There’s a clear trend developing in global equity markets where expectations for monetary stimulus in Europe (ex-Switzerland of course!) are driving stocks higher whilst the prospect, or possibility, of Fed tightening combined with worries over corporate earnings are depressing US share values. Every North American market has seen year-to-date losses – the DJIA is down another 0.42% today – whilst France and Germany are both up over 4% since January 1st.

We mentioned here Tuesday that a 2½% drop in crude oil prices on the day would struggle to make headlines and whilst WTI crude is down 4½% today at just $46.55 per barrel, it still barely features in the overnight news. The challenge for investors is to decide whether the initial negative impact on inflation is more important than the second-round impact on consumption and activity in terms of monetary policymaking. It’s a tough call, but price action in fixed income markets suggests the inflation impact may be more important to those at the top of the Fed who set the terms of its internal debate.

In foreign exchange, the USD has found its mojo once more with the DXY index back on a 93 big figure and within a quarter of a percent of its 10½ year high reached on Monday. Whilst the IMF’s changes to its economic forecasts should have surprised no-one, the last 18 hours have seen a swathe of media reports highlighting divergent performance across the major economies with the US revised upwards, and the metaphorical red pen taken to China, Japan and Europe.

The New Zealand Dollar sits at the bottom of the pile as markets await Q4 CPI data this morning. Consensus is for an unchanged quarterly reading , taking the annual rate of inflation down to just 0.9%; below the RBNZ’s 1-3% medium-term inflation target. NZD/USD at 0.7665 is barely half a cent above the year’s low (0.7605) whilst the AUD/NZD cross looks in very good technical shape at 1.0650. Cancellation notices are being sent out for the parity party.

Newswires and banks are running user and client surveys of the amount of sovereign QE likely to be announced by ECB President Draghi on Thursday. Expectations centre on 650-700bn euro but we’d note that apart from the initial algo-dominated reaction to the number, it will be important to look at the timetable for implementation and whether it involves potential ‘burden-sharing’ whereby the ECB undertakes the purchases and the liability for any losses falls jointly and severally on all National Central Banks in line with their ‘capital key’ or whether the programme is devolved to each nation state. Big, quick and ECB-driven will be the combination most likely to push both the euro and bond yields lower. After all, the concept of a Monetary Union surely implies some degree of mutual support, however unwelcome this may be to German voters, politicians and Central Bankers.

Coming Up

The US residential property market is very much in focus this week. Today a 1.2% increase in housing starts is forecast to take the level up to 1040k(saar); just shy of July’s 1097k peak and still a very healthy number almost double the rate seen as recently as 2011. Building permits are expected little changed around 1055k. Thursday brings the FHFA house price index which is expected to rise 0.3% m/m in November after October’s +0.6% increase, whilst on Friday the market expects a 2.4% m/m increase in existing home sales to an annual pace of 5.05m.

In the UK, unemployment is forecast to fall one-tenth to 5.9% with average earnings edging up to 1.7% y/y; comfortably but belatedly above the annual rate of CPI. After almost 5 years of negative real income growth, hopes are rising that households are finally catching a break and will be in a better position to support economic recovery.

The Bank of Japan will release its monetary policy statement today and the Bank of Canada will surely announce rates have been left unchanged at 1.0%.

Australian New Home Sales on Thursday are the only numbers of any note for the rest of this week.

Overnight

On global stock markets, the S&P 500 was +0.00%. Bond markets saw US 10-years -3.51bp to 1.80%. On commodity markets, Brent crude oil -1.50% to $48.11, gold was +1.3% to $1,293, iron ore +0.1% to $68.16.

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