In a festive combination, data released yesterday showed US consumers growing less worried about inflation and more optimistic on the economy. In December, the Conference Board’s measure of US consumer confidence climbed to its highest levels since April as income gains continued and price pressures began to ease. The headline index jumped to 108.3 in December from 101.4 in the prior month, supporting hopes for sustained corporate earnings growth. Inflation expectations fell to the lowest levels in a year, reducing some of the impetus behind the Federal Reserve’s tightening campaign.

Markets rallied through much of the session, and are only gradually losing momentum as liquidity falls today. The dollar is trying to regain its footing, moving incrementally higher against a weaker yield backdrop, equity futures are up, commodities are stronger, and risk-sensitive currencies like the Canadian dollar are eking out small gains.

The yen is continuing higher, with Tuesday’s Shinkansen-like rally giving way to a steamroller-esque move as traders become more convinced that additional policy tweaks from the Bank of Japan are in the offing. In an interview with Bloomberg News, former finance minister Eisuke Sakakibara said Governor Haruhiko Kuroda “likes to surprise” and could widen the Bank’s yield control band “significantly” before his term is up in April. Options pricing suggests some investors are betting the exchange rate will breach 120 in the months ahead – but this would likely require more profound narrowing in rate differentials and a bigger shift in Japanese investment flows than has been evident thus far.

Economists expect initial claims for unemployment benefits to inch up, hitting 220,000 in the week ended December 17, up from 211,000 in the prior week. Unemployment has remained stubbornly low despite the Federal Reserve’s best efforts, and the number of claims has repeatedly undershot forecasts in recent a months.

A third estimate for third quarter gross domestic product is thought likely to remain unchanged at 2.9 percent. The Kansas City Federal Reserve’s manufacturing survey for December is expected to show further signs of weakness as the global manufacturing cycle rolls over.

Tomorrow’s durable goods and personal expenditures data could prove market-moving. Economists think purchases of long-lasting goods climbed 0.1 percent in November, while personal income and spending measures rose 0.2 percent over the prior month. The core personal consumption expenditures index – the Federal Reserve’s preferred inflation indicator – is seen rising 4.7 percent year over year. Thin trading conditions could exacerbate price action.

Karl Schamotta, Chief Market Strategist