European disinflationary readings seem immovable in the near-term

Fundamental View

Last night saw the continuation of “patient” monetary policy from the Federal Open Market Committee meeting for January. This is in line with our expectations and we have seen T-Notes return higher as near-term interest rate hike forecasts have been priced out of the market. The short-term yields, a direct competitor with interest rates have pared the small gains seen over the past few days with price on the 10YR firmly above the 130 handle. We have seen and expect inflation in the US to continue to drop throughout the first half of 2015 and although Consumer Spending is up, it is not near the levels required to bring the US out of the disinflationary environment we are currently enduring. The German Bund also moved higher to make a new All-time high at 159.19. The other notable headline from yesterday was the build in Crude Oil Inventories, posting a second large figure at 8874k barrels, with last week’s posting 10071k barrels. This saw oil push lower but as the API numbers on Tuesday were an all-time record build in the inventory number, market participants were left disappointed at the “lack-lustre” DOE figure.

Today’s View

Today has seen Germany post worse than expected unemployment change figures as unemployment figures dropped by less than the expected 10k. The previous percentile reading was also revised up from 6.5% to 6.6%, allowing the Bund to remain elevated. We also saw the regional CPI figures post inline lower figures across the regions, the disinflationary readings seemingly immovable in the near-term. Ahead on the data calendar we have the Combined German Preliminary CPI readings, a reading already priced in due to this morning’s subcomponents. We have Initial Jobless claims and Continuing claims and also Pending Home Sales for December. The “Non-Seasonally adjusted” figure will post a higher reading due to many buyers closing deals ahead of Christmas but the adjusted expected reading of 0.5% should be reviewed with more weight. If the NSA posts outside of expectations, expect underlying moves in the dollar and T-Note to be the clearer trade. On the weekly employment figures we are expecting 300k to hold once again and is likely to spur dollar strength in the event of a beat of the lower expectation of 270k.

Alternative View

We continue to monitor the Greek risk situation; the lack of reaction with regards to contagion risk yesterday has given some respite to the situation but with the ATHEX down over 9% in yesterday’s trade we are still cautious with taking risk-on positions.