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Analysts at Danske Bank revise up their forecast for USD/JPY on the back of optimism around the trade war. They now have the pair's target at 110 in 1-3 months and at 112 in 6-12 months.

• "In recent month(s), global markets have seen renewed optimism on everything from trade talks, Brexit risk and global demand. We continue to be quite positive on continued trade de-escalation and improving Chinese demand - and in turn on the prospects for a higher USD/JPY.
• We lift our profile for USD/JPY to 110 on a 1M and 3M horizon. We keep our expectation of 112 on 6M and 12M, which reflects optimism on the global risk and growth outlook for next year and an expectation that we will not see a worsening - but rather an improvement - in US data over Q1. We see EUR/JPY as having effectively bottomed out after two years of cyclical compression and the 12M target has moved slightly higher (129)."

The U.S. Energy Information Administration (EIA) revealed on Wednesday that crude inventories decreased by 1.085 million barrels in the week ended December 13. Economists had forecast a drop of 1.288 million barrels.

At the same time, gasoline stocks surged by 2.529 million barrels, while analysts had expected an increase of 2.000 million barrels. Distillate stocks climbed by 1.509 million barrels, while analysts had forecast a decline of 0.400 million barrels.

Meanwhile, oil production in the U.S. was unchanged at 12.800 million barrels a day.

U.S. crude oil imports averaged 6.6 million barrels per day last week, down by 308,000 barrels per day from the previous week.

• Fed will have to see a substantial change in economic conditions before making any changes to its monetary policy stance
  
  

Analysts at By RBC Financial Group note the jump in Canada's headline inflation in November was mostly due to base effects, with energy prices having fallen sharply toward the end of 2018.

• "Inflation should remain above 2% until that decline washes out of the year-over-year calculation (we think around March 2020). That said, there is growing evidence of (an admittedly modest) firming in underlying inflation trends. The BoC's core measures averaged 2.2% in November, the strongest pace in a decade. And prices for goods excluding food and energy are growing at their fastest rate since a currency-driven increase in 2015-16.
• Consumers can be forgiven for thinking prices are rising even faster than the headline rate suggests. Prices for food purchased from stores have been growing at 4% for the last six months. Households will also be feeling an increase in debt servicing costs, which according to data last week hit a record high in Q3. For some highly indebted borrowers, that won't be fully reflected in the shelter component of CPI, despite its inclusion of mortgage interest costs which are up 6.6% year-over-year.
• We don't think today's inflation data ties the Bank of Canada's hands. Policymakers will likely be more influenced by next week's October GDP report, which we think will set up for another quarter of sub-trend growth in Q4. That should leave the door open to a rate cut next year, even with underlying inflation now on the high side of 2%."

Analysts at TD Securities are expecting the BoE to keep its policy stance unchanged with another 7-2 vote.

• "The macro data has deteriorated further, but there's a firm hope that as political uncertainty lifts, UK growth will pick up. The recent US-China deal also reduces the downside tail.
• FX: Politics rather than monetary policy remains the focus for GBP as its post-election honeymoon was cut short. Our base case suggests sterling should remain steady, but we think GBP may show only a limited reaction in either direction even on a more surprising outcome."

Analysts at TD Securities note the People's Bank of China (PBoC) today injected a net CNY 200bn into the financial system via reverse repos, while lowering the rate on 14-day reverse repos by 5bps to 2.65%.

• "This took place in advance of a likely liquidity drain in January ahead of Lunar New Year holidays, in order to prevent a sharp tightening in interest rates, and to prevent a sharp move higher in bond yields.
• Banks' purchases of local government bonds, which are largely front loaded in Q1, will also result in tighter liquidity. As such, PBoC is likely to step up measures to infuse liquidity while remaining consistent with incremental easing. We expect a cut in the 1y loan prime rate by 5bps on Friday as another step along this path while a cut in the RRR may follow soon."

