1. China raised interest rates 25 basis points.
The People’s Bank of China increased their one year lending rate and deposit rates 25 basis points on Saturday. The one year benchmark lending rate rose to 5.81 percent and the deposit rate rose to 2.75 percent.
Chinese officials are attempting to reduce the amount of lending and credit expansion to drop the rate of inflation. In November, the inflation rate soared to 5.1 percent and was the highest rate in 28 months. It was driven mainly by food inflation, and poor families spend up to half their incomes on food.
The PBOC is shifting from an accommodative stance to a prudent stance due to their rapid growth and inflation.
The markets will watch closely to see if this is the first of several rate hikes to combat inflation and whether the PBOC front loads the hikes in the early part of the year.
2. Japan readies for 2011 FX intervention.
Taking a cue from the Swiss, the Bank of Japan is preparing to intervene in the foreign exchange markets to quell the rise of the yen. Japan is an export dependent economy and the rise of the currency has reduced the profits of their major corporations.
Citing unidentified sources, Reuters reported that Japan will likely increase its reserves set aside for intervening in the currency market by 5 trillion yen ($60 billion) in the next fiscal year.
Currently, Japan has 145 trillion yen in their intervention pool. Due to low global interest rates, there is no reason for the yen carry trade and therefore no reason to sell yen by the markets.
Once they start, I expect Japan to spend a large amount of their pool to stem the rise of the currency.
3. Most of the markets are closed due to holidays and weather.
The Christmas holidays and a massive storm that has dumped snow in the US that have no idea how to deal with it are making trading extremely thin. Early risk-off trading due to the Chinese rate hike has fizzled and markets are about in the middle of the overnight ranges.
However, these are dangerous times should any event or newsflow create a vacuum.
4. This is a great time to read.
The stories out in the world revolve around the top stories of 2010 and predictions for 2011. (My favorites are the year in pictures. Chicago Tribune had amazing pictures by a war photog who snapped while he stepped on a land mine.)