Positive effects of central bank activism continued to buoy risk assets last week, while safe Government bonds did not suffer

Tom Tong21/Ιαν/2013Currency Updates

Positive effects of central bank activism continued to buoy risk assets last week, while safe Government bonds did not suffer
The positive effects of central bank activism continued to buoy risk assets last week, while safe Government bonds did not suffer. Unconventional monetary easing is turning out to be the tide that lifts all financial boats.

Generally positive economic news, particularly out of China, contributed to optimism among market participants. The euro appears to have decoupled somewhat from risk assets, and it dropped moderately during the week against most currencies save sterling, which had a difficult week, dropping against both the dollar and the common currency.


The main news of the week was the publication of inflation data for December. This came near expectations; with headline CPI printing 2.7% (unchanged from the previous month) while the core components slowed down to 2.4% from 2.6%. UK inflation has proven very sticky, and the roughly 1% differential between it and inflation rates in most other advanced economies is not expected to disappear soon.

We do not expect the Bank of England to be overly concerned with this development, among other reasons because it helps reduce the real debt burden in a highly leveraged economy without having (so far) any negative impact on the UK’s ability to fund itself at much lower rates.

Sterling had a rare week of underperforming both the US dollar and the euro, as traders started to focus on next week fourth quarter GDP release. We expect it to be flat to slight negative, and are this somewhere below consensus.


The dichotomy of the past few weeks between negative macroeconomic releases and rising peripheral sovereign bonds continued into this week. Data out of Germany and the eurozone as a whole confirmed that the European economy likely shrunk by roughly 2% QoQ saar in the last quarter of 2012. In particular, European industrial production failed to rebound from its disastrous showing of the past few months and is now tracking a near-10% decline for the quarter in annualised terms.

We believe the term «double dip recession may be too optimistic, as secular stagnation and actual contraction have become the baseline for European economic performance since the austerian ideology took over decision centres sometime in the year 2010.

The Euro continues to trade in a tight range around the 1.33 level, oblivious for the time being to the slow-motion disaster unfolding in the real economy.


The US economy appears to be weathering relatively well both the conflict over the fiscal cliff and the debt ceiling, and the fiscal drag brought about by the increase in both high-end income taxes and workers’ payroll taxes.

Retail sales rose a healthy 0.5% last December, and other high frequency readings of consumer spending are consistent with growth just north of 2% in real terms. Weekly jobless claims continue their clear downward trend, providing further support to incomes and spending.

While we expect the headline number for fourth-quarter growth to be somewhat depressed by inventory reduction, we still think that the lee volatile domestic demand number will continue to print in the 2 to 2.5% range. This is consistent with a continuation of last year’s trend: moderate growth and further progress in reducing unemployment.

We expect this to translate, at the margin, into less aggressively dovish language on the part of the Fed than markets are generally expecting, which should support the dollar during 2013.


Written by Tom Tong

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