U.S. stock-index futures rose on Wednesday as investors took a breather after recent record-setting rally.

Global Stocks:

FedEx (FDX) target lowered to $185 from $190 at Cowen 

Twitter (TWTR) target lowered to $36 from $45 at Citigroup

FedEx (FDX) downgraded to Perform from Outperform at Oppenheimer

FedEx (FDX) downgraded to Perform from Outperform at Oppenheimer

DuPont (DD) upgraded to Buy from Hold at DZ Bank

NIKE (NKE) named Top Picks for 2020 at Guggenheim

Statistics Canada reported on Wednesday the country's consumer price index (CPI) edged down 0.1 percent m-o-m in November, following a 0.3 percent m-o-m increase in the previous month.

On the y-o-y basis, Canada's inflation rate increased 2.2 percent last month after a 1.9 percent gain in each of the previous three months. That was the highest inflation rate since May.

Economists had predicted inflation would decrease 0.1 percent m-o-m but advance 2.2 percent y-o-y in November.

According to the report, gasoline prices drove the CPI increase in November, growing 0.9 percent y-o-y, following a 6.7 percent y-o-y decline in October. Excluding gasoline, the CPI rose 2.3 percent y-o-y, the same pace as in October.

Meanwhile, the closely watched the Bank of Canada's core index rose 1.9 percent y-o-y in November, the same pace as in each of the previous three months. Economists had forecast an advance of 1.9 percent y-o-y.

Analysts at Nordea Markets note that in the U.S., tonight, the House will vote on impeachment and will be a key event for markets today.

• "After months of speculation, House speaker Nancy Pelosi has announced two articles of impeachment against President Donald Trump: Obstruction of Congress and abuse of power due to the Ukraine gate in which Trump allegedly harmed former vice-president and political rival, Joe Biden. The vote on these charges will take place tonight in the House of Representatives. The vote requires simple majority to pass.
• According to betting markets, the likelihood of Trump being impeached as only the third president in history is high."

Analysts at TD Securities are expecting Canada's CPI inflation to firm to 2.2% YoY in November as a 0.1% MoM decline is offset by sizable base effects from 2018.

• "Gasoline prices fell by 9.4% m/m last November, and more modest declines this year should see the year-ago drag from energy diminish by 0.2pp. Higher food prices should help offset the month-over-month decline in gasoline, while muted base-effects to CPI-trim and CPI-median present a high bar for any pullback in core CPI, which should leave the average of the three near 2.1% y/y. Teranet home prices for November will be published alongside CPI."

FedEx (FDX) reported Q2 FY 2020 earnings of $2.51 per share (versus $4.03 in Q2 FY 2019), missing analysts' consensus estimate of $2.78.

The company's quarterly revenues amounted to $17.324 bln (-2.8% y/y), missing analysts' consensus estimate of $17.685 bln.

The company also issued downside guidance for FY 2020, projecting EPS of $10.25-11.50, down from its prior guidance of $11.00-13.00, vs. analysts' consensus estimate of $12.02.

FDX fell to $151.04 (-7.47%) in pre-market trading.

Analysts at TD Securitiesnote the UK’s inflation data was a touch stronger than expected this morning with CPI coming in at 1.5% YoY in November (market 1.4%), but that is its joint-lowest YoY rate in 3 years, so the overall picture is still pretty tame.

• “Core CPI was unchanged at 1.7% y/y, in line with consensus. Overall, inflation is running in line with what the BoE had expected in the November MPR, so shouldn't be a major factor in tomorrow's rate decision. The bigger issues are the evolution of political uncertainty, Brexit negotiations, and overall growth dynamics.”

The Mortgage Bankers Association (MBA) reported on Wednesday the mortgage application volume in the U.S. fell 5.0 percent in the week ended December 13, following a 3.8 percent advance in the previous week.

According to the report, refinance applications slumped 6.5 percent, while applications to purchase a home dropped 2.1 percent.

