European Outlook: The Bund contract has broken the downtrend that had been in place since the end of September and is ending the year on a new uptrend after Draghi managed to inject new life with his QE extension. At the same time 2-year yields are testing new lows as the ECB drops the deposit rate floor for asset purchases. Gilt yields are also heading south again, although the 10-year yield recovered a lot of ground since the BoE removed its easing bias in November. Stock markets are set to end the year with solid gains on both sides of the channel. Today will be an early close for many centres. The calendar is relatively quiet, although Spanish HICP inflation is likely to attract some attention as this is the first of the big Eurozone countries to release preliminary December numbers and expectations are for a sharp acceleration in the headline rate, which will set the stage for the release of Eurozone numbers next week.
Overnight Update: WTI crude rallied to $54.19 from $54.05 following the EIA inventory data which showed a 600k bbl rise in crude stocks. The street had been expecting a 1.5 mln bbl decrease, though API data released on Wednesday revealed a 4.2 mln bbl increase in U.S. stocks. Gold rallied to and continues its good week on thin trading, overnight it reached $1163. The major mover was EUR bids at the close when EURUSD rallied to over 1.0650 for a three week high on very low liquidity and profit taking. .
Yesterday’s U.S. reports: revealed big but divergent surprises in the November advance indicators report that left a likely new 20-month high for the goods and services trade deficit in November of $45.8 bln, alongside surprisingly big November wholesale and retail inventory gains that translate to a big 0.7% November business inventory increase. The initial claims figures revealed a 10K drop to 265k in the fourth week of December that trimmed the 21k surge to 275k in the BLS survey week, which we still see as consistent with a tight claims trend despite holiday volatility that likely prompted the mid-month pop. Q4 GDP estimates remain at 1.5%, and expectations are for a 185k December nonfarm payroll rise.
Germany 2017- Election Jitters and Brexit Risks: The German economic recovery continues, largely driven by domestic demand and consumption. Inflation is set to continue to top the Eurozone average and the challenges for the next years will include trying to cope with a monetary policy that is too expansionary for the Eurozone’s largest economy. At the same time like for the rest of the Eurozone political risks, including the start of official Brexit talks and of course the general election in autumn will take centre stage next year amid the refugee crisis and rising support for the populist AfD.
President Obama: sanctioned Russia over email hacks by expelling 35 Russian intelligence operatives and closing two compounds. This followed and FBI/DHS report that revealed evidence of some of the electronic infrastructure and outlined the methods used to steal information. The Russians responded by stating the Obama admiration was trying to “completely ruin Russian-American relations.” This will put the new Trump administration on awkward footing and will be yet one more geopolitical risk that could destabilize the markets.
Main Macro Events Today
- Spanish HICP – Last month it came in at 0.7% and as the first of the large euro area economies to report expectations are for a rise to 0.9%.
- Chicago PMI- Here expectations are for a dip to 56.5 from the surge of 7 points in November. The October 50.6 was the weakest since May.
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