This is the most unproductive day for work ever. Computing power at work is used for booking trips, grabbing on-line discounts and digesting a raft of holiday-related emails. Trolling the internet for deals is perhaps a good way to think about how markets are reacting to the news headlines today – they are ignoring the bad and accentuating the good. Internet sales over the holiday weekend support the view that US demand is just fine. Despite that e-commerce shove, the alternative money BTC continues to collapse, now below $4000. This despite the need for safe-havens like gold. The weekend brought the usual geopolitical ugliness – Russia blocking the Ukraine shipping in the Sea of Azov. Russia on Sunday seized two small Ukrainian armored artillery vessels and a tug boat, which Moscow said had illegally entered Russia’s territorial waters. The sea lane was opened Monday after international pressure. NATO plans to hold an emergency meeting to discuss Ukraine. China adds to pressure on Taiwan’s President after poll defeat. Tsai, who faces presidential elections in a little over a year, resigned on Saturday as chairwoman of the Democratic Progressive Party (DPP) after losing key battleground cities in mayoral polls to the China-friendly Kuomintang. The DPP now only controls six cities and counties to the Kuomintang’s 15. The official China Daily said in an editorial Tsai had ignored Beijing’s “cooperative stance” and forced relations into a deadlock, and that “her separatist stance has lost her the support of the people on the island”. Not the news was bad for markets, with the Italian government seen bowing to budget pressure from the EU. The governing coalition is discussing reducing next year’s budget deficit target to as low as 2 percent of gross domestic product from the draft budget target of 2.4 percent of GDP, a government source told Reuters. Against the politics is the usual set of economic data with New Zealand retail sales lower, Japan flash Manufacturing PMI at 2-year lows with orders lower along with confidence, and with German IFO lower – suggesting 4Q weakness extends with no bounce back. This is a market obsessed about US divergence still but the news overnight is all about hope and watching the G20 to see if there is a trade deal and a bounce back to globalization trends. The chart that matters is in 10Y yields with the FOMC minutes and a host of FOMC speakers driving the argument that Fed hikes are closer to the end – stalling the USD rally, helping oil and equities and making the double top in US 10Y yields important. Watching 3.10% and 2.98% today and this week for proof that something has changed.

Question for the Day: Is the ECB bullish? There is a host of ECB speeches to dissect today after a weaker German IFO and an upbeat Italian bond and stock market on hopes of EU budget compromises. No one is quite sure if the 4Q slowdown in growth in Germany will lead to less from the ECB but here is what they have said so far this morning - maybe they are all looking at the IFO clock:

• ECB Economist Praet: Acknowledged slowdown, sees lower oil as a help. Praet acknowledged the slowdown but argued that the economy is still expanding, inflation pressures are building, the oil price fall would help growth and many of the growth risks are outside the ECB’s control because they are related to global politics. To counter this, he argued, that even when bond buys end, the ECB will continue to reinvest cash from maturing securities for an ‘extended period’ of time, a phrasing markets estimate will be around 2 to 3 years. Praet declined to discuss a more precise definition for this time frame but said that the ECB would have to do this at its next meeting on Dec 13 and may say more about how long reinvestments would go on. 

The key for markets remains understanding if oil prices weakness is good or bad. The relationship to the USD is notable as the chart suggests. A weaker EUR won’t upset the ECB and clearly helps with normalization – it makes a taper tantrum a non-event. But the weakness in oil prices reflects doubts about growth and this shows up particularly in Asia – which matters significantly to Germany. The IFO weakness confirms the flash PMI from last Friday and growth slowing is on watch to see if its more than a reversion back to trend or worse.

What Happened?

• New Zealand 3Q retail sales up 0.6% q/q to NZ$153mn after 1.1% q/q- weaker than 1% expected.  In real terms sales were flat after inflation and core sales were up 0.4% q.q.  Nine of the 15 retail industries had higher sales values in the September 2018 quarter.  Of the six retail industries that fell in the latest quarter, the food and beverage services recorded the largest fall (down 2.4 percent), followed by motor vehicle and parts retailing (down 1.7 percent). Fuel sales rose 7% and dominated the gains. “The notable increase in the value of fuel sales coincided with the start of the Auckland regional fuel tax and record pump prices,” retail statistics manager Sue Chapman said.

• Japan November flash manufacturing PMI 51.8 from 52.9 – weaker than 53 expected – 2-year lows. Confidence fell for the 6th consecutive month. Demand fell for the first time since Sep 2016. 
• Japan September final LEI 104.3 from 104.3 – better than 103.9 expected. The Coincident Indicator fell to 114.4 from 115.6 – weaker than 114.6 expected – with August revised up from 114.6. 
• BOJ Kuroda: Not concerned about BOJ balance sheet shrinking. “How to deal with the BOJ’s expanded balance sheet would be among key challenges for us when we were to exit from quantitative easing,” Kuroda told parliament. “But past experience of other central banks indicate that with a good mix (of redemption and re-investment of bonds), it’s possible to shrink our balance sheet at an appropriate pace, while keeping markets stable,” he said. 

• German November IFO business climate 102 from 102.9 – weaker than 102.3 expected. The current conditions 105.4 from 106.1 (revised from 105.9) also weaker than the 105.3 expected.  The expectations index fell to 98.7 from 99.7 – also worse than the 99.2 expected. Companies scaled back their assessments of the current business situation albeit from a high level. Their business expectations also clouded over. Together with other indicators, these results point to 0.3 percent economic growth in the fourth quarter at most. The German economy is cooling down. 

Market Recap:

Equities: The S&P500 futures are up 1.2% after losing 0.66% Friday. The Stoxx Europe 600 is up 1% with Italy leading. The MSCI Asia Pacific rose 0.7% with focus on tech. The MSCI all-country World Index is up 0.4%.

