BOE reveals a hawkish shift

!! Economic Data !!
*- (GE) Germany Dec Import Price Index M/M: 2.3% v 1.2%e; Y/Y: 12.0% v
10.8%e*
*- (SP) Spain Nov Mortgages on Houses Y/Y: -14.6% v -24.3% prior;
Mortgages-capital loaned Y/Y:* -26.1% v -32.9% prior
*- (SW) Sweden Dec Trade Balance (SEK):* 10.9B v 7.0Be
*- (IC) Iceland Jan CPI M/M: -0.9% v -0.6%e; Y/Y:* 1.8% v 2.2%e
*- (IT) Italy Nov Retail Sales M/M: -0.3% v 0.1%e; Y/Y:* 1.0% v 1.5%e
*- (UK) Bank of England Minutes: Voted 6-2-1 in its fourth consecutive
split decision; Member Weale joined Sentence in calling for a rate
hike; Posen again sought to increase the APT by £50B*
*- (UK) Dec BBA Loans for House Purchase: 28.7K v 29.3Ke*
*- (BR) Brazil Jan FGV Construction Costs M/M:* 0.4% v 0.4%e

*Fixed Income*
- (GE) *Germany sold €1.62B in3.25% July 2042 Bunds; Avg Yield 3.58%
v 3.33% prior; Bid-to-cover:* 1.2x v 1.2x prior
- (IT) *Italy Debt Agency* (Tesoro) sold €8.0B in 6-month Bills vs
€8B Indicated; Avg Yield 1.421% v 1.698% prior
- Sold €2.5B in Dec 2012 Zero Coupon Bonds, avg yield 2.626% v 2.937
- (SW) *Sweden* sold SEK2B in 5% 2020 Bonds; Avg Yield 3.385%
- (EU) ECB allotted $70M in 7-day USD liquidity operation at fixed
1.17%
- (EU) ECB allots €71.1B in 91-day tender

!! SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM !!
*Notes/Observations:*
- FOMC decision expected to highlight an improved US economic outlook,
but fall short of any imminent policy bias shift
- BOE minutes show a hawkish shift
*- Obama State of the Union address:* To target budget deficit
reduction of about $400B in the next decade

*Equities:*
*FTSE 100 +1.2% at 5989,* DAX +1.25% at 7148, CAC 40 +0.90% at 4057,
IBEX +1.2% at 10,791, FTSE MIB +0.80% at 22,119, SMI +0.40% at 6603
*- European shares were up during the session on optimism that
economic recovery is on track.* Investors are expecting the Fed's
policy announcement during NY session which is expected to provide
supportive rhetoric to the economy. German automakers rebounded from
early week losses aided by *Porsche* [PAH3.GE] which climbed approx 3%
after reporting a 63% increase in China's sales for 2010. This further
improved sentiment that global auto sales are improving in conjunction
with the economy recovery.
- In individual stocks, *SAP* [SAP.GE] traded lower by less than 1%
after reporting a 36% decrease in profit attributed to Oracle fine.
Revenues came slightly higher than estimates. Company guided FY11
operating profit to achieve €4.45-4.65B. Dutch telecom company *KPN*
[KPN.NV] was up by less than 1% after its Q4 report. While net came
higher than expected, EBIT was lower than expectations while revenues
were in line. Company also announced that it would repurchase €1B in
shares. In energy news, BG Group [BG.UK] gained over 2.5% after
disclosing a new oil discovery in Carioca area. On the other hand
Heritage Oil [HOIL.UK] dropped by 13% after announcing major gas
discovery in Kurdistan but expressed disappointment that it was not
oil.

*Speakers:*
*- The BOE minutes registered another three-way split for the fourth
consecutive policy meeting* by member Weale joined member Sentence in
calling for a 25bps hike in rates. Member Posen again voted to
increase ATP by £50B. The members did considered the case for raising
rates in January but some members feared that markets might
misinterpret such a rate hike as signal MPC would raise rates rapidly,
and hurt the economy. It noted that the probable near-term CPI would
be 'materially higher' than Nov BOE inflation report as risks from
commodity prices, imported inflation and rise from domestic import
substitutes. The majority also saw rise in medium-term inflation
risks. On the growth front the MPC saw little change in risks since
its Dec meeting with growth likely in line with trend despite snow
storms and VAT increase

*- Japan LDP member Hayashi* commented that the recent trend in the
USD/JPY would persist for time being but the gov't needed to consider
measures to further weaken its JPY currency. He noted that Japan
should again intervene in the FX markets if USD declined rapidly
towards ¥79.75. (Current all-time low set back in 1995). The official
noted that the Chinese economic growth suggested that the CNY currency
could appreciate by 30% against the USD. On domestic matters he noted
it would be difficult to achieve positive CPI by end FY12 and the
rising JGB yields suggested a sign of declining confidence in Japanese
fiscal policy. He cautioned that there was a risk of JGB collapse in
FY12 (Begins Apr 1st 2011)

