Equity markets look to be in a better mood today, although this could simply reflect position-squaring as we run into the end of year. The rally overnight reflects slightly stronger US economic data, but European markets remain skittish as forecasts for growth next year are downgraded. INSEE now expects France and the eurozone to experience a recession next year and the threat of sovereign downgrades still overhangs eurozone member governments. Global banks also suffered a downgrade from Fitch overnight due to regulatory risk as well as swings in global economic activity.

The euro found support at $1.2960 yesterday and has managed to regain $1.30 in early trading. It looks as if the single currency is trading sideways for now, with euro-sterling trading in a narrow range around £0.8390. The Swiss franc rallied by 1% yesterday after the SNB chose not to increase its target rate for the CHF. We believe that markets may have misunderstood the SNB as its inflation target was hardly revised, despite the fall in the CHF effective exchange rate. This implies that the SNB need the CHF to depreciate even further to avoid the risk of deflation. However, with the euro still being pushed lower by fears of sovereign contagion, the timing of any attempt to push the CHF lower will be delayed.

BoE Governor King, ECB President Draghi, EFSF CEO Regling and Banca d’Italia Governor Visco are all due to speak today in Rome in a conference in memory of former Italian Finance Minister Padoa- Schioppa. These sort of conferences tends towards the academic side rather than a discussion of the conjuncture and the subjects chosen: Monetary policy and payments systems; Financial system regulation and supervision; European integration and the reform of the international monetary system are unlikely to generate vast amounts of headlines.

The only other releases of note today are US consumer prices for November. Core inflation had surged in summer, rising by at least 0.2% per month for five consecutive months. It has eased in September and October, growing by 0.1%, which the market expects to continue today. The fall in monthly increases reflects falls in vehicle and clothing prices, with the latter now easing after the cotton price increase finally fed through. The main driver of core consumer price inflation is now the rental component, which accounts for around 40% of core inflation. With vacancy rates low, rental prices look likely to rise over the coming months so core inflation will suffer some upward bias in the months ahead. A rise in core inflation due to one component should not require a policy response so the Fed can continue to look through it unless rising rents feed through to higher wages. This seems unlikely given the current unemployment rate in the US so we do not expect to see much market reaction. Headline consumer prices are also expected to rise by 0.1% in November, with the annual rate remaining unchanged at 3.5%.

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