US December Retail Sales on tap

Australia's December employment report up tonight likely to show accelerating job losses. Germany unveils underwhelming stimulus package.

MAJOR HEADLINES – PREVIOUS SESSION

• New Zealand Nov. Building Permits rose 4.3% MoM after a -21.9% drop in October

• US Weekly ABC Consumer Confidence was steady at -49 vs. -48 expected

• Australia Nov. Home Loans rose 1.3% v. 1.0% expected

• Japan Dec. Machine Tool Orders fell -71.9% YoY vs. -62.1% drop in Nov.

THEMES TO WATCH – UPCOMING SESSION

Events Today:

• Germany Annual Growth Rate (0800)

• Sweden Dec. Average House Prices (0830)

• EuroZone Nov. Industrial Production (1000)

• US Dec. Import Price Index (1330)

• US Dec. Advance Retail Sales (1330)

• US Fed's Plosser to speak (1330)

• US Nov. Business Inventories (1500)

• US Weekly Crude Oil and Product Inventories (1530)

• US Fed's Stern to speak (1800)

• US Fed Beige Book (1900)

• US Treasury's Nason to speak about TARP (1900)

• Japan Nov. Machine Orders (2350)

• Japan Nov. Domestic CGPI (2350)

• Australia Dec. Employment Change and Unemployment Rate (0030)

Market Comment:

The market action yesterday broadly followed the southbound trajectory in equities, with JPY crosses leading the downside, but the USD also powering ahead with impressive gains. But the failure of the US S&P500 to break key support around the 855 area saw the USD and JPY longs heading for the exits overnight. One of the biggest movers has been AUDUSD, which swooned all the way below the 0.6600 handle yesterday before bouncing almost to 0.6800 overnight in an impressive display of volatility. That low completed a relentless slide from above 0.7100 as recently as last Thursday. EURJPY took out a trendline in the 117.75 area only to tease the market by rallying strongly from new lows to back above 119.00, as perhaps the market decided it is premature for the pair to break down ahead of the ECB meeting and would rather wait until post-meeting to test the downside further.

Helping to fuel the greenback's rally yesterday was a shock November US Trade Balance figure that registered a short fall of only a smidgen over $40 billion vs. $50 billion expected. That was the smallest monthly trade deficit in 5 years and was mostly driven by falling imports - most obviously as oil prices plummeted. In the coming months, the trade gap will fall further as lower and lower oil prices and US consumption are added into the mix, but may begin to even out as the weakness abroad also will mean declines in US exports, which were affected much later than the import side of the equation, as the US was the first major economy to weaken sharply in this global economic debacle.

The German government yesterday unveiled a new stimulus package supposedly designed to kickstart the German economy again, but the measures in the package look like a sorry collection of political pork rather than any real effort to get to the heart of the problem with the German economy: German consumers don't like to spend money and most of Germany's woes are caused by a collapse in its export markets. The question is whether any stimulus package could force a cultural change upon a population. In any case, the measures announced include infrastructure spending (very slow) and income tax cuts (not especially stimulative for demand) to a large degree and lower payroll taxes (more demand stimulative) to a lesser degree. Worst of all, the SPD slipped in a measure that calls for a minimum wage for temporary workers, which will only serve to raise the unemployment rate for the cycle. The brilliant designers of the package decided to wait until 1 July for the new rules to go into effect. Not to make a value judgment here, but could there be more contrast between the German approach and the profligate US Fed and Treasury's money fire hose? The package must now navigate the Bundestag, where it could be made even less relevant to Germany's current economic straits.

As many are increasingly pointing out in the press, the export/producer/saver countries are now feeling the worst of the global recession as their end market demand has shriveled. A measure like Japan's December Machine Tool Orders, a reasonable representative of the factors of production, showing a drop of over -70% vs. a year ago gives an idea of the pain being felt in the production and production of production sectors of these economies. This should cause tremendous concern over the state of play in China - and debate is swarming over how bad things actually are in the Middle Kingdom. Our only guess is that they are probably a lot worse than the powers that be are letting on, considering the collapse in global trade and shipping rates that are now below cost in some cases!

Today may be mostly about range trading and gunning for stops as the market tries to take out the weak hands ahead of the ECB meeting tomorrow. Our default expectation is that the ECB cuts 50 bps and signals that it is very reluctant to move on further easing, but will do so if necessary (and the market has already declared that it will be necessary). It is difficult to find a Euro-bullish outcome to tomorrow's meeting, even if we get a EUR short squeeze in the interim as the trade may be a bit crowded tactically. Also up today, we have US Advance Retail Sales for the crucial month of December and tonight the Australian employment report for December.
Considering the rate at which the global economy, especially in Asia, has shown signs of falling off a cliff in late Q4, it would seem that the Australian economy's trajectory could show signs of a sharper worsening than what we have seen to date, though employment indicators are notorious laggards. A worse than expected outcome would not come as a surprise. It's hard to believe that Australia's unemployment rate peaked out above 10% in the early 1990's - it now stands at 4.4% and actually bottomed early this year at 3.8%. A vast acceleration in this measure is unfortunately likely in the months ahead.