Portugal received a clear statement of financial support from China

Economic Data

- (FR) France Nov Consumer Price Index M/M: 0.1% v 0.1%e; Y/Y: 1.6% v 1.7%e; CPI Ex Tobacco Index: 120.09 v 120.15e

- (FR) France Nov CPI EU Harmonized M/M: 0.1% v 0.1%e; Y/Y: 1.8% v 1.8%e

- (IN) India Nov Wholesale Prices Y/Y: 7.5% v 7.5%e

- (SZ) Swiss Dec SECO Forecasts maintain the 2010 GDP at 2.7%; Raised 2011 GDP growth at 1.5% from 1.3% prior

- (FI) Finland Nov CPI M/M: 0.2% v 0.1%e; Y/Y: 2.5% v 2.3%e

- (NV) Netherlands Oct Trade Balance: €3.5B v €4.6B prior

- (CZ) Czech Oct Current Account (CZK): +0.6B v -10.0Be

- (IT) Italy Q3 Labor Costs Q/Q: 0.5% v 0.5% prior; Y/Y: 3.1% v 3.4% prior

- (SA) South Africa Nov CPI (all items) M/M: 0.2% v 0.1%e; Y/Y: 3.6% v 3.5%e

- (UK) Oct DCLG UK House Prices Y/Y: 5.5% v 6.1%e

- (UK) Nov CPI M/M: 0.4% v 0.3%e; Y/Y: 3.3% v 3.2%e; CPI Core Y/Y: 2.7% v 2.7%e

- (UK) Nov RPI M/M: 0.4% v 0.2%e; Y/Y: 4.7% v 4.5%e; RPIX Y/Y: 4.7% v 4.4%e

- (SP) ECB Nov Funding to Spainish Banks M/M: €64.5B v €71.0B prior

- (GR) ECB Nov Funding to Greece Banks M/M: €95.1B v €92.4B prior

- (GE) Germany Dec ZEW Economic Sentiment: 4.3 v 3.9e; Current Situation: 82.6 v 84.5e

- (EU) Euro Zone Nov ZEW Economic Sentiment: 15.5 v 10.5e

- (EU) Euro Zone Oct Industrial Production M/M: 0.7% v 1.3%e; Y/Y: 6.9% v 7.6%e

- (PO) Portugal Nov Consumer Price Index M/M: 0.2% v 0.4% prior; Y/Y: 2.3% v 2.3% prior

- (PO) Portugal Nov CPI EU Harmonized M/M: 0.1% v 0.3% prior; Y/Y: 2.2% v 2.3% prior

- (IS) Israel Q4 Current Account: $2.3B v $2.0B prior

- (BR) Brazil Oct Retail Sales M/M: 0.4% v 1.2%e ; Y/Y: 8.8% v 10.4%e

Fixed Income:

- (SA) South Africa sells total ZAR2.1B vs ZAR2.1B indicated in 2018 and 2020 Bonds

- (SP) Spain Debt Agency (Tesoro)sells approx €2.51B vs €2-3B Indicated Range in 12-month and 18-month

- Sold €1.99B in 12-month Bills; avg yield 3.449% v 2.363% prior; Bid-to-cover: 2.2x v 1.9x prior

- Sold €520M in 18 month Bills; avg yield 3.721% v 2.664% prior; Bid-to-cover: 4.54x v 3.7x prior

- (EU) ECB allotted €187.8B in its 7-Day Main Refi Tender at fixed 1.0%

- (HU) Hungary Debt Agency (AKK) sold HUF40B in 3-Month Bills; avg yield 5.69% v 5.72% prior

- (BE) Belgium Debt Agency sold approx €2.51B in 3-month and 12-month Bills

- Sold €940M in 3-month Bills; avg yield 0.884% v 0.864% prior; Bid-to-cover: 1.5x v 1.5x prior

- Sold €1.56B in 12 month Bills; avg yield 1.821% v1.117% prior; Bid-to-cover: 3.8x v 2.4x prior 

SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM 

Notes/Observations:

- Portugal Fin dos Santos in Beijing requesting China to purchase Portuguese govt bonds; talks seemed to have paid off

- German ZEW data continue to highlight the German growth engine.

- Continues cautious 2011 growth outlook from various countries and think-tanks

- US Retail sales data to guage the mood of consumers into Holiday season

- FOMC prepares to discuss interest rates and bond purchases later today

- Equities:

Eurostoxx50 at 2854, -0.05%, FSTE100 at 5859, -0.03%, CAC40 at 3895, +0.07%, DAX at 7026, -0.04%

- European shares declined and slipped into negative territory after six consecutive winning sessions as markets pause ahead of FOMC's meeting on Tuesday NY afternoon. Financials were pressured lower. Allied Irish Bank [ALBK.IR] fell about 4% following news that Irish government would block bonus payout stating that it would withhold state aid if €40M in bonuses would be paid.

