Capital Markets: "Whiff of Inflation in the Air"

From Marc to Market:

Overview: It is risky to read too much into the price action in holiday-thin markets, but inflation fears are beginning to surface. The price of January WTI is around $61, having tested $50 a barrel in Q3. The CRB Index made new highs for the year yesterday and is up almost 9% for the year. The US yield curve (2-10 year) has been steepening after being inverted for a few days in August, and now at nearly 29 bp, also is new highs for the year. The US trade deal with China risks pushing up domestic US prices. Separately, Canada reported the highest (median) core CPI in a decade in November of 2.4%. US and EMU inflation impulses were muted at the end of 2018, and early 2019, and the base effect could also lift measured inflation in the coming months. Bond markets are selling off. The US 10-year yield is in the upper end of the where it has been in H2 and is approaching the 200-day moving average just above 2.0%. Ironically, as the US yield approaches 2%, the German 10-year Bund is approaching minus 20 bp, the upper end of its H2 range. The Japanese 10-year yield has been hovering around zero, the upper end of where it has traded since January. Benchmark yields are up mostly 2-3 bp higher today, though 5-6 bp increases are being seen in Australia, Italy, and Greece. Asia Pacific equities mostly fell, with Korea, India, and Thailand resisting the pull. European indices are edging higher after slipping in the past two sessions. US shares are flat. In the foreign exchange market, the dollar is trading a heavier bias, with the Scandis and Australian dollar leading the gainers. Emerging market currencies are more divided. The South African rand, Mexican peso, and Indian rupee are nursing loss while the Russian rouble and Korean won have firmed. Gold and oil are little changed.

Asia Pacific
The Bank of Japan held policy at today's meeting as widely expected. The underlying message was one of optimism. The combination of the government's fiscal stimulus and the easing of trade uncertainty is underpinning expectations of renewed growth in the next fiscal year. Yesterday, the government projected growth in FY20 to 1.4%. This is twice the BOJ's forecast, which is likely to be revised higher early next year.

Australia reported job growth more than twice what economists forecast. The 39.9k new jobs compare to 15k the median economist expected in the Bloomberg survey and follow a revised 24.8k loss in October (initially, a 19k decline). Although the participation rate was unchanged, the unemployment rate slipped to 5.2% from 5.3%. The one less favorable aspect of the report was that the bulk of the new jobs were part-time positions. Still, the report saw expectations for a February cut (the next meeting) scaled back. Separately, New Zealand reported its economy grew by 0.7% in Q3, which was slightly ahead of (0.5%) expectations....

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