BOE minutes show another 3-way split

European Market Update: BOE minutes show another 3-way split but growing concerns on short-term inflation

Economic Data

- (GE) Germany Nov Import Price Index M/M: 1.2% v 0.5%e; Y/Y: 10.0% v 9.3%e

- (SA) South Africa Oct Leading Indicator: 129.8 v 130.6 prior

- (HU) Hungary Oct Retail Trade Y/Y: -0.7% v +0.6%e

- (TT) Taiwan Nov Unemployment Rate: 4.8% v 4.9%e

- (DE) Denmark Q3 Final GDP Q/Q: 1.0% v 0.7%e; Y/Y: 3.3% v 3.0%e

- (IT) Italy Dec Consumer Confidence: 109.1 v 108.3e

- (SW) Sweden Nov PPI M/M: 0.8% v 0.3%e; Y/Y: 2.2% v 1.7%e

- (IC) Iceland Dec CPI M/M: 0.3% v 0.1% prior; Y/Y: 2.5% v 2.6% prior

- (IT) Italy Oct Retail Sales M/M: 0.3% v 0.1%e; Y/Y: -0.6% v -0.3% prior

- (MA) Malaysia Nov CPI Y/Y: 2.0% v 2.1%e

- (NO) Norway AKU Unemployment Rate: 3.6% v 3.5%e

- (UK) Bank of England (BOE) Minutes: Another three-way split on MPC views

- (UK) Q3 Total Business Investment Q/Q: +3.1% v -0.2%e; Y/Y: 8.9% v 4.6%e

- (UK) Q3 Final GDP Q/Q: 0.7% v 0.8%e; Y/Y: 2.7% v 2.8%e

- (UK) Q3 Current Account: -£9.6B v -£8.5Be

- (BR) Brazil Dec FGV Consumer Confidence: 122.5 v 125.4 prior

- (IT) Italy Nov Hourly Wages M/M: 0.2% v 0.0% prior; Y/Y: 1.7% v 1.5% prior

Fixed Income:

- (EU) ECB allotted $75M in its 14-day USD liquidity operation at fixed 1.17%

- (EU) ECB allotted €149.5B in 3-Month LTRO Tender and satisfied all 270 bids

SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

Notes/Observations:

- China said to be poised to buy up to €5B in Portuguese Gov't debt

- Fitch placed Greece sovereign "BBB-" ratings on Watch Negative; Threatens possible Junk status (Moody's & S&P already rate Greece as junk)

- UK Q3 GDP was unexpectedly revised lower

- BOE Minutes: Another 3-way split on views among MPC and revealed a growing number of MPC members are worried about inflation

Equities:

FTSE MIB +0.30% at 20,807, FTSE 100 +0.25% at 5,967, IBEX 35 +0.25% at 10,229, DAX flat at 7,080, CAC 40 flat at 3,927

- European shares were flat following yesterday's levels which were similar to those seen before Lehman's collapse in 2008. Volumes remain thin ahead of Christmas holidays. Miners were lower as they investors started to take in profits after recent highs.

- ARM Holdings [ARM.UK] traded higher by 3% at the open as media reports noted that Microsoft was plannning to launch a version of Windows tailored to ARM processors. Hermes [RMS.FR] gained over 5% after LVMH reported that it now held more than 20% stake in the company.

- In other M&A news Northern Foods [NFDS.UK] confirmed press reports and said that it had received an approach from Boparan Holdings. London Telegraph had reported earlier that Ranjit Boparan had made a hostile bid which valued the company at £300M. Oxford Biomedica [OXB.UK] rallied 17% after presenting positive data for its ProSavin drug.

Speakers:

- China is said to be ready to purchase between €4-5B in Portuguese debt according to the Portuguese Press. A China PBoC official had no comment on the speculation.

- The Bank of England minutes from its Dec MPC meeting again shows a 3-way split. MPC voted 8 to 1 to keep both interest rates unchanged at 0.50% and maintain the Asset Purchase Target (APT) at £200B. Member Sentance again voted for a 25 bps interest rate hike while member Posen again voted to increase the ATP by £50B. The majority of members reiterated that spare capacity was likely to bring CPI to target but saw an upward shift in balance of risks to inflation (Members had noted in November that balance of risks had NOT changed significantly). Members noted that euro zone developments may exacerbate the risks to recovery of private sector

- Spain PM Zapatero reiterated that the EU planned to carry out new round of stress tests, to be broader and more transparent

- Hungary PM Orban commented that euro entry seemed unrealistic prior to end of decade

- Japan Econ Min Kaieda commented that PM Kan was concerned about Q4 GDP data

- Brazil Central Bank updated its economic forecasts which forecasted a rise in 2010 and 2011 inflation views. It maintained 2010 GDP growth at 7.3% and initiated 2011 forecast for GDP growth of 4.5%. It raised 2010 inflation view to 5.9% from 5.0% prior and raised 2011 inflation view to 5.0% from 4.6% prior. Above target inflation suggests the need for interest rate increases.

