The minutes of the US FOMC’s December 16-17 meeting were released overnight with the language doing nothing to dispel the notion that Committee members are readying markets for a rate increase despite risks from disinflation and weak growth from abroad. On the falling crude oil price and potential slowdown in growth offshore the minutes noted that ‘while some participants had lowered their assessments of the prospects for global economic growth, several noted that the likelihood of further responses by policymakers abroad had increased. Several participants indicated that they expected slower economic growth abroad to negatively affect the U.S. economy, principally through lower net exports, but the net effect of lower oil prices on U.S. economic activity was anticipated to be positive’. On risks to the US economic outlook ‘many participants regarded the international situation as an important source of downside risks to domestic real activity and employment, particularly if declines in oil prices and the persistence of weak economic growth abroad had a substantial negative effect on global financial markets or if foreign policy responses were insufficient. However, the downside risks were seen as nearly balanced by risks to the upside. Several participants, pointing to indicators of consumer and business confidence as well as to the solid record of payroll employment gains in 2014, suggested that the real economy may end up showing more momentum than anticipated, while a few others thought that the boost to domestic spending coming from lower energy prices could turn out to be quite large’. On the outlook for inflation the committee split with a number of participants seeing ‘a risk that it could run persistently below their 2 percent objective, with some expressing concern that such an outcome could undermine the credibility of the Committee’s commitment to that objective. Some participants were worried that the recent substantial fall in energy prices could lead to a reduction in longer-term inflation expectations, while others were concerned that the decline in market-based measures of inflation compensation might reflect, in part, that such a decline had already begun. Counteracting that view ‘a couple of others noted that if the unemployment rate continued to decline quickly, wage and price inflation could rise more than generally anticipated’. Despite the uncertainty over the inflation outlook, and as communicated in Chair Janet Yellen’s press conference following the meeting, the minutes also revealed that ‘most participants thought the reference to patience indicated that the Committee was unlikely to begin the normalization process for at least the next couple of meetings’. Elaborating on this further ‘participants generally stressed the need to communicate that the timing of the first increase in the federal funds rate would depend on the incoming data and their implications for the Committee’s assessment of progress toward its objectives of maximum employment and inflation of 2 percent. With lower energy prices and the stronger dollar likely to keep inflation below target for some time, it was noted that the Committee might begin normalization at a time when core inflation was near current levels, although in that circumstance participants would want to be reasonably confident that inflation will move back toward 2 percent over time’.
US private-sector hiring accelerated in December with the ADP national employment report revealing a net increase in payrolls of 241k. The reading was higher than the upwardly-revised 227k increase seen in November and expectations for a further gain of 226k and left net payrolls growth for 2014 at 2.53m, the highest level seen since the survey began in 2001.
The US international trade deficit narrowed to the lowest level seen since December 2013 in November with a decline to $39b reported. The reading was below the $42.25b figure of October and expectations for a decline to $42b with a 2.2% drop in imports to $235.36b overshadowing a 1.0% fall in exports to $196.36b. Helping to explain the deficit reduction petroleum imports fell to just $23.1b, the lowest level seen since August 2009.
US mortgage applications surged last week with the MBA mortgage market index rising 11.1%. Both refinancing and new mortgages bounced during the week, the former by 16.0%, the latter by 4.5%, with the average 30-year mortgage rate slipping a further 3bps to 4.01%.
Eurozone consumer prices fell 0.2% in the year to December. The reading, below the 0.3% increase of November and expectations for a decline of 0.1%, marked the fastest pace of deflation seen since September 2009. A 6.3% annual contraction in energy prices was largely to blame for the headline miss with prices ex energy holding steady at 0.6% for a second-consecutive month. While not as severe as the regional gauge Italian consumer prices held steady in December with the annual rate slipping to 0.0% from 0.2% in November. Using EU methodology prices were also unchanged on month with the annual rate slipping into deflationary territory at -0.1%.
Eurozone unemployment held steady at 11.5% in November, a reading that was in line with expectations. Demonstrating the headache that currently confronts the ECB German unemployment fell to 6.5% in December, the lowest level on record, with total unemployed dropping by 27k to 2.841m. On the other side of the ledger Italian unemployment climbed to 13.4% in November, the highest level since records began in 1977, with youth unemployment soaring to 43.9% from 43.3%, also the highest level on record.
German retail sales increased by 1.0% in November. Despite following on from an upwardly-revised 2.0% expansion in October and beating expectations for no change overall, with weaker data rolling off the series the annual rate dipped to -0.8% from 2.1% seen previously.
The Day Ahead (AEDT)
The ASX 200 looks set to follow Wall Street into the black this morning with SPI futures pointing to a gain of 25pts on the open. As was the case offshore gains should be broad-based, and potentially greater than what SPI currently suggests, with financials, healthcare and consumer staples likely to do most of the heavy lifting. With the chase for yield returning the domestic building approvals data released at 11.30am, an important economic indicator when it comes to the outlook for RBA monetary policy, is also likely to be influential. Should it project weakness rather than strength it may actually be supportive of the market, particularly higher-yielding plays.
The AUDUSD maintained a familiar range overnight with the pair operating between .8034-.8090 throughout. While crude oil futures will continue to be the underlying driver of movements in the pair the domestic building approvals data released at 11.30am will also be influential today. Should we get weakness in both the headline and private home approvals figures expect the Aussie to retest buying support located below .8040. On the flipside, should the data project strength, expect the pair to squeeze higher with a test of selling pressure at .8100, and beyond that .8125 and .8150, likely.
Australian building approvals data for November will be released at 11.30am this morning. While volatile at the best of times given the 11.4% increase in October there is risk of some payback today.
Data releases this evening include jobless claims, consumer credit and Challenger layoffs series from the States, PPI and retail sales from the Eurozone, German industrial orders, Greek unemployment and Canadian new home prices. On the policy front the Bank of England announce their January monetary policy decision although no change in either the bank rate or asset purchase program is expected.
Fed speakers today include Evans, Kocherlakota and Rosengren. The first two will be active during the Asian session with the latter appearing in the early hours of tomorrow morning.