeting earlier this month revealed a unanimous 9-0 vote to retain present settings.  The ECB’s injection of liquidity through a 3-year refinancing operation was applauded and credited with reducing the risk of a severe meltdown in the regional banking system.  Members were divided over whether further quantitative easing in the U.K. would be needed, and the committee expressed greater doubt that inflation would recede as much as the baseline forecast implies.  All in all, the minutes were not as predisposed to easing as the committee had seemed late in 2011.

However, British GDP fell 0.2% last quarter according to the first estimate of national income accounts, and that was a tad more than presumed.  Production dropped 1.2% following a 0.2% uptick in the third quarter, construction contracted by 0.5% versus a 0.3% gain in 3Q, and services, which had risen 0.7% in 3Q, were flat last quarter.  GDP rose only 0.8% between 4Q10 and 4Q11 and by 0.9% in calendar 2011 as a whole versus 2.1% in 2010.

British mortgage approvals rose 4.3% on month in December according to BBA figures and also surpassed analyst expectations.  The CBI’s monthly survey of industrial trends showed a 7-point improvement in January to minus 16.0%, the best level since September and identical to the January 2011 reading.

The Bank of Thailand implemented a second straight 25-basis point of the one-day repo rate to 3.0%, but officials signaled that more cuts are unlikely.

The Bank of Japan monthly economic report reiterated what was said in yesterday’s post-Policy Board statement, namely that exports and industrial production are likely to stay flat for the time being.

Consumer prices in Singapore were unchanged on month but 5.5% higher than a year earlier in December.  The average headline and core rates of inflation last year were 5.2% and 2.2%, but deceleration is projected in 2012.  Malaysian unemployment ticked a tenth of a percentage point higher to 3.1% in November.

Italian retail sales in November fell 0.3% and by a greater-than-forecast 1.8% from a year earlier. Spanish producer price inflation slowed as expected to 5.2% last month from 6.3% in November.  Retail sales in Hungary rose 0.2% on month and 1.1% on year in November.  Greece posted a EUR 1.17 billion trade shortfall in November, slightly greater than the October deficit.  The Dutch business sentiment index posted a negative 1.4 reading in January, somewhat less in the red than predicted.

Scheduled U.S. data today include the FHFA house price index and pending home sales, but the main focus of the day will be the Bernanke press conference and the broadened scope of forecasts that are being released by the central bank in an effort to expand transparency.

Copyright 2012, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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