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2. What is happening in Europe? Is it all about European politics? Given solid PMI readings evidence that price pressures are rising, will the ECB adjust its policy initiatives accordingly?

Anxiety over European politics remains elevated, but it has eased by nearly any metric one chooses. The interest rate premium investors demand for holding French paper over German narrowed last week at both the two- and 10-year sectors. The French 10-year premium has narrowed nearly 20 bp from its peak, while the two-year premium has been by around 13 bp. There is scope for one major twist in the drama. The beleaguered Fillon could pull out of the race and could be replaced by Juppe who could catapult toward the top of the polls. Meanwhile, Le Pen has her own legal difficulties.  In the Netherlands, the latest polls suggest the populist-nationalist have also slipped recently.

More generally throughout the EMU, premiums narrowed, and importantly, the narrowing occurred in a rising interest rate environment, Often the spreads have been more sensitive to the overall direction of interest rates. The rising rates should also be kept in perspective. Not just Germany, but France, the Netherlands, Italy, Spain, Portugal, and Ireland can all borrow for two years at negative interest rates. Indeed, it appears that nearly all EMU members, save Greece, are paid to borrow for two years.

ECB policy is on hold, probably through the Q3. Draghi will likely be encouraged by the recent PMIs, which suggest that the region's economy may even be accelerating a bit. The staff will update its forecast, and there is scope to lift growth and inflation projections a little.  That said, the January industrial production reports may be softer than the PMIs implied. Draghi is likely to be disappointed that his calls for structural reforms continue to find few takers.

Questions about the ECB's inflation credibility will be rebuffed. The increase in headline inflation is largely a function of higher energy costs, and secondarily seasonal foods (weather-related). Many on the ECB want to look through this temporary impact. Instead, they are focusing on the core rate, which remains in the trough near 0.9% (having bottomed at 0.6%). We also think that relatively higher German inflation within the EMU is not an urgent problem. It is not the most desirable way for other countries to gain competitiveness over Germany, but it is one way.

A month ago, it looked as if UK Prime Minister would formally trigger Article 50 on March 8-9. However, that time frame is unlikely now that the House of Lords passed an amendment to the bill (seeking to protect the rights of EU citizens in the UK). It seems procedurally more significant than substance, as some government officials were sympathetic with the sentiment. It may delay the actually triggering by a week or so.

3. With the focus on the Fed and European politics, Japan and China may have slipped off radar screens. What is happening there and what should we expect from this week's data?

Japan's Prime Minister Abe may be disappointed by the US withdrawal from TPP negotiations, but is probably happier with the Trump's Administration plans for increased military spending on top of the increase that had already been planned, and its tough line toward China. The Japanese economy is being lifted by capex, industrial output, exports, and fiscal support. After the recent capex report, many expect Japan's Q4 GDP will be revised from 0.2% to 0.4% (from 1.0% on an annualized basis to 1.6%).

Japan will also report its January current account. Seasonal factors are dominant. The current account and the trade balance always (without fail for 20 years) deteriorate in January compared with December (and always improves in February). Remember, unlike Germany, Japan's trade balance does not drive the current account. Investment income is typically larger than the trade surplus.

Japanese shares have underperformed at the start of 2017. The Nikkei is up 1.8% and the Topix 2.6%. The Nikkei trails other G7 markets this year, while the Topix edges ahead of Italy and Canada. The 10-year bond yield has been above zero since the middle of last November. It has been confined mostly to a three to 10-basis point range, with the BOJ deterring moves above the range. After being challenged late last year, the BOJ has regained the upper hand.

The dollar-yen exchange rate remains strongly correlated to 10-year interest rate differentials. The correlation is among the highest for the past 20 years. With Japan's side of the spread fairly stable, the movement of the US 10-year yields drives the differential. The correlation with between dollar-yen and the two-year interest rate differential is not as strong as the 10-year, at 0.65, has hardly been surpassed over the past two decades.

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