3 Numbers to Watch: Spain CPI, US PPI, EURUSD interest rates
With the year end approaching and the meeting of the Federal Reserve Open Market Committee (FOMC) due next week, markets are adjusting to a risk of an announcement on tapering. The US data has remained robust and the uncertainties over the budget negotiations are fading. This could open the door for the Fed to announce tapering of its asset purchase programme (QE). Unsurprisingly, the US stock market has been weak over the past few days and EURUSD finally gave up some of its recent gains yesterday.
I’ve said it before, but I say it again: even though growth remains weak, job markets are weak and inflation is by no means any kind of a threat, the Fed seems willing to start tapering soon. Perhaps the Fed is worried about the approaching natural limits to QE, asset price bubbles or the inefficiency of QE in helping the real economy. That changes the reaction function of the Fed — it is not looking for excuses to continue QE, instead it is looking for excuses to taper. Central banker speeches today include Benoît Cœuré (09:45 GMT) and Peter Praet (11:15 GMT) from the European Central Bank (ECB). Note that the Fed is in a “black out period” ahead of its meeting next week.
Are Fed taper thoughts ruled by asset-bubble fears or QE limits and inefficiency? Pic: Berit Ullman
Spain November Consumer Price Index (08:00 GMT): The November flash consumer price indices (CPI) for the euro area and Spain have already been published, and both of them showed a small increase, after falling for several months in a row. Spain’s CPI already fell below the dreaded zero, being negative 0.1 percent in October. While the latest estimate is expected to keep the CPI above the zero level, another flirt with negative levels would make for a nasty headline and sour the mood regarding Europe’s slow, almost non-existent recovery. Spain’s banking system is currently the euro area’s weakest link, and not only because of its large size. A nice, low number with a whiff of debt deflation would be just what is needed to push the ECB into action in early 2014.
Source: Saxo Bank
US November Producer Price Index (13:30 GMT): A zero reading is expected for November, with a small increase of 0.1 percent for the core index. This would leave the annual rate of change of finished goods prices near zero, and the core finished goods price change to about 1.5 percent. The rate of change has been declining since beginning of 2012, but looks like it is stabilising now. Even though the PPI might have found a bottom, there are no signs of a trend change yet. The consumer price index will be released next Tuesday, conveniently for the Fed to decide if tapering is warranted. The data release will be posted here.
Source: Saxo Bank
EURUSD and the 2-year interest rate differential: During the past couple of years of the euro crisis, the interest rate differential between the two-year interest rate on the euro and the dollar has moved hand in hand with the EURUSD exchange rate. This is related to the carry trade, or the tendency of a currency with a higher interest rate to rise in value against a currency with a lower interest rate. The callout boxes on the chart show the interest rate premium that one would have earned from being long the USD. Note that the relative peaks in the EURUSD have coincided with a low USD premium, and the EURUSD troughs have seen the USD interest premium at a high level. For another chart, see this blog article.
Source: Saxo Trader
Currently, the USD premium is very low, which has driven EURUSD higher. This is a reflection of the ECB’s reluctance or inability to easy its monetary policy further. But, after the year is over, a snapshot of the banks’ balance sheets is made for the coming stress tests and the ECB can again consider easing, things could change quickly. The December flash consumer price index will be released on January 7, and the next ECB meeting with a press conferece will be held on January 9.
Source: Saxo Trader
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