Originally posted at MarctoMarket.com.
Economic data: Japan stands out with industrial production in Nov. rising 1.5%, which is the most it has raised in five months. It was a little less than expected, but the expectations for Dec. (2%) and Jan. (2.2%) are constructive. There seems to be a function of two things: stronger exports and a cyclical function with inventories falling and shipments rising. It seems to me that it is too early to expect yen depreciation to have much feed through impact.
Separately, Japan reported retail sales jumped 1.7% (year-over-year). It is the first gain since Feb. and it is twice the gain as expected. However, earlier this week Japan reported a 1.5% decline in overall household spending. The decline indicates what was gained in retail sales was more than offset elsewhere and that the consumer sector is still weak in Japan.
Equities: Good day in Asia, where the MSCI Asia-Pacific Index rose 0.3% to snap a six-day slide. Of note the Hang Seng re-opening from a long holiday weekend rose (0.8%) from a five-month low. Chinese shares that trade in HK also did well by rising 1.5%. Indonesia, which broke a nine-day slide yesterday, is building on the gains today. Foreigners had been consistent sellers previously. European shares are narrowly mixed with the Dow Jones Stoxx 600 up marginally but a higher close would be the third in a row. Materials and energy are leading the way. Note that the financials are lows as well as Italian bank shares.
Bonds: Yields are mostly softer. Of note the US-German 2-year yield is making a new extreme near 210 bp. Caution should be warranted here. The on-the-run, which is the latest 2-year bund that Germany sold is not the same as the generic yield, which is what the spreads are calculated from. The US 10-year premium is near 3.35%, which is also an extreme. Gilts are leading the decline in yields today in a significant way. We note that Italy is keeping up with Spain.
Sterling: Traded on both sides of yesterday's ranges, but held just above last week's lows. I think the drop likely reflects thinness of price action. A move toward $1.2270-$1.2280 seems likely in North America.
Euro: Initially rose to $1.0480 in Asia (last week's high ~$1.05), but was sold off and held yesterday's lows to almost the tick. It is not particularly pretty, but my sense is that the consolidation/correction remains intact. A move back to $1.0460 or so would not be surprising.
JPY: The dollar has been confined to about a third of a yen at the upper end of yesterday's ranges. Initial support is seen in the JPY107.40-50 area. The dollar has closed above JPY118 once in recently and that was December 15. In thin markets, the dollar is making higher highs and higher lows this the third session. The 10-year spread is steady around 2.50%. Note that the BOJ appeared to be somewhat less active in the long-end of its curve, which suggests that the recent stepped-up action was a result of the speed of the move possibly rather than the level.
Dollar-bloc and Scandis: Both are the strongest currencies today. As far as I can reckon there are two forces at work here. First is the thin holiday demand having exaggerated impact. Second, there does seem to be some end-of-year parking of funds in high yielders.