Meanwhile, the average fixed 30-year mortgage rate remained unchanged at 3.98 percent.

“As we move into the slowest time of the year for home sales, purchase application volume is declining but continues to outperform year-ago levels, when rates were much higher,” said Mike Fratantoni, MBA’s chief economist. “2019 was another year of inadequate housing supply in relation to demand. The good news is that the tide could be slowly turning for potential buyers. Housing starts and permits rose strongly in November, and homebuilder confidence has surged to a level not seen since 1999.”

Carsten Brzeski, a Chief Economist ING Germany, notes that Germany’s most prominent leading indicator, the Ifo index, just added more evidence to a tentative bottoming out of the German economy. 

• "The Ifo index increased for the fourth month in a row to 96.3 in December, from 95.1 in November. In December, both the current assessment and expectations component increased. However, before anyone gets too cheerful, just want to remind you all that the headline number is still not back where it was in June, earlier this year. 
• This positive Ifo reading brings a conciliatory end to the economic year 2019. It ends the year on a positive note and with the hope for a rebound in 2020. However, as much as we would like to see the German economy leaving the stagnation territory behind, truth is that any tangible bottoming out is still hard to find. In fact, hard data disappointed in October and particularly the manufacturing sector remains in the doldrums. Inventories are still increasing and order books are still thinning out. A combination which does not bode well for industrial production in the near future. Still, a rebound of global activity on the back of a phase-one trade deal between the US and China would clearly benefit the German economy in 2020 and could make hard economic data eventually catch up with optimistic soft indicators.
• With today’s Ifo index, a turbulent year for the German economy draws to a close. A year, in which the economy has been flirting with stagnation and technical recession. A year, in which strong private and public consumption has offset the impact from the manufacturing slump.
• Looking ahead, the widening gap between a weak manufacturing sector and solid consumption as well as a strong labour market looks hard to sustain. Something has to give."

Analysts at Deutsche Bank note the UK’s jobs data out yesterday beat expectations, with employment up +24k (vs. -14k expected) in the three months to October compared with the previous three-month period, sending the 16-64 year old employment rate up to 76.2% to it's highest level since records began in 1971.

• “The unemployment rate remained at 3.8% (vs. 3.9% expected), while average weekly earnings growth (excluding bonuses) fell a tenth to +3.5% (vs. +3.4% expected).
• Finally on the UK, Bloomberg reported yesterday that the UK government was close to making its decision on the next Bank of England governor, with the incumbent Governor Carney due to leave the BoE at the end of January. The report said the appointment could come as soon as this week.”

• ECB actions have been effective
• Central banks may have to navigate in a low growth, low inflation environment
• ECB should clarify that the medium-term inflation goal is 2%
• Lowering inflation target would be wrong
• ECB could communicate a tolerance band for inflation
• But tolerance band is not an invitation for inaction, complacency
• ECB could communicate the range of inflation outcomes that can be considered as acceptable in normal times

• Cliff-edge Brexit will harm UK more than it would the EU
• We will make the most of the time available
• Ready to start talks with UK on trade deal on February 1

Britain stands to lose more than the European Union if the two fail to strike a trade deal by the end of next year, the head of the European Commission Ursula von der Leyen told the European Parliament.

Britain set a hard deadline of December 2020 on Tuesday to reach a new trade deal with the EU, betting that the prospect of another Brexit cliff-edge would force Brussels to move quickly to seal an accord.

“The timetable ahead of us is extremely challenging,” Von der Leyen said. “It ends by December 2020. It leaves us very little time. In case we cannot conclude an agreement by the end of 2020 we will face again a cliff-edge situation,” she said.

“This would clearly harm our interests, but it would impact the UK more than us as the European Union will continue benefiting from its single market, its customs union and the 70 international agreements we have signed with our partners,” she said.

