FUNDAMENTAL ANALYSIS

Market Catches Breath after Yesterday's OPEC-Induced Moves

OPEC decision to roll-over existing quotas sent oil prices sharply lower, pushed European bonds and stocks higher, and generally gave the US dollar a boost.  Today's theme is more consolidative in nature.    At the same time, the dollar's firmer tone against the yen helped lift the Nikkei while European stocks and bonds are struggling to extend yesterday's advance. 

There is much data for investors to digest today, but the key takeaway is that Japan's economy continues to absorb the fiscal shock of the sales tax hike back in April, while euro area flash November CPI slipped lower.  In Japan, part of the monetary policy response has already been taken.  The data may encourage a larger fiscal response in the form of a supplemental budget.  In the euro zone,  the low inflation fans speculation that the ECB could announce a sovereign bond purchase program as early as next week (though we remain skeptical). 

Japanese data can be summarized as low inflation, weak household spending, better than expected industrial output, and relatively tight labor market.  Core October CPI slipped to 2.9% from 3.0%, but when adjusted for sales tax increase (BOJ estimates it boost CPI by two percentage points), it eased below 1.0%.  The core November measure for Tokyo also ticked down further to 2.4% from 2.5%.   The 5% decline in the yen this month is expected to help renew the upward pressure on prices.

Overall  household spending rose 0.9% in October after a 1.5% increase in September.  It still leaves the year-over-year rate 4% lower than a year ago.  Retail sales dropped 1.4% in October, after rising 2.8% in September. Separately, Japan reported industrial production rose 0.2% in October.  The consensus had expected a 0.6% decline after September 2.9% rise.  The year-over-year rate was -1.0%.  The consensus expected -1.7%.  The unemployment rate slipped to 3.5% from 3.6% and the job-to-applicant ratio rose to 1.10 from 1.09.

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