Currencies:

- Safe havens flows continue to be the main factor in FX price action. The EUR/CHF continued to act as the barometer of Euro sentiment as the pair consistently hits fresh all-time lows. The USD/CHF is close to all-time lows of 0.9461 as the CHF currencies continued to reflect concerns over the European economic stability and the distressed debt scenario.

- The EUR/USD remained locked within the 1.3070 to 1.3200 range with stops now building on both sides of the key trading range. The Euro did get a lift on reports that China might buy up to €5B in Portugal Gov't bonds. However, the approx €150B allotted in the ECB's 3-month LTRO operation again highlighted the banking sector concerns in Europe. Analysts were looking for around €100B in the tender.

- GBP hit 3-month lows below 1.5325 lows after U.K. Q3 GDP data was unexpectedly revised lower but recovered as the BOE minutes hinted that revealed a growing number of MPC members were worried about inflation.

Geo-Political/ In the Papers:

- Though the Irish media had originally speculated that the new bank bill would be put into effect by the end of last week, Irish president McAleese signed the Credit Institutions (stabilization) Bill into law Wednesday. It was signed into law after a three-hour discussion with the Council of State regarding its constitutionality. Last Wednesday and Thursday, both the lower and upper house quickly pushed through the new bank bill.

- In the Financial Times the IMF was reported to have said it completed its program of gold sales, selling 403 tons of gold as expected. Back in Mar 2009 The G20 leaders planned to discuss the use of proceeds from planned gold sales by the IMF to increase funding for poor countries. In the Sept 2009 the IMF announced its plans to sell its holdings of approx 400 tons of gold to assist with income in accordance with its Mar 2009 G20 agreement

- According to an article in the Guardian, recent monthly budget deficit trends may point to higher than expected annual deficit. The City had expected £17.4 billion for the month of November compared to the actual £23 billion. Office of National Statistics (ONS) data revealed that public borrowing has virtually not improved year on year. Citing analysts, the article does note month to month data fluctuates, however, according to trends the deficit for the year may total £155B. This compares to the Office for Budget Responsibility (OBR) 2010/11 forecast of net borrowings at £148.5 billion.

- The Telegraph's Evans-Pritchard reviewed reports of warnings of new wave of European bank failures. Citing Citigroup's chief economist, and former Bank of England member Willem Buiter, there is an impasse between the ECB and EMU governments facilitating the possibilities of further bank failures and sovereign defaults in the Euro region. Citigroup's credit chief Mark Schofield noted that Portugal will require a rescue package soon, with a strong likelihood that Spain will follow.

- Although a 2% decline in home values is expected next year, the Royal Institution of Chartered Surveyors in the British press added that the supply shortage should prevent large declines, as supply shortages should stabilize markets during the first half of 2011. Reduction in public spending was cited as the main factor for the predicted price decline. Similar negative sentiments were noted by Capital Economics, noting that it sees house prices to decline by approximately 10% by 2011 year-end, and a further 10% decline in 2012.

Looking Ahead:

- (PD) Poland Central Bank Interest rate Decision: Expected to maintain the Base Rate at 3.50%

- 6:00 (RU) Russia to Sell Up to RUB15.2B in OFZ Bonds

- 6:00 (IR) Ireland Oct Trade Balance: No est v €3.9B prior

- 7:00 (CZ) Czech Central Bank Interest Rate Decision: Expected to maintain the Repo Rate at 0.75%

- 7:00 (US) MBA Mortgage Applications w/e Dec 17th: No est v -2.3% prior

- 07:00 (NV) Netherlands Central Bank Publishes Statistical Bulletin

- 8:00 (RU) Russia to Sell Up to RUB10.5B in OFZ Bonds

- 8:30 (US) Q3 Final GDP Q/Q (Annualized): 2.8%e v 2.5% prelim; Personal Consumption: 2.9%e v 2.8% prelim

- 8:30 (US) Q3 Final GDP Price Index: 2.3%e v 2.3% prelim; Core PCE Q/Q: 0.8%e v 0.8% prelim

- 9:00 (BE) Belgium Dec Business Confidence: 1.2e v 0.8 prior

- 10:00 (US) Nov Existing Home Sales: 4.75Me v 4.43M prior

- 10:00 (US) Oct House Price Index M/M: -0.2%e v -0.7% prior

- 10:00 (MX) Mexico Nov Preliminary Trade Balance: -$976Me v -$814M prior

- 10:00 (MX) Mexico Nov Unemployment Rate: 5.4%e v 5.7% prior

- 10:30 (US) DOE weekly energy inventories: Crude: -1Me; Gasoline:+500Ke; Distillate: -1Me; Utilization: 87.8%e

- 11:00 (US) Fed to Purchase $1.5-2.5B in Notes/Bonds

- 14:00 (AR) Argentina Nov Trade Balance: No est v $931M prior

- 16:45 (NZ) New Zealand Q3 GDP Q/Q: No est v 0.2% prior; Y/Y: No est v 1.9% prior