Week 51 2010 weekend

Going into the final (four day) week in the Nordic markets, Denmark and Southern Sweden continue to struggle with the snow that has been causing trouble all over the Western Europe. Many passengers are still stranded in Central European airports. Oslo is closing in on its coldest December in a century. Electricity firms are predicting record spending for January. United States is now getting its share of the snow blizzards as well. Japan’s Cabinet approved a record 92.41 trillion Yen budget on Friday. More data from the country is due on Tuesday.

The shift from ‘moderately loose’ to ‘prudent’ began in earnest as People’s Bank of China gave the markets its chosen Christmas present and raised one-year lending rate and one-year deposit rate by 25 basis points. The interest rate hike is the second one this year. The Chinese government is becoming very worried about the inflation. It was important for them to get the measure in within the calendar year, as yields with over a yield to maturity are reset in the beginning of the year. One should notice how the real interest rate on one-year deposits, now at 2.75%, compares to inflation target of under 3% and inflation expectations that currently are clearly above that mark, thus the real interest rate on deposits is negative.

The commodities may be affected at least in short term by this move. For agricultural products, China’s announcement that biodiesel made from animal fat and vegetable oil will be exempt from consumption tax coupled with peak demand season and drought in South-America may make any pullback short-lived. China’s trade minister also saw it fit to comment during the weekend, that the Eurozone has a ‘chronic' debt problem that may very well escalate in January and February. In other news from the region, Beijing’s new traffic measures will greatly cut the amount of new car registrations in the city, something that already hit car manufacturer stocks on Friday. Should the policy be deemed successful, other big cities in China might follow the lead in couple years time.