Japan's economy may already be in mild recession and will rebound only modestly next year, forcing the central bank to maintain its huge stimulus despite the rising costs, former Bank of Japan executive Hideo Hayakawa said.

Given its dwindling ammunition, the BOJ is likely to hold off on expanding stimulus unless an external or market shock deals a more severe blow to the economy, said Hayakawa, who retains close contact with incumbent central bank policymakers.

Prolonged economic stagnation, however, will also prevent the central bank from normalising crisis-mode policies any time soon, he said.

"With inflation very distant from the BOJ's 2% target, the BOJ won't be able to dial back stimulus any time soon," Hayakawa said.

"The best it can probably do is to 'stealth' normalise," or to continue quietly tapering asset purchases, he told.

While Japan's economy is expected to rebound next year, any pick-up will be modest as lingering overseas uncertainties and slow wage growth weigh on exports and consumption, he said.

Capital expenditure is also unlikely to strengthen much as many firms already spent years ramping up spending, he added.

Eurostat said, in October 2019 compared with September 2019, seasonally adjusted production in the construction sector decreased by 1.0% in the euro area (EA19) and by 1.2% in the EU28. In September 2019, production in construction increased by 1.1% in the euro area and by 0.5% in the EU28. In October 2019 compared with October 2018, production in construction increased by 0.3% in the euro area and decreased by 0.2% in the EU28.

In the euro area in October 2019, compared with September 2019, civil engineering fell by 1.0% and building construction by 0.9%. In the EU28, civil engineering decreased by 1.7% and building construction by 1.1%.

In the euro area in October 2019, compared with October 2018, civil engineering increased by 1.1% and building construction by 0.2%. In the EU28 building construction decreased by 0.4% while civil engineering rose by 0.4%.

According to the report from Eurostat, the euro area annual inflation rate was 1.0% in November 2019, up from 0.7% in October. A year earlier, the rate was 1.9%. European Union annual inflation was 1.3% in November 2019, up from 1.1% in October.

The lowest annual rates were registered in Italy, Portugal (both 0.2%) and Belgium (0.4%). The highest annual rates were recorded in Romania (3.8%), Hungary (3.4%), Slovakia (3.2%) and Czechia (3.0%). Compared with October, annual inflation fell in five Member States, remained stable in two and rose in twenty.

In November, the highest contribution to the annual euro area inflation rate came from services (+0.82 percentage points, pp), followed by food, alcohol & tobacco (+0.37 pp), non-energy industrial goods (+0.10 pp) and energy (-0.33 pp).

Office for National Statistics said, the Consumer Prices Index (CPI) 12-month rate was 1.5% in November 2019, unchanged from October 2019. Economists had expected a 1.4% increase.

The Consumer Prices Index including owner occupiers’ housing costs (CPIH) 12-month inflation rate was 1.5% in November 2019, unchanged from October 2019. The largest contribution to the CPIH 12-month inflation rate in November 2019 came from housing, water, electricity, gas and other fuels (+0.36 percentage points). The largest downward contributions to change in the CPIH 12-month inflation rate between October and November 2019 came from accommodation services and tobacco. The largest offsetting upward contributions came from food, and recreation and culture, where prices rose this year by more than a year ago.

A separate report from the ONS showed that the headline rate of output inflation for goods leaving the factory gate was 0.5% on the year to November 2019, down from 0.8% in October 2019.

The growth rate of prices for materials and fuels used in the manufacturing process was negative 2.7% on the year to November 2019, up from negative 5.0% in October 2019. Tobacco and alcohol made the largest downward contribution to the change in the annual rate of output inflation. Crude oil provided the largest upward contribution to the change in the annual rate of input inflation.

According to the report from Ifo Institute for Economic Research, German business morale rose more than expected in December, in a further sign that a manufacturing crisis in Europe’s largest economy could be bottoming out after overall output shrank earlier in the year.