*- OECD Gurria* commented that the UK should maintain its current
course on its fiscal front. Low interest rate should stimulate the
economy with modest growth seen in 2011 and stronger in 2012. He noted
that UK underlying inflation was under control
- Thai Central Bank Gov commented that it saw the need for continued
gradual interest rate hikes to return to normalization. He noted that
negative real interest rates were not good for economy and that the
central bank would focus on inflation in 2011. He added that economic
growth to return to normal trends in 2011 but that political situation
remained a concern for the Thai economy. On the currency, the THB
would move in line with market but it could use capital controls if
necessary

*- Czech Central Bank Gov Singer* commented that the CZK currency was
near long-term trend despite its recent appreciation this month
*- Turkey Central Bank Gov Yilmaz* commented that the recent reserve
ratio increases were dampening domestic demand. The impact of policy
on credit to be seen in Feb period. The central bank was considering
disclosing how policy committee voted on rate decisions and was aware
of impact of recent measures on TRY FX rate
*- Sweden Central Bank (Riksbank) Gov Ingves* commented that he was
not opposed to rising SEK as the stronger currency would not hurt the
competitiveness of domestic companies. H e noted that global trade was
more important than SEK currency rate.Household debt wass a threat to
the domestic economy.
- China Cabinet: Rapid rises in property prices have been curbed;
raised 2nd home down payment requirements - State Media

*Currencies/Fixed income:*
- The GBP/USD popped higher following the release of the BOE minutes
as it revealed a hawkish shift. BOE member Weale joined established
hawk Sentance in calling for a tightening and most members saw recent
developments that medium-term inflation risks had probably shifted
upwards. GBP/USD at its best levels as the NY morning approached
testing above 1.5870.
- The EUR/USD continued to probe fresh two-month highs as the pair
touched 1.3722 due to renewed vigor following significant demand into
yesterday's healthy EFSF auction. The price action was capped by
option-related flows with chatter of a 1.3730 DNT option in play but
euro buy-stops lurking above.
- The USD/JPY hovered the lower end of the 82 handle as the USD was
weighed down by softer bond yields.
- Overall dealers noting that the soft USD theme likely to continue
into the FOMC decision later today.

*Geo-Political/ In the Papers:*
- The Telegraph's Evans-Pritchard commented on the recent remarks out
of the IMF related to the fiscal situation in the US. According to the
IMF, stimulus measures that were recently implemented by the US
government may only have a small impact on growth but large fiscal
costs. The IMF expects that the deficit will remain at 10.8% of GDP in
2011, with public debt being above 110% of GDP in 2016. IMF said the
US needs a credible medium-term fiscal plan in order to prevent rises
in interest rates.
- Ireland will see a key vote for the finance bill today when the
debate in the lower house of parliament (Dail) resumes at 10.30 GMT.
If the bill is defeated, then it may prompt an immediate dissolution
of the government pushing forward the general election again, and
delay the finance bill until the formation of the next government. The
first vote is to take place around noon local time.
- The passage of the bill effectively rests with Independent ministers
Michael Lowry, Jackie Healy-Rae and Mattie McGrath who have stated
that their vote cannot be relied upon as they see the bill as
inadequate. The bill is expected to be defeated if all three ministers
vote against it.

!! Looking Ahead !!
- 6:00 (CZ) Czech Republic to sell CZK5B in May 2024 Floating Rate
Bonds
*- 6:00 (BR) Brazil Jan IBGE CPI IPCA-15 M/M:* 0.7%e v 0.7% prior
*- 6:00 (IR) Ireland Nov Preliminary Trade Balance:* No est v €4.1B
prior
*- 7:00 (US) MBA Mortgage Applications w/e Jan 21st:* No est v 5.0%
prior
*- 8:00 (NO) Norway Central Bank (Norges) Interest Rate Decision:
Expected to maintain the Deposit Rates unchanged at 2.00%*
*- 9:00 (MX) Mexico Nov Retail Sales:* 4.0%e v 4.4% prior
*- 10:00 (US) Dec New Home Sales: 300Ke v 290K prior; M/M:* 3.5% v
5.5% prior
*- 10:30 (US) Weekly DOE Energy Inventories: Crude +1Me;
Gasoline:+2.5Me; Distillate:*0.0e; Utilization: 83.1%e
- 11:00 (EU) ECB's Stark speaks in Germany
*- 12:00 (FR) France Dec Net Change Jobseekers: 0.0Ke (flat) v 21.3K
prior; Total Jobseekers:* No est v 2.70M prior
*- 13:00 (US) Treasury to sell $35B in 5-Year Notes*
*- 14:00 (AR) Argentina Dec Industrial Production M/M: No est v 3.9%
prior; Y/Y:* 8.2%e v 12.8% prior
*- 14:00 (AR) Argentina Dec Supermarket Sales Y/Y:* No est v 19.4%
prior
*- 14:15 (US) FOMC Interest Rate Decision: Expected to maintain
interest rates at 0.25%*
*- 15:00 (NZ) New Zealand Central Bank (RBNZ) Interest Rate Decision:*
Expected to maintain the Official Cash Rate at 3.00%
Source: Fxstreet.com