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ECB unchanged interest rate proves the EURO`s slightly strengthen

ECB unchanged interest rate proves the EURO`s slightly strengthen

Stock markets rallied this morning as central banks stood pat yesterday and ECB President Draghi tried to boost confidence in the Eurozone. Euro-dollar rallied to $1.2870 in early trading before falling back and the dearth of data this morning should be supportive for the single currency.

Oil prices fell sharply yesterday after reports that any European ban on Iranian oil exports would be phased in over six months. The delay in the embargo helped assuage fears that refiners would be scrabbling for cured and helped the front Brent contract gall from a peak of $115 to a low of $110.31 overnight before it regained the $112 level this morning. The entire commodities sphere was weaker, with the FAO showing global food prices falling in December, largely due to a fall in cereals prices. Given the links between food and energy prices, it is hardly surprising that a fall in grain prices fed through to the energy complex.

With the MPC remaining on hold this month, producer price inflation data are a little meaningless as far as financial markets are concerned. However, they will show us whether the MPC‟s contention that inflation will fall sharply through 2012 will be met. We suspect that stagnating oil prices kept input prices flat on the month, but we suspect that manufacturers took the opportunity of pre-Christmas trading to raise factory gate prices, leaving retailers to take any margin hit. We therefore look for headline output prices to rise by 0.3%, which is a little above consensus. We are also fairly gloomy on the outlook for core output prices, where we also look for a small rise against market expectations of unchanged.

The US November trade balance is the last piece of hard data to be released ahead of the first estimate of Q4 GDP in two weeks time. As with the UK, December data are „guessed‟ using econometric models and survey data. But given the large swings in trade data –due partly to large and erratic items such as aircraft and also oil- then trade can have a considerable effect on the composition and growth rate of GDP. Net trade contributed 0.4pp to Q3 GDP growth but is expected to raise growth by only half that amount in the fourth quarter. The proof will be in the November trade balance, where the deficit is expected to widen from $43.5 billion to $45 billion, driven by an increase in the oil deficit and a rise in core import orders ahead of the holiday sales season.

A stronger trade reading would provide some relief after yesterday‟s disappointing retail sales data. Advance sales rose by 0.1% against market expectations for a 0.3% increase as gasoline prices fell and electronic goods sales unexpectedly stalled. Still, the pause in November could be revised higher in due course and suggest that December will show a small rally. The key to the outlook for consumption remains consumer confidence and the University of Michigan Consumer Confidence Survey is expected to rise to 71.5 in January, matching a high last seen in June.

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