Awaiting Fresh Cues, the Greenback Consolidates Gains

Amid light news, the US dollar’s recent gains have pared slightly. Attention turns to the US, were several Fed officials speak, October housing starts/permits will be released, and then later in the session, traders will peruse the minutes from last month's FOMC meeting.

The euro held Tuesday's low near $1.0630, and short-covering lifted the single currency to almost $1.07 before the bears showed their hand. Similarly, after the JPY123.50 level was tested, the dollar pushed back, but the quarter yen range is among the narrowest session ranges. Sterling did not keep pace with the euro, but it did briefly trade above yesterday's high to reach almost $.15250. Comments from the BOE's Broadbent, who, by talking about the need to look past near-term cost shocks, was a bit more hawkish than somewhat dovish reputation.

Although the Nikkei posted a small gain, most stock markets are lower today after the S&P 500 failed to sustain its gains yesterday. The S&P 500 reversed after hitting the 50% retracement objective of the slide since the November 4 high near 2114.60. While it successfully closed the gap created by last Friday's lower opening, last Thursday's gap remains unfilled. The gap is found 2044.64 and 2045.66.

Three of the four Fed officials that speak today are known quantities. Barring a significant surprise, Dudley, Lockhart (voting members) and Mester (non-voter) are inclined to support a hike next month. The three are on a panel discussing the payments system, and may not address the state of the economy or monetary policy. The new Dallas Fed President is less familiar to the markets, and he speaks at midday.

The FOMC minutes are somewhat dated, but may still offer insight into how the Fed is thinking about the pace of tightening. Recall that the September dot-plots suggested that the majority see a four rates hikes next year. The market is less sanguine. We note that the December 2016 Fed funds futures contract implies a yield of 89 bp.

Three reports since the FOMC met have likely provided officials with the "more data" showing the resilience of the US economy to a number of headwinds. The US employment report (for October) was one of the strongest of the year. September consumer credit rose by a record. Although the headline pace of yesterday's CPI report was in line with expectations, the details likely bolstered confidence that price pressures will increase. The three-month annualized pace of core PCE is 2% compared with 1.7% previously.

The two sectors that will likely see core measures of inflation rise are healthcare, which accounts for 25% of the core PCE basket. Premiums are expected to rise next year. Medical costs are rising at near a 3% year-over-year pace. Housing costs are also rising, with rents rising at more than a 3% year-over-year pace. Goods prices are still soft. They slipped 0.1% in October, but core services rose 0.3%. Moreover, the willingness of airlines to pass the energy saving to consumers may have peaked. Airfare rose 1.5%, snapping a three-month declining streak. The 10-year breakeven is about 10 bp higher at 1.56% from when the Fed meet in late-October and nearly 20 bp higher than was prevailing at the September FOMC meeting.

The latest DOE energy information is also awaited. Yesterday's API estimate showed a small decline in oil inventories. However, the consensus expects a 2.2 mln barrel build from the official report. Output rose 25k barrels to 9.19 mln in last week’s report, even while the rig count has slipped to new five year lows. The January light sweet futures contract is trading comfortably within Monday’s range ($41.21-$43.24)