Fed eyes further asset purchases

Catching up with other CB's earlier pledges

Chart of the Day

The attention was on the Fed’s latest meeting yesterday, and it announced some small changes to its guidance on asset purchases, which it will now continue until “substantial progress” has been made toward its mandated targets of 2% inflation and full employment. That is still vague, but the poor employment recovery to date means there is scope for the Fed to carry on buying large volumes of assets throughout next year. Its balance sheet is still smaller than that of many CBs, although this new pledge probably won’t change its relative position, given many other CBs have already pledged to keep on buying assets until they are closer to reaching their targets.

Macro

The flash December composite PMIs for Europe were better than expected, with both the UK and eurozone ones rising to near neutral territory. The US declined amid renewed measures to prevent the spread of Covid, but still held up at a decent level.

US retail sales were also weaker than expected, dropping by 1.1% MoM. The breakdown showed sales of clothing and at food and drinking places - two sectors very sensitive to lockdown measures - performed the worst.

Still, US mortgage applications rebounded last week, even though they would normally start weakening around now ahead of the holidays.

In Canada, inflation has started rising again, although remains at just 1%. Core inflation has held up much better than elsewhere.

UK core inflation unexpectedly dropped sharply, to 1.1% in November, but retailers’ price expectations point to a rebound.

One key measure to track for US inflation risks is the business inventories-to-sales ratio, which declined to a fresh six-year low in October. Low inventories imply greater inflationary pressures if there is a sudden jump in demand.

Markets

US crude production dropped back again last week, despite the recent rise in oil prices.

It seemed all eyes were on bitcoin, which reached a new record high with a further 10% gain yesterday. Its YTD of +200% performance is actually much lower than that for Ehtereum, of near +400%.

While there are still plenty of signs of speculative excess out there, it is interesting that outstanding equity call volumes as tracked by CBOE has declined in the past week - this might just be traders trimming positions ahead of the holidays, though.

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