THEMES TO WATCH

THEMES TO WATCH – UPCOMING SESSION (All times GMT) Swiss PPI (0815) EU Euro-zone Employment (1000) EU Euro-zone Industrial production (1000) CA Capacity Utilization (1330) Market Comments: All eyes were fixed on the US retail sales data on Friday – and they did not disappoint. Retail sales was among a trio of stronger than expected US data releases that ensured the dollar had a good day on Friday, with expectations resurfacing that the Fed’s hiking phase would be brought forward rather than delayed. On the headline, retail sales rose by 1.3% m/m in November (consensus 0.6%) with core retail sales (ex autos and gas) up 0.6%. While above forecast and suggesting a strong start to the holiday shopping season, it is worth noting that the previous month’s data was revised lower and led to a more muted response to the headline. There was also a spike in import prices (+1.75% m/m) and a leap in Michigan sentiment to 73.4 vs. a meager 68.8 expected that contributed to the bullish mood for the dollar. US bond markets were softer with the 10-year bond yield rising 5bp to 3.55% while shorter-term interest rate futures shifted to pricing in a hike by August and a full 50bp increase by November. The dollar’s gains were again more pronounced against the EUR, still reeling from the after affects of Greece’s ratings downgrade last week. This time it was talk of the Ukraine heading to the IMF for cash that exacerbated the move, though the 1.46 level remained intact. The start to the week was a relatively quiet affair in Asia, with liquidity and activity notably reduced from last week’s levels (psychologically one week closer to the holiday season?). The Japan Tankan survey for Q4 was a mixed bag, with diffusion indices for both large manufacturers and the non-manufacturing sector (both current and outlook) all beating forecasts. However, yet again a shadow formed when capital expenditure failed to match expectations. Large firms expect investment in the 2009 financial year to decline by 13.8%, worse than the 11.3% expected and -10.8% in the September Tankan, -9.4% in June’s. Weekend press in the UK appeared non-too impressed with Chancellor Darling’s plans to address the UK’s budget deficit with his pre-budget report. GBP appears to have escaped the Asian session relatively unscathed, more moving in tandem with other currency pairs rather than out on its own. With PM Brown warning the Labour Party to get ready for a snap election (Sunday Times) as a latest poll (also Sunday Times) shows that gap between Tories and Labour narrowing to 9% from 13%, the pound is looking more and more likely to feature in the headlines going into next year. Late in the Asian session headlines showed that Abu Dhabi would step in to pay the $4.1 bln bond Nakheel Sukuk bond due today, thereby eliminating one Dubai cloud that had overshadowed sentiment in recent weeks. Risk certainly responded in the positive with equity markets rebounding and the respective currencies benefitting (EUR, AUD and NZD for Asia). From here, the data slate is a bit sparse at the start of the week with Europe featuring Swiss PPI and Euro-zone employment and industrial production. North America only has Canadian capacity utilization on tap but the major focus will be on the FOMC mid-week. Strong US data over the past week/10-days has seen the market adjusting for an earlier US rate hike but will Ben Bernanke et al risk stifling the economic rebound and making a sharp u-turn on recent rhetoric?