- UK restaurant and hotel operator Whitbread [WTB.UK] fell about 1% in London trading after its interim statement. Company showed a strong growth in hotels and Costa Coffee chain which did not offset the more sluggish growth of its restaurant business. The company acknowledged that sales in the restaurant business had slowed in Q3 and that outlook for consumer spending remained uncertain. Finnish stainless steel producer Outokumpu [OUT1V.FH] slipped about 8% after cutting its Q4 guidance of operating profits, expecting them to be negative rather than prior view of breakeven. The news dragged down other steel names such as Thyssenkrupp and ArcelorMittal. German private broadcaster ProsiebenSat1 [PSM.GE] also fell in the session following news that the company may be sold by Kohlberg Kravis Roberts and Permira in 2011. Meanwhile TUI AG [TUI1.GE] rose about 3% after FY earnings beat analysts' expectations. The company had a positive outlook for 2011. Among the best winners in London was Bunzl [BNZL.UK], UK non-food consumable products supplier guided FY10 revenue growth at 3 to 4% and was optimistic on the current environment. - European airliners were higher after Credit Suisse upgraded Lufthansa [LHA.GE] and Air France [AF.FR] citing increased air traffic ahead of the holidays season

Speakers:

- Reportedly Portugal says it received a clear statement of financial support from China

- Swiss Dec SECO Economic forecast noted that the country's 2011 economic growth was likely to slow less than expected while it's the unemployment rate would continue to decline.

- Hungary Central Bank Gov Simor commented that the Hungarian economy was still vulnerable to shifts in investor sentiment and expressed concern that eroding investor confidence was one of the biggest potential threats. The Gov added that rising Credit Default Swaps (CDS spreads) were being closely watched as risk assessment of Hungary had deteriorated during the recent months. Simor labeled the Gov't government measures of high temporary taxes on banks and other big businesses as "unconventional"

- On the recent tightening cycle: Simor stated that one should not believe that a 25-basis-point increase would get inflation back to target and stated that a modest tightening cycle" could be enough to damp inflationary expectations.

- Czech Central Bank Hampl commented that he saw a higher possibility of anti-inflationary risks to the central bank's forecast . he noted that the risk that the European debt crisis was spreading farther than earlier forecasted and would it would react accordingly on its policy

- Russia Central Bank Board Member Shvetsov commented that the CBR could maintain either an accommodative monetary policy or shift towards a more neutral stance. On th topic of currencies he expected the Euro to remain under press in 2011 as he was concerned over EU stability. H added that he saw upside risks to inflation in 2011, citing food prices - Portugal Fin dos Santos in Beijing requesting China to purchase Portuguese govt bonds

- IMF officials commented from a Moscow conference that emerging markets reserves growth was contributing to global imbalances. The IMF sought a greater role of the Special Drawing Rights (SDRs) to make the monetary system less USD dependent. It noted that it could propose guidelines on capital flows for some countries.

- ZEW Economists noted that EU Austerity measures and recent China monetary policy steps were risks to German exports . It added that Germany's domestic demand to complement its export growth

- IFO institute noted that German Economic growth would continue in 2011 but at a slower pace. Growth would slow along with the wider global economy and become more dependent on domestic demand. It noted that slowing growth in emerging economies earlier this year had begun to affect developed countries since the middle of the year

- Italy PM Berlusconi wins first of two key confidence votes

Currencies:

- The EUR/USD maintain a firm, steady tone into the session as Portugal received a clear statement of financial support from China. The pair tested above 1.3470 for fresh 3-week highs before settling down around 1.3450 area heading into the NY morning. The economic data in the session continued to show the robustness of the German economic engine while Euro zone industrial production should the broader picture in a less positive light. Some of the Eastern European central banks voicing some concerns over contagion effect of the peripheral debt situation (refer to speakers above). Dealers noted that perhaps the euro upside might be limited should euro zone spreads widen further but thin December markets tend to have a mind of their own.

- Overall the USD was softer against the major pairs as some suspect that the Fed might signal an increase its debt purchase plan. USD/JPY dipped below the 83 handle while USD/CHF was off over 50 pips in the lower portion of the 0.96 area.

Geo-Political/ In the Papers:

- In European parliamentary news, Prime Minister Berlusconi won the confidence vote in the Senate (upper house), though the highly anticipated vote in the Chamber of Deputies (lower house) continues to remain tight with a differential of one or maybe two votes to side in either direction. The initial vote in the Senate is expected around 1030 GMT, followed later by the no-confidence vote in the lower house with result expected after 1230 GMT. Note that if the prime minister loses in either house, then he will have to resign his position.