• Japan Nikkei up 0.76% to 21,812
• Korea Kospi up 1.24% to 2,083.02
• Hong Kong Hang Seng up 1.73% to 26,376.18
• China Shanghai Composite off 0.14% to 2,575.81
• Australia ASX off 0.76% to 5,749.60
• India NSE50 up 0.97% to 10,628.60
• UK FTSE so far up 0.85% to 7,013
• German DAX so far up 1.2% to 11,324
• French CAC40 so far up 1.0% to 4,996
• Italian FTSE so far up 2.75% to 19,233

Fixed Income: Focus is on Italy and the hope for a bigger EU deal, then UK Brexit and UK May’s ability to get the deal through parliament.  Equities bid mean bonds should be lower but not in periphery. Italy 10-year BTP yields off 16.5bps to 3.24% with 3.00% key pivot and target. Spain off 5.5bps to 1.57%, Portugal off 4bps to 1.895%, Greece off 17bps to 4.35% while core sells off despite weaker German IFO – 10Y Bunds up 2bps to 0.36%, French OATs up 1bps to 0.73% and UK Gilts up 2bp to 1.40%.

• Germany sold E1.7bn in 0% 6M bills at -0.7855% and 2.24 cover. 
• Norway sold NOK3bn in 9M bills at 0.82% with 2.93 cover. 
• US Bonds are bid waiting for FOMC and more data – tracking equity bounce – 2Y up 2.3bps to 2.832%, 5Y up 2.7bps to 2.894%, 10Y up 2.6ps to 3.064%, 30Y up 1.1bps to 3.313%. 
• Japan JGBs rally with focus on growth after weak PMI – 2Y off 0.4bps to -0.152%, 5Y off 0.7bps to -0.115%, 10Y off 0.9bps to 0.077%, 30Y off 1bps to 0.803%.  BOJ kept buying unchanged in Rinban today.  Kuroda comments didn’t matter. 
• Korea sold KRW900mn of 1-year bonds at 1.92% with 1.611 cover. 
• Australian bonds rally with weaker commodities, NZ retail sales – 3Y off 2bps to 2.042%, 10Y off 1bps to 2.635%. RBA Lowe spoke about e-payments while Kent focused on the RMBS markets. The AOFM sold A$600mn of 10Y 2.75% bonds at 2.6418% with 4.66 cover. 
• China PBOC skips open market operations for 22nd day, keeps liquidity neutral.  The China security journal suggested some banks may have done reverse repos with the PBOC. China bonds mixed with 2Y off 1.7bps to 2.73%, 5Y up 1.5bps to 3.15% and 10Y up 5bps to 3.40%. 

Foreign Exchange: The US dollar index is off 0.15% to 96.75 with 96.65-97.03 range. Fcosus is on rates and FOMC speakers, minutes this week. In emerging markets, USD mostly lower – EMEA – RUB exception off 1.2% to 67.01 with Ukraine story, ZAR up 0.3% to 13.82, TRY up 1% to 5.232; ASIA: TWD up 0.1% to 30.88-election relief, KRW up 0.15% to 1128.85 and INR off 0.25% to 70.87 – tracking oil.

• EUR: 1.1365 up 0.25%. Range 1.1327-1.1384 with weak German IFO countered by Italy hopes – watching US rates, FOMC speeches with 1.13-1.15 holding. 
• JPY: 113.20 up 0.25%. Range 112.88-113.36 with EUR/JPY 128.65 up 0.5% - risk back on but 112-114 holds and FOMC key. 
• GBP: 1.2845 up 0.25%. Range 1.2796-1.2859 with EUR/GBP .8855 flat – watching UK May and politics now for Brexit bounce to extend with 1.27-1.30 key. 
• AUD: .7260 up 0.4%. Range .7224-.7276 with weaker commodities capping but carry supporting. NZD up 0.3% to .6805 despite weaker retail sales. 
• CAD: 1.3205 off 0.25%. Range 1.3187-1.3237 with focus on 1.3150-1.33 still oil bounce and BOC key.
• CHF: 0.9965 off 0.1%. Range .9955-.9984 with EUR/CHF 1.1330 up 0.15% - Italy driving first, UK second, equities third but weaker data and ECB still risk with 1.00 USD pivot.
• CNY: 6.9453 fixed 0.22% weaker from 6.9306, trades stronger up 0.1% to 6.9390 with 6.9302-6.9502 range. 

Commodities: Oil up, Gold up, Copper off 0.1% to $2.8170, Iron Ore fell 3.9% to CNY478.

• Oil: $50.79 up 0.75%. Range $50.10-$51.42. Rebounds with equities first watching $50-$52 for breakouts. Brent $59.68 up 1.5% with $60 pivot with $58-$61.50 keys.  Reuters reported Saudi crude oil production hit 11.1-11.3 million barrels per day (bpd) in November, although it will not be clear what the exact average November output is until the month is over. Those levels are up around 0.5 million bpd - equal to 0.5 percent of global demand - from October and more than 1 million bpd higher than in early 2018, when Riyadh was curtailing production together with other OPEC members. 
• Gold: $1225.90 up 0.25%. Range $1224-$1229 with Russia story one driver, USD weakness the other. Watching $1220-$1235 for momentum moves. Silver up 0.6% to $14.38 with $14.20-$14.50 keys. Platinum up 0.3% to $846 and Palladium up 1.8% to $1141.25. 

 Economic Calendar:

• 0830 am US Oct Chicago Fed National Activity Index 0.17p 0.42e
• 0900 am ECB Draghi Speech
• 1030 am US Nov Dallas Fed Manufacturing 29.4p 25.0e
• 1130 am US $39bn 3M and $36BN 6M Bill Sale
• 0100 pm US $39BN 2Y note sale