– Berlusconi pledge to resign supports risk
– Chinese inflation fell to 5.5%yoy in October
– National Bank of Poland to keep policy rate on hold at 4.5%
– Bernanke’s speech today is unlikely to surprise
What to watch for today
PLN: On hold. We expect the National Bank of Poland to keep its policy rate on hold at 4.5%, in line with the market consensus forecast. Recent comments from several MPC members suggested little room for policy easing. In addition, the central bank is concerned that recent zloty weakness will feed inflation. With the central bank supporting the zloty through intervention in the FX market, we think the risk for EURPLN is skewed to the downside, particularly if we see positive policy surprises in the euro area.
SEK: Weak industrial production. The consensus forecasts that industrial production fell 0.5%mom (sa) in September. The weak German growth outlook and the below 50 PMI print in both September and October raises the risk of the Riksbank easing policy rate, in our view. The SEK rates market is currently pricing in a 50% likelihood of a December rate cut by the Riksbank and we expect this to rise unless we get a turnaround in the growth indicator and/or a moderation in inflation.
USD: Bernanke’s speech unlikely to surprise. Fed Chairman Bernanke speaks at 14:30 GMT on “Small business and entrepreneurship”. The title of the speech and the proximity to last week’s FOMC meeting would argue against expecting strong policy signals today. Markets will likely focus on any discussion of the possibility of further asset purchases, particularly after yesterday’s uncharacteristically balanced speeches from Fed hawks Plosser and Kotcherlakota, who are both voters.
What happened overnight
News that Italy’s Prime Minister Berlusconi will resign and that Lucas Papademos will lead Greece supported risk, but not FX. The S&P 500 rallied about 0.8% on the news. Most Asian equity markets are up with the Nikkei rising 0.8, Hong Kong up 1.8% and KOSPI essentially flat. JPY strength and NZD weakness have dominated G10 FX price action. USDJPY has dropped to 77.57 with no signs of official protest. AUDNZD rose to a high of 1.3039 even as AUDUSD fell from its high of 1.0398 despite better real economy data in both countries. In contrast EURUSD is essentially flat versus its New York highs of about 1.383 as is EURCHF. However, flows were very light and the tone of the market was indecision and reluctance to take position ahead of further clarity from Europe and the US budget super committee meetings.
Asian currencies are mixed. USDMYR fell to 3.113, while the INR weakened to 49.8 versus the USD in response to reports of a record trade deficit in October late yesterday (see below). Also, Moody’s cut the outlook on India’s banking system outlook to negative and likely weighed on the INR. PBoC fixed USDCNY 40pips lower to 6.3207 today. Several of the Asian currencies rallied at the open but failed to hold gains through the Asian trading session. The CNY curve has flattened significantly in response to a bout of CNY buying.
EUR: Reduction in tail risks from Greece and Italy. Greece is reportedly going to announce a new national unity government today. Italy’s Prime Minister Berlusconi said that he will resign after the 2012 budget vote next week. We see this constructively as it implies that even if there are early elections, the key elements of the pro-growth reforms would be put into law. This would reduce a key uncertainty for the market and is a more favourable backdrop for the ECB to support Italian bonds more aggressively.
AUD: Better consumer confidence and housing data. Westpac consumer confidence rose 6.3%mom to 103.4 in November, likely due to last week’s surprise RBA rate cut. The number of housing finance commitments rose 2.2%mom, driven by a 1.9% rise in investment lending. The data show that the RBA’s rate cut is working buttomorrow’s speech by RBA Assistant Governor Philip Lowe and the employment report are more important gauges on the direction of monetary policy.
CNY: Inflation softer, real economy data mixed. CPI inflation fell to 5.5%yoy in October as was widely expected. We believe that inflation has likely peaked in China but may remain structurally higher then before. In contrast, retail sales growth of 17.2%yoy in October was weaker than expectations for 17.6%yoy and growth of 17.7%yoy in September. Industrial production grew 13.2%yoy, also weaker than expected (13.4%yoy) and slower than September’s 13.8%yoy even as fixed asset investment growth surprised slightly strong at 24.9%yoy year-to-date. Given the significant sampling error in these data, we characterise them as reflecting steady, albeit slightly slower strong growth. IMF chief, Christine Lagarde, said in a speech today that China needs a stronger currency in real exchange rate terms. There was nothing new or specific about this statement which came in the context of her arguing China should work to strengthen domestic demand and de-emphasize exports as a driver of Chinese growth.
INR: Trade deficit likely rose in October. Commerce Secretary Rahul Khullar said late yesterday that India’s trade deficit widened to $19bn in October due to a collapse in export growth to 10.8%yoy from 36.4%yoy. This would push the 12-month rolling trade deficit to $107bn, but still below the $125bn peak in October 2010. The official release for the trade data is scheduled for 1 December. We see a good likelihood that Khullar’s data are based on preliminary results that may ultimately be less extreme than yesterday’s release. More constructive INR news is Bloomberg reporting that Asia’s biggest asset managers are starting debt funds to invest in India to take advantage of the high yields. This suggests potential for further bond inflows into the INR, particularly if the government increase the FII limits to buy Indian bonds.
Credit Suisse
FIXED INCOME RESEARCH & ANALYTICS