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The US dollar is consolidating yesterday's gains against the euro and sterling, while seeing its losses against the yen and slumping against the Australian and New Zealand dollars.

Asian equities remained under pressure after the US decline yesterday, though Europe is posting modest gains, with the Dow Jones Stoxx 600 up about 0.3% near midday in London. Most sectors are higher except for basic materials.

Meanwhile, Italian and Spanish bonds have continued to rally and the premiums over German have fallen to the lowest since Q2 2011. US bonds are consolidating with 10-year yields just below 3.0%.

Trading conditions have yet to return to normal after the holidays, but the winter storm hitting the northeast of the US will ensure even thinner conditions. Data due out today includes