Deflation and Stagnation

US economic data pointed to a sluggish economy and slow income growth but risk appetite won out the day. The Canadian dollar was the top performer while the yen lagged. The lone item on the upcoming calendar is the Japanese government monthly report.

The market was surprisingly active for such a quiet day, likely due to the top tier economic data on the schedule. The main surprise in the US PCE report was slow US income growth at just 0.2% m/m compared to 0.5% expected but the main focus was on inflation. The PCE deflator rose 0.9% y/y as expected but core inflation was a touch soft at 1.1% compared to the 1.2% consensus.

The market largely ignored the report and the US dollar gradually drifted higher after falling in Asian and European trading. USD/JPY slipped as low as 103.75 prior to the data but finished at the highs of the day at 104.12. EUR/USD rose as high as 1.3717 but slowly drifted back to 1.3700.

The larger story was the S&P 500 as gained 0.5% to a fresh record high. Bourses in Europe were similarly buoyant.

Solid risk appetite helped the Canadian dollar outperform for the third day. It also got a boost from a 0.3% m/m rise in October GDP compared to 0.2% expected. USD/CAD slid below 1.0600 but edged back to 1.0616 later in the day.

As Western markets head to heavy holiday mode, liquidity will fall to the lowest levels of the year. The lone item on the calendar is the monthly economic report from the Japanese government. Last week, Nikkei reported that the line mentioning deflation (ie 'deflation is ending') will be scrubbed from the report. It will be the first time there is no mention of deflation since Sept 2009.