Highlights
Core bonds on the skids
Euro counters strong start of the US dollar
Graph of the week
Eonia strip curve: While strip curve was largely below zero after the December meeting, eonia curve shifter higher both before and after January ECB meeting.
Economic Data
Review: The Good & The Bad
US
Good News
NFIB Small Business Optimism
US small business confidence picked up unexpectedly in December. The headline index rose from 87.5 to 88.0 which was better than expected, but is still a poor performance after the strong drop in November.
Bad News
Initial jobless claims
In the week ending the 5th of January, US initial jobless claims increased further, rising from a downwardly revised 367 000 to 371 000, while an outcome of 365 000 was expected.
Trade balance
The US trade deficit widened sharply in November, from -$42.1B to -$48.7B, suggesting that net exports will post a significant drag on Q4 GDP.
EMU
Good News
Economic confidence
European Commission’s economic confidence improved for a second straight month in December. Economic confidence rose from 85.7 to 87.0, while a more limited increase was expected.
Bad News
Retail sales
Euro zone retail sales picked up only marginally in November. Retail sales rose by 0.1% M/M, the first increase in four months, but the previous figure was upwardly revised from -1.2% M/M to -0.7% M/M.
Unemployment rate
The euro area unemployment rate extended its upward trend in November, rising from 11.7% to 11.8%, a new record high.
Preview: US eco calendar heats up
US
Last week, the US eco calendar was very thin, but this week, the calendar heats up with retail sales, industrial production data, the NY Fed and Philadelphia Fed index, Michigan consumer confidence, housing starts and building permits and CPI inflation data. The confidence data will give us a first indication whether the fiscal cliff deal was able to boost sentiment among both consumers and producers, while it will also be interesting to see with the retail sales held up well in December.
In December, US retail sales are forecast to have risen for a second straight month. On a monthly basis, retail sales are expected to have increased by 0.2% M/M after the 0.3% M/M increase in November. Strength should mainly come from replacements and repairs after tropical storm Sandy, which will boost sales of building materials and vehicle sales. Gasoline station sales are expected to have dropped as prices fell during the month, while holiday sales were probably poor for the time of the year, which was partly compensated by strong online sales. Overall, we have no reasons to distance ourselves from the consensus as the 0.2% M/M increase looks fair. For retail sales excluding autos and gas we believe that the 0.4% M/M consensus might be too optimistic.
The NY Empire State manufacturing index and Philadelphia Fed index should give us a first indication whether the fiscal cliff deal was able to stem manufacturers a bit more positive. The NY Fed index is already in negative territory for five months, but is forecast to increase from -8.1 to 0 in January. We believe however that the bar might be too high and the risk is for a sixth consecutive month of contraction. The Philadelphia Fed index picked up in November, but was significantly downwardly revised last week (from 8.1 top 4.6). In January, the Philly Fed index is expected to show a slight improvement in sentiment, from 4.6 to 6.0. We believe that for the Philly Fed index, the risks are for a stronger reading after new orders improved significantly in December, while the fiscal cliff deal might remove some uncertainty.
For the consumer sentiment indicator on Friday, signals are more mixed. Michigan consumer confidence weakened sharply in December, plunging almost 10 points. For December, consensus is looking for a slight increase from 72.9 to 75.0 as the last minute fiscal cliff deal might have caused some relieve. But the increase in taxes, agreed early December might weigh on consumer sentiment. Overall we believe that any rebound should be limited in scope.
On Wednesday, the US industrial production data should indicate whether production continued to profit from the aftermath of the tropical storm. In November, production rebounded by 1.1% M/M led by a rebound in production of motor vehicles and parts. For November, the consensus is looking for more limited 0.2% M/M increase. The index of aggregate hours worked in the manufacturing sector rose by 0.5% M/M in December, which is an encouraging sign and suggests that a stronger increase is not excluded.
Finally regarding the housing market, both US housing starts and building permits are forecast to have extended their rebound in December. Housing starts fell by 3.0% M/M in November, but are expected to reverse this drop in December. The consensus is looking for an increase in starts by 3.4% M/M to 890 000. Building permits, on the contrary, look to be broadly unchanged after rising 3.7% M/M in November. The consensus is looking for a slight increase to 905 000. We have no reasons to distance ourselves from the consensus, but believe that the strong momentum in the US housing market will remain in place in 2013.
Finally, the CPI inflation data are less interesting for markets and are forecast to show a stabilization at 1.8% Y/Y. While food prices rose during the month, this will be offset by lower gasoline prices, while also prices of clothing and footwear probably fell in December due to large discounts.
EMU
In the euro zone, the eco calendar is light, especially after today’s industrial production data. The only interesting data left are the German 2012 GDP data and the final release of the December CPI inflation data.
In 2012, the German economy is forecast to have grown by 0.8% Y/Y, on a non-seasonally adjusted basis, sharply down from the 3% Y/Y growth rate in 2011. This is in line with the estimates of the Ministry of Economics and suggests that the economy contracted during the final quarter of the year. The data might give us some clues on what to expect for the Q4 GDP data, which will only be released in about one month.
According to the first estimate, euro area CPI inflation stabilized at 2.2% Y/Y in December, while the consensus was looking for a further slowdown to 2.1% Y/Y. The final release is expected to confirm this outcome and we have no reasons to distance ourselves from consensus. Lower energy prices were probably offset by higher prices for food and hotels & restaurants at the end of the year. As a result, also core inflation is forecast to have picked up in December. Core inflation is expected to have increased from 1.4% Y/Y to 1.5% Y/Y in December.
