The last piece of interesting US data

Market Movers

• Main event in Scandies will be the Riksbank meeting where a rate cut cannot be ruled out, see Scandi Markets.

• Otherwise the key market drivers continue to be developments in the oil market, the stress in US high yield and the Fed meeting tomorrow.

• The last piece of interesting US data ahead of the Fed decision will be released today with the November US inflation numbers. Core inflation is the number to watch and it is expected to rise 0.2% m/m. This will take the annual core inflation rate to 2.0% y/y from 1.9% y/y. The US also releases the Empire manufacturing survey as well as the NAHB housing survey.

• UK inflation for November is due for release and we look for an increase to 0.1% y/y (in line with consensus) from -0.1% y/y in October boosted by all four major components (services, non-energy industrial goods, energy and foods). We estimate core inflation has increased from 1.1% y/y in October to 1.3% y/y (consensus 1.2% y/y) in November.

• We expect German ZEW expectations for December to increase modestly signalling further improvement in the German business cycle following the recent soft patch.

Selected Market News

The oil price fell further yesterday to a new low before rebounding slightly again in the afternoon. The declining trend is still in place, though, and it is too early to call the bottom. Bloomberg reported yesterday that hedge funds are boosting bearish bets on oil contributing to the push lower. Risk sentiment recovered together with the oil price and US stocks as well as bond yields finished the day higher.

Despite the slight rebound in oil prices, US high yield remained under pressure with spreads widening to new highs. The stress in the high yield market is a big concern as liquidity is very poor leaving the market vulnerable if outflows from retail investors intensify. The combination of lower stock markets and higher credit spreads has led to a sharp tightening of US financial conditions lately – something that will likely worry the Fed.

Interestingly, EUR/USD moved higher yesterday alongside a decent move up in US 2- year yields suggesting that the relative yield spread to the euro area is having less of an impact currently. As we have highlighted, the relative yield spread loses its power to drive the exchange rates when positioning is stretched as is the case currently with investors being heavily long the USD and short EUR.

In China the CNY has weakened further against the USD after China on Friday highlighted that the CNY is managed against a basket of currencies and not just the USD. USD/CNY is trading at the highest level since summer 2011 at 6.465.

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