News & Views: Wednesday, December 17
What you need to know for today's trading day.
Russian Government Tries to Support Volatile Ruble (NYTimes)
Bank of England committee remains divided over interest rate rise (Guardian)
Russia Crisis Hits Pimco Fund, Wipes Out Options (Bloomberg)
Shanghai Composite Rises to Four-Year High as Financials Advance (Bloomberg)
Gross Backs Krugman View of Fed on Hold in Weak Inflation World (Bloomberg)
Note that wheat is strongest performing commodity for a second day in a row on a risk-adjusted basis and is now up the last five days. The reason behind the increase is twofold, although both come from Russia. First, Russia will export a significantly smaller amount of its wheat next year, according to the government, because the drop in the Ruble makes it exponentially harder to obtain foreign food supplies. The Russian government said yesterday that it will pay a higher price for wheat to be used for domestic stockpiles and increase grain reserves by 5 million metric tons. Second, if capital controls are implemented, it will only increase the effect of domestic stockpiling because Russia will need to dramatically increase its current account balance.
The minutes of the Bank of England's (BoE) latest policy meeting continued to show 2 dissenters. That is not a negative, however, because that minority have already said publicly they only see very limited rate hikes. The "most significant developments" discussed at the meeting were the oil price drop and the decline in interest rates. The 10yr UK Gilt is now at 1.78% and yield declines have accelerated in the past two months. For example, the 10yr Gilt yield is now 18bps below the low yield on Oct 15. Lastly, and most importantly as it pertains to the US Fed, BoE policymakers said that they should look through the short-term oil price decline as it is a net stimulus for the UK economy. Although the market certainly has a different opinion on that subject, and rightfully so, this is important to shape the reaction function from the Fed today.
Lastly, note that UK wages accelerated in October after sharp drops in the months prior. UK Gilts have not reacted, although US Treasuries certainly could be.
- Japan trade balance (Nov) up to -925B Yen vs -982.8B expected, prior -985.1B
-- Exports YoY up 4.9% vs 7.0% exp, prior 9.6%
-- Imports YoY down -1.7% vs 1.6% exp, prior 3.1%
- UK ILO unemployment rate 3M (Oct) unchanged at 6.0% vs 5.9% exp, prior 6.0%
- UK average weekly earnings 3M/YoY (Oct) up 1.4% vs 1.2% exp, prior 1.0%
-- ex Bonus up 1.6% vs 1.6% exp, prior 1.2%
- Eurozone CPI YoY (Nov final) up 0.3% vs 0.3% prelim
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