After yielding ground yesterday, the US dollar comes back bid today. The main driver is the divergence that favors the US.  Specifically, yesterday two people we have identified as part of the troika at the Federal Reserve, from where policy signals emanate,  played down the disinflationary threat of the fall in oil, saying it would likely be temporary. 

Instead both Fischer and Dudley discussed the stimulative aspects of drop in energy prices.  At the same time, Dudley explicitly reaffirmed his belief that the pricing in of a rate hike in mid-2015 is reasonable. For his part Fischer also seemed to indicate that it was undesirable for interest rates to stay near zero for any longer than necessary.  

This stands in stark contrast to Asia and Europe. The PBOC refrained from draining funds from the banking system today. This served to heighten speculation that a cut in reserve requirements is likely shortly. The ECB meets Thursday. Following last week’s lower flash CPI, the weakness in Germany’s PMI (below the 50 boom/bust level), and a continued decline in market measures of inflation expectations, many expect some sort of policy response.  

The market has all but ignored Moody’s downgrade of Japan that was announced yesterday.  The generic 2 and 5 year bond yields fell to record lows today. The 10-year yields was a more volatile, but also finished lower on the day, despite the poor reception to the new 10-year bond sale. The bond auction saw a weak bid-cover  (3:1 which is the lowest in nearly 1.5 years) and a large tail. Moody’s also downgrade five Japanese banks, but the financial component of the Nikkei gained slightly, but sufficient to outperform telecoms and consumer staples.  

Prime Minister Abe cannot be happy with today’s day, which underscore why the LDP is likely to lose seats at the December 14 election.  Wage growth remains miserly. Wages, when adjusted for inflation, have been falling for 16 months through October, when they were 2.8% below year-ago levels. Total cash earnings are up 0.5% year-over-year. It is the third consecutive month that the pace of increase as slowed.  In July it stood at 2.4%, which marked a peak. In September, it was 0.7%. The consensus expected a small improvement. 

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