Italy Raises Funds, Market Still MIA

A favorable reception to Italy's debt sales failed to breathe fresh life into the moribund foreign exchange market.  The euro continues to trade in last Thursday's range of $1.3017-$1.3119.  It continues to trade within the range seen on Monday, when much of the world was still on Christmas break, and it was confined to $1.3035-$1.3083.   

The yen is trading higher for the fourth consecutive session.  Today the dollar traded at its lowest level against the yen since Dec 16th.  Some observers will link today's yen gains to the fact that the US Treasury's report was critical of Japan's recent intervention.  Yet the fact that the US did not participate in the intervention already had already signaled the market that the US did not support the intervention.  The US did participate in the intervention in the immediate aftermath of the earthquake. 

Japan did report a slew of poor data that featured much larger than expected declines in household spending and industrial production than expected.  Industrial output fe;ll 2.6% in Nov, three times more than the consensus expected.  The news was mitigated by the the recovery expected in Dec and Jan.  Household spending fell 1.3% in Nov, 4-times more than expected. 

Separately, deflation forces remain evident as Japan's core CPI for Nov fell 0.2% year-over-year after Oct\s 0.1% pace.   Japan's core measure excludes fresh food.  The measure excluding food and fuel fell 1.1% year-over-year.   Tokyo core prices for December for 0.3% lower than a year ago, representing slight improvement from the Nov -0.5% reading. 

Italy raised 9 bln euros in 6-month bills at half the yield that was paid at the last 6-month auction in late Nov.  The 3.25% yield compares with the 6.50% paid on Nov 25.  The bid-cover was even greater at 1.69 up from 1.47.  Italy also sold Sept 13 CTZ (zero coupon).  It raised 1.73 bln euros of a target of 1.5-2.5 bln.  Although this was the low end of the range, the yield fell sharply to 4.85% form 7.81% on Nov 25 and the bid-cover was 2.24 from 1.59.   

Italian retail accounts were thought to be keen participants.  Tomorrow's bond auctions are understood as more important.  Several issues, including a floating rate note, will be sold to raise 8.5 bln euros.   Banks have increased their deposits at the ECB to a record 425 bln euros.  Although we anticipated that some of the recent liquidity injections, including the 3-year LTRO would be deposited at the ECB, it is too early to read much into the recent increase in deposits. 

There has not been time to make new loans, there are year-end considerations, and there have not been much in the way of new sovereign supply.  Moreover, part of the argument was that the funds would be used to boost the bank's liquidity cushion, which is also an important function.