The headline German Business Climate Index came in at 96.3 in December, firmer than last month's 95.0 and bettering the consensus (95.5). Meanwhile, the Current Economic Assessment arrived at 98.8 points in the reported month as compared to last month's 97.9 and 98.1 anticipated. On the other hand, the IFO Expectations Index – indicating firms’ projections for the next six months, came in at 93.8 for Dec, up from previous month’s 92.1 reading and beat market expectations of 93.0

Comments by Ifo economist, Klaus Wohlrabe:

• German industrial sector is still in recession, will take a while to get out of it

• German economy is heading into the new year with more confidence

• There are signs that US-China trade conflict is easing, German exporters are pleased about that

• German GDP likely increased by 0.2% in Q4.

• Election result in Britain ensures there is more clarity around Brexit, that should also reduce uncertainty

Danske Research discusses the JPY outlook in light of its latest forecasts updates.

"We continue to be quite positive on continued trade de-escalation and improving Chinese demand – and in turn on the prospects for a higher USD/JPY. We lift our profile for USD/JPY to 110 on a 1M and 3M horizon. We keep our expectation of 112 on 6M and 12M, which reflects optimism on the global risk and growth outlook for next year and an expectation that we will not see a worsening – but rather an improvement – in US data over Q1. We see EUR/JPY as having effectively bottomed out after two years of cyclical compression and the 12M target has moved slightly higher (129)," Danske adds.

Ratings agencies Standard & Poor's and Fitch scaled back their warnings that Britain might suffer a new credit downgrade, saying Prime Minister Boris Johnson's emphatic election victory last week reduced the risk of a no-deal Brexit next month.

S&P raised Britain's outlook to stable from negative while Fitch took the country off its rating watch negative list although it kept its broader outlook at negative.

Johnson now plans to pass legislation to prevent the country asking for an extension to a Brexit transition period which is due to expire on Dec. 31, 2020.

S&P said it expected a no-deal Brexit at the end of next year would be avoided by London asking for more time.

"Despite the government's current stance, we expect that the UK will seek, and the EU will grant, an extension beyond December 2020 to negotiate the future relationship between the two," the ratings agency said.

Fitch said the risk of a "cliff-edge" Brexit at the end of next year had not disappeared.

S&P's sovereign credit ratings for the country stand at AA/A-1+. Fitch affirmed its AA rating.

In view of analysts at ANZ, trade deals are expected to continue to be prominent news in the year ahead.

“Negotiations on a UK/US deal are expected to kick off as soon as Brexit occurs, but PM Johnson’s move to change the law to guarantee the transition phase isn’t extended past end-2020 ups the ante on all fronts. It may be difficult for NZ to gain a seat at the UK negotiating table any time soon. US trade negotiator Kudlow say the US-China Phase One deal will double the value of the goods China will import from the US, reportedly including agricultural products, energy goods and industrial goods. But Trump has said a 25% tariff will remain in place to be used as a negotiating tool for Phase Two. A Chinese official has stated that imports of pork and poultry are urgently needed.”

October and November highs at 1.1175/80 yesterday and above it remains the current December peak at 1.1200.

“Further up the 55 week moving average can be spotted at 1.1208 and the August peak at 1.1249. Still higher up meanders the 200 week moving average at 1.1358 which remains in focus for the weeks to come. It represents a critical break point on the topside from a medium term perspective. Support below the 1.1116/01 December 4 high and December 13 low sits at the 1.1097 November 21 high. Much further down lies the December 6 low at 1.1040. Failure at 1.0981 would target the 78.6% Fibonacci retracement at 1.0943. This is seen as the last defence for the 1.0879 October low. If revisited, we would look for signs of reversal from there.”

Swiss National Bank Chairman Thomas Jordan cannot exclude more interest rate cuts, he said in an interview published on Wednesday, although such a step was not needed now.

"We can't rule it out," Jordan said told Swiss newspaper Blick when asked whether the SNB's minus 0.75% interest rate - one of the lowest in the world - could be lowered further.