- Following yesterday's decision against bonuses by the board of Allied Irish Banks, the Irish government stated that it would withhold state aid to the bank if the €40M in bonuses were to be paid out.

- There were reported improvements in foreign relation in the Korean peninsula as the Chinese Foreign Ministry said that North Korea has responded positively to six-party talks.

- The Financial Times commented on the deleveraging by US consumers, as mortgage borrowers seek to repay balances ahead of schedule and repay credit card debt with disposable income. The article cited chief economist at Freddie Mac Frank Nothaft stating the trend may be positive over the long-run but detrimental to growth over short-term.

Looking Ahead:

- 7:00 (EU) ECB to drain €72B in 70-day Term Deposit Facility

- 7:30 (US) Nov NFIB Small Business Optimism: 92.5e v 91.7 prior

- 7:45 (US) ICSC Weekly Chain Store Sales

- 8:00 (PD) Poland Nov CPI M/M: 0.3%e v 0.5% prior; Y/Y: 2.8%e v 2.8% prior

- 8:30 (CA) Canada Nov Leading Indicators M/M: 0.5%e v 0.2% prior

- 8:30 (CA) Canada Q3 Labor Productivity Q/Q: -0.1%e v -0.8% prior

- 8:30 (US) Nov Producer Price Index M/M: 0.6%e v 0.4% prior; PPI Ex Food & Energy M/M: 0.2%e v -0.6% prior

- 8:30 (US) Nov Advance Retail Sales: 0.6%e v 1.2% prior; Retail Sales Less Autos: 0.6%e v 0.4% prior

- 8:55 (US) Weekly Redbook Retail Sales

- 9:00 (EU) EU's Barroso Takes Part in European Parliament Question

- 10:00 (US) Oct Business Inventories: 1.0%e v 0.9% prior

-11:30 (US) Treasury to sell 4-Week Bills and 1-year Bills

- 14:15 (US) FOMC meeting

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China: PBoC raises reserve requirement again

• The People’s Bank of China (PBoC) has today raised the reserve requirement for commercial banks by 50bp. This is the third hike in the reserve requirement in less than two months. The hike was widely expected and, as PBoC did not raise its leading interest rate, it might be a relief for stock markets.
• A rate hike this weekend now appears unlikely and PBoC might also be signalling a reluctance to raise interest rates. While we still expect a rate hike before year-end, the likelihood that it will not happen until Q1 11 has increased.
• With growth accelerating and inflation poised to increase to 5.5% y/y in early 2011, there is an urgent need for less accommodative monetary policy in China.

Details
PBoC has again increased the reserve requirement ratio (RRR) for commercial banks by 50bp (effective 20 December). For major commercial banks, RRR now is 18.5%. This is the third hike in RRR in less than two months. Importantly, PBoC did not raise its benchmark lending and deposit rates. There has been increasing speculation that PBoC would raise its lending interest rates – possibly as soon as this weekend – after the release of several important data for November was brought forward from Monday to tomorrow.

Assessment and outlook
The hike in the reserve requirement comes as no surprise. PBoC has recently failed to absorb sufficient liquidity through its open market operations and for that reason it was widely expected to use the RRR tool instead. It might come as a slight relief for the stock market that PBoC did not raise its benchmark lending and deposit rates today. In light of today’s move, it now appears unlikely that there will be a rate hike this weekend. By not raising interest rates today, PBoC might also be signalling a reluctance to raise interest rates, partly because PBoC fears it will boost speculative hot money inflows into China. We still expect a 25bp rate hike before year-end, although the likelihood that PBoC will not raise interest rates until Q1 11 has increased.

Recent economic data suggests that China’s growth is again accelerating, see Flash Comment – China: Exports and imports surge in November and inflation is poised to reach 5.5% y/y in early 2011. That said, we do not expect a nasty surprise in the November inflation data to be released tomorrow (Danske Bank: 4.6% y/y, consensus: 4.7%, market speculation is that it could exceed 5% y/y). However, we do believe PBoC is behind the curve in its monetary tightening. Real deposit rates are currently negative and according to a simple Taylor rule based on current inflation and current output gap, PBoC’s benchmark lending rate should currently be 100bp higher (see chart). In our view, interest rates do matter in China, particularly for asset prices, and it will not be enough to curb lending growth. Data released earlier today showed that house prices have again started increasing, albeit the year-on-year growth in house prices continues to decline.

Chinese policymakers are this weekend convened for the important Central Economic Work Conference, where they will have to agree on macroeconomic targets for 2011. In the usual Chinese understatements, they will signal a shift in monetary policy from ‘moderately loose’ to ‘prudent’ and this will include lower targets for credit growth next year. In our view, it will eventually also include interest hikes (we expect four 25bp hikes over the next year) and a faster appreciation of CNY.
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Full report: China: PBoC raises reserve requirement again

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