Markets Becalmed in Wait-and-See Mode

As skeleton teams return to the trading desks
in New York, the US dollar is largely
where they left it at the end last week. 
Japanese markets were open
yesterday, while UK, Australia, New Zealand, Hong Kong and Canadian markets are still closed today. The Australian and New Zealand dollars are up
about 0.2% from before the weekend. 
Sterling is trading with a downside bias after falling every session
last week.  The euro and yen are
practically unchanged.  

emerging market, the South African rand and Russian ruble are faring best
  Equity markets are narrow
mixed, but of note, bargain-hunting finally emerged to allow the Indonesian
equities to post their first advance since December 9 (the longest losing
streak since 2005.   While most markets
are quiet, we note that gold is up 0.8%, which, if sustained, would be the
largest advance in a month. 

While the dollar is little changed, bond markets are mostly softer, though Germany
appears to be experiencing mild, safe haven flows. 
Asian equities were mixed, while European equities are
   The MSCI Asia Pacific Index eked out a minor gain
(less than 0.1%), but sufficient to snap a five-session pullback. 
Although the dollar is trying to end a four-session drop against the yen, the
Topix extended its correction for a fourth session (and five of the past
six).  In contrast, the Nikkei edged higher (less than 0.1%) and broke ended its three-day

Japan reported November inflation and
employment figures. 
The key takeaway
is that although the labor market remains tight, inflation remains
elusive.  The jobless rate ticked up to the still-enviable 3.1%.  The
job-to-applicant ratio stands a 1.41.  However, the key measure of
inflation, CPI minus fresh food, remained at minus 0.4%, which is what
it has averaged this year.   Excluding both food and energy, Japan’s CPI
stood at 0.1% in November down from 0.2% in October.  The Tokyo data,
which is reported with less of a lag, gives no reason to be optimistic.  The  December headline CPI fell to zero from 0.5%,
and the core rate, which excludes fresh food, fell to minus 0.6% from minus

Moreover, the full employment is not only
failing to boost prices, but it is not boosting consumption. 
household spending slumped to minus 1.5% in November from minus 0.4% in October.  The
Bloomberg median had expected a rise to 0.1%.   Japan also reported weak
housing starts and construction orders.  Forecasts for Q4 GDP will likely be revised lower.  Japan will report industrial output and retail sales

There are three developments to note from
  First, at the very end of last week, Fitch downgraded Belgium
from AA to AA-.  It cited the high debt-to-GDP ratio for an AA rating and noted that fiscal
consolidation has been weak.  There does not appear to be much of a market
reaction.  The 10-year yield is up half a basis point, in line with the
change in French yields today.  

Second, Italy is finding that supporting Monte
Paschi may be more expensive than it may have anticipated. 
has argued that due to the deterioration in liquidity, the troubled bank needs
8.8 bln euros rather than five bln.
  Also, the Bundesbank has expressed
concerned that the new EU rules are not being
.  Italy’s bank stock index is off 0.6%, or about what it
had gained before the holiday weekend.  Italian two and 10-year yields are
half a basis point higher.  

Third, after a short disagreement over what
Greece could do given that its revenues surpassed targets and expenditures were
below targets.
  The Greek
government insisted on an extra pension payment to civil servants and a VAT
break for a few islands overwhelmed by refugees.  It appears that an
agreement was reached.   
Greece’s 10-year bond yield is off nearly 12 bp.

The US reports house prices, the Conference
Board’s measure of consumer confidence, and the Richmond Fed’s manufacturing
None are typically market-moving.  


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