Draghi putting together a compromise QE plan

Nothing could be clearer than the current economic and policy divide than between the US and Europe. As the Fed ponders rate lift-off and US consumer sentiment hits its highest level for 11 years, the ECB last week has been putting together a QE plan that will get some sort of approval from Germany.

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Nothing could be clearer than the current economic and policy divide than between the US and Europe. As the Fed ponders rate lift-off and US consumer sentiment hits its highest level for 11 years, the ECB last week has been putting together a QE plan that will get some sort of approval from Germany. According to weekend press reports, ECB President Draghi met with German Chancellor Merkel last week to present a compromise plan that would leave the responsibility and risk for buying government bonds with the national central banks. Not sure how that works with the ECB running the show, but there you have it, according to these Reuters reports.

There will no doubt be a lot of wire traffic after Thursday’s meeting about these details and such structural shortcomings, but the total QE to be announced will get prime attention, the market now looking for €1tr+ to impress markets and the likes of which had front and centre billing after last week’s SNB shock move. The Euro fell further on Friday by around another big figure and is trading in the mid 1.15s this morning ith the AUD/EUR commensurately higher.

US data was again very positive. The UoM consumer sentiment report for early January jumped from 93.6 to 98.2. Any reading approaching or above 100 is super-high. The index has averaged 85.1 since 1978. Lower gasoline prices (CPI fell another 0.4%, boosting consumer’s real incomes) and an improving US economy are doing the trick as far as US consumers are concerned, increasing the prospect that rate lift-off from around mid-year remains in prospect.

After a rocky start, European equities rallied late, while US equities also had a good session after a bumpy open, the strongest performer energy, oil and metals higher. The AUD/USD is now 0.82 at recently familiar levels.

Coming up today/ this week

It’s a partial holiday in Wellington NZ today. Second tier local data due today with the release of the monthly TD-MI CPI gauge for December a look see into next Wednesday’s December quarter CPI. December motor vehicle sales are also due. For Japan there is the final Nov industrial production report due along with department sales for Tokyo and Japan.

There is also quite a correlation between the Kiwi and Aussie CPI; so we’ll be looking at NZ CPI (Wed) as a taste of what the Aust CPI might reveal next week. NZ inflation is tipped to reveal a 0.1% fall, annual inflation down to 0.8% from 1.0%. Wed also sees the W-MI consumer sentiment for Jan. Lower petrol prices should support the feel good factor, as will have last week’s good employment data. We look for the index to regain some ground after the poor outcomes recorded through 2014. Also on Wednesday the NAB releases the Q4 Residential Property Survey, after the Q3 edition had shown a pickup in foreign buyer activity.

Tomorrow is a big data day for the Aussie markets with December Chinese activity data (retail sales, industrial production and fixed assets investment. Equally important will be Q4 GDP which is expected to slow very modestly from 7.3% to 7.2%; the slowest pace of growth in over five years.

After then, it’ll be the focus on the Thursday’s ECB QE program and this weekend’s Greek election. Weekend polling shows the anti-austerity party Syriza’s lead in the polls widening to 3.1% points from 2.6%. Weekend press has been quoting unnamed EZ officials talking of a third bailout program for Greece and extending Greek loans for up to six months, but how this plays out with Syriza remains to be seen. There have also been reported deposit outflows from the Greek banking system.

Overnight

Risk back on, equities higher: Eurostoxx 600 +1.1%, Dax +1.3%, CAC +1.3%, FTSE +0.8%. Dow +191 points to 17,512, +1.1%, S&P 500 +1.1%, Nasdaq +1.3%, VIX 20.95 -6.4%. Shanghai +1.2%, Mumbai +1.2%, Nikkei 225 +1.4% and ASX 200 +0.2%; ASX SPI futures this morning +1.5%. US bond yields: 2s at 0.48% (7), 10s at 1.84% (+12). WTI oil at $48.69 (+5.3%), Brent at $50.17 (+3.9%), Malaysian Tapis (yesterday) $49.72 (+1.5%). Gold at $1276.90/oz (+1.0%). Base metals: LME copper +1.5%, nickel +2.1%, aluminium +3.0%. Iron ore $68.6/t -0.0% Chinese steel rebar futures -1.2%. Soft commodities spot futures: wheat -0.2%, sugar -0.1%, cotton -0.4%, coffee -3.2%. Euro Dec 14 CO2 emissions at €7.22/t (0.1%).

EZ CPI (Dec F) -0.2%/-0.2% % (Prelim: -0.2%/-0.2%; E: -0.1%/-0.2%); core CPI 0.7% y/y (L: +0.8%; E: 0.8%)

US CPI (Dec) -0.4%/0.8% (L: -0.3%/1.3%; E: -0.4%/0.7%); core CPI 0.0%/1.6% (L: 0.1%/1.7%; E: 0.1%/1.7%); Industrial production (Dec) -0.1% (L: 1.3%; E: -0.1%); UoM Consumer Sentiment (Jan) 98.2 (L: 93.6; E: 94.1)

Chinese property prices (Dec), still falling, -0.3%/4.3% y/y

 

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