Hey big spender! Bernanke opens the coffers again; pro-easing Abe victorious in Japanese election

It was an eventful week as the actions of the global ‘high-rollers’ dominated the headlines. With investors still struggling to digest the news of Italian Prime Minister Mario Monti’s decision to resign, and Silvio Berlusconi’s intention to stand in the election, due in early 2013, the spotlight soon returned to the US. Federal Reserve (Fed) Chairman Ben Bernanke announced that ‘Operation Twist’ would be replaced by monthly purchases of US$45bn of Treasuries. Although this was largely anticipated, markets were surprised by the Fed setting a numerical threshold for future interest rate policy: near-zero rates are here to stay until US unemployment declines to 6.5% (and so long as inflation is contained). In contrast, political intransigence frustrated the market’s attempts to move higher. House Speaker John Boehner accused President Obama of "slow walking" the US economy off the ‘fiscal cliff’.
 

Macroeconomic news was widely encouraging in both the developed and emerging world. US weekly unemployment claims dropped to almost their lowest level since February 2008, US retail sales improved in November, and Markit’s eurozone manufacturing purchasing managers’ index (PMI) ticked up to 46.3 in December. But Chinese manufacturing PMI was the week’s ‘top trump’: the consensus-beating 50.9 reading for December is its best print since October 2011. One notable negative, however, was ratings agency Standard & Poor’s decision to downgrade the outlook for the UK’s AAA credit rating to negative.
 

Over the weekend, the Japanese general election resulted in a decisive win for Liberal Democratic Party leader, Shinzo Abe, whose pro-monetary easing stance may bode well for Japanese equities and the yen, which weakened to nearly ¥84 to the US dollar at the end of last week. The yen/dollar rate is very important to Japanese exporters, both to corporate profitability and to wages paid within the domestic economy. Thus, a weaker yen, should it continue, would likely be positive for the whole of Japan.

Home for Christmas? US housing momentum set to continue; but cliff fears could chill confidence

Looking ahead in the US, housing data will be in focus, given a number of key releases. Tuesday’s NAHB housing market index is expected to hold steady at around 46, given record affordability and low inventory. There were fewer available building days in November because of hurricane Sandy’s effects to the Northeast region, but housing starts (construction of a new house) data on Wednesday could continue to evidence strength. Mortgage purchase applications have been increasing, so existing home sales (data due to be released on Thursday) are anticipated to come in at 4.85 million in November, showing a steady climb from September and October. Third-quarter gross domestic product (GDP) growth could be revised up to 2.8% from 2.7% this week (quarter-on-quarter annualised), but consumer confidence and manufacturing surveys could be weak, given uncertainties about the fiscal cliff.

In Asia, the Japanese central bank meets this week; although weak data is adding to arguments for further stimulus measures it is unlikely that policy will be changed so soon after the election. European releases include the German IFO business climate survey, which should provide further insight into euro area morale. UK consumer price index inflation data will be in focus on Tuesday after last month’s rise to 2.7% (year-on-year), as food and utility prices continue to exert pressure on the index. Expectations are that the measure will come in at 2.6%. Lastly, the third estimate of UK GDP growth for the third quarter is due out on Friday, although no change is expected to the previous strong figure of 1%.