A Few Developments Augment Holiday Mood

The US dollar is mixed.  Softer against the European complex, but firmer against the dollar bloc.  It is essentially flat against the yen.  Equity markets are advancing and the Nikkei, which gapped above the 3-year downtrend line yesterday, extended its gains by another 1%.   Spanish and Italian bond yields are lower.
   

Japanese yields continue to edge higher, with the long-end of the curve continuing to steepen gradually.   The 10-20 year spread is near a 13-year high, for example.  The BOJ's Shirakawa met with Abe briefly (20 minutes, according to press reports).  The last big event of the week is the BOJ meeting that concludes on Thursday.  

Many observers still seem to be debating the different scenarios, though a Bloomberg poll found 17 of 21 expect the BOJ expand its asset purchase program again.  However, there is some speculation that the for the BOJ to win the war is to lose the battle and that means adopting open-ended QE before it is foisted on it.  That was it can still control the process and retain some semblance of independence.  Yet another camp is arguing that the BOJ may stand pat, defending its independence, and forcing the new government to "fire the first shot".  

The dollar failed to extend yesterday's gains against the yen and a consolidative tone is threatened.   Initial support is seen near yesterday's low near JPY83.60.  Note that last week, the greenback finished near JPY83.50. 

For its part, the euro tested yesterday's high (~$1.3190), but failed to extend it, though another attempt in North America seems likely.  Sterling has extended its recent gains, but currently lacks meaningful momentum above $1.62

Some risk-taking may have been bolstered by reports suggesting some progress on US fiscal talks.  Two areas of compromise have surfaced.  The first is if taxes on high income will rise, what is the definition of high income.  Under the Bush tax cuts, it was $250k.  Republican negotiators seek to raise it to $1 mln.  Obama has offered $400k.  Both sides now, though, seem amenable to changing how cost of living adjustment for some benefits is calculated to use a chain CPI measure.  Leaving aside the technicalities, this would have the net effect of slowing the rise in benefit spending.  

Both sides have been criticized in the past by their own members for compromising too much too early.   While there has been some movement, there is no deal in hand and it still looks to got to wire, if not a bit later.  

Sweden's Riksbank delivered a 25 bp rate cut that was widely expected and the krona has ticked higher in a "typical" sell the rumor buy the fact type of activity.  Although there was no hint of a rate cut in 2013 and the central bank again warned about household debt levels, we are inclined to expect another 25 bp rate cut next year as the economy weakens and core inflation remains soft.  The Riksbank projects that after about 0.9% this year, core inflation will ease to 0.8% next year.   Norway's central bank meets tomorrow and is widely expected to stand pat.  

The minutes from the Dec 4 meeting of the Reserve Bank of Australia was released.  It appeared the decision to cut rate was a bit closer than expected and there was not much of a signal for another rate cut.   Nevertheless, we expect another 25 bp rate cut possibly in February, after the Jan 23, quarterly CPI report. 

The UK reported Nov CPI figures and they were firm with a 0.2% rise on the month and a 2.7% rate year-over-year.  The consensus expected a 2.6% year-over-year rate.  Food and housing helped lift the price of the consumer basket, while furniture and transportation held it in check.  The near-term risk is on the upside, with the utility hike likely to filter into the Dec and Jan reports.