"But we carry out a very precise cost-benefit analysis and we would never simply cut the interest rates if that brought no benefit. At the moment, however, a further reduction is not necessary."

The SNB last week kept its rates locked down at minus 0.75%, the same level it has for nearly five years, and indicated negative rates would remain in place for the foreseeable future.

In the interview, Jordan said it was difficult to predict how long the measure would remain in force. "That depends very much on the economic development, above all in Europe," he said.

He added that negative rates were needed to prevent a rapid appreciation in the Swiss franc which would damage the country's export-reliant economy.

According to analysts at Danske Bank, the German IFO-indicator will give more clues to whether the German business cycle is bottoming out.

“The expectations index has improved in recent months and the December German ZEW index jumped higher. However, Flash PMI for December disappointed a bit so the signals are mixed. We also have a couple of inflation prints out from the UK and the euro area (final number). The Flash release for euro CPI showed a rise in core CPI from 1.1% y/y to 1.3% y/y but this was mostly due to transitory effects from prices on German package tours. We will get more details in the final release for inflation. We believe core inflation will fall back again in December when the effect from package tours is likely to drop out. UK core inflation is expected by consensus to be flat at 1.7% y/y. Overnight Bank of Japan will meet but no change is expected. We expect the BoJ to keep the current QQE with yield-curve control framework in place and Governor Haruhiko Kuroda to iterate his commitment to ease without hesitation if inflation momentum is lost.”

According to the report from Federal Statistical Office, in November 2019 the index of producer prices for industrial products decreased by 0.7% compared with the corresponding month of the preceding year. Economists had expected a 0.6% decrease. In October 2019 the annual rate of change all over had been -0.6%. Compared with the preceding month October 2019 the overall index remained unchanged in November 2019 (-0.2% in October 2019).

Energy prices as a whole decreased by 3.4% (+0.2% compared to October 2019). On an annual basis prices of petroleum products decreased by 12.2% and prices of natural gas (distribution) by 7.1% whereas prices of electricity rose by 2.2%.

The overall index disregarding energy was 0.2% up on November 2018 and decreased slightly by 0.1% compared to October 2019.

Prices of intermediate goods decreased by 2.1% compared to November 2018. Compared with October 2019 prices of intermediate goods fell by 0.3% in November 2019. Prices of durable consumer goods were up 1.3%, prices of capital goods increased by 1.4%. Prices of non-durable consumer goods increased by 2.6% compared to November 2018 (+0.2% on October 2019). Food prices were up 3.5% on November 2018.

EUR/USD

Resistance levels (open interest**, contracts)

$1.1247 (5144)

$1.1230 (2564)

$1.1222 (3735)

Price at time of writing this review: $1.1136

Support levels (open interest**, contracts):

$1.1094 (4191)

$1.1047 (5487)

$1.0998 (3085)

Comments:

- Overall open interest on the CALL options and PUT options with the expiration date January, 3 is 53903 contracts (according to data from December, 17) with the maximum number of contracts with strike price $1,1050 (5487);

GBP/USD

Resistance levels (open interest**, contracts)

$1.3343 (881)

$1.3310 (1139)

$1.3281 (1687)

Price at time of writing this review: $1.3101

Support levels (open interest**, contracts):

$1.3021 (940)

$1.2988 (690)

$1.2951 (1650)

Comments:

- Overall open interest on the CALL options with the expiration date January, 3 is 19513 contracts, with the maximum number of contracts with strike price $1,3500 (3264);

- Overall open interest on the PUT options with the expiration date January, 3 is 27321 contracts, with the maximum number of contracts with strike price $1,2700 (2408);

- The ratio of PUT/CALL was 1.40 versus 1.41 from the previous trading day according to data from December, 17

* - The Chicago Mercantile Exchange bulletin (CME) is used for the calculation.

** - Open interest takes into account the total number of option contracts that are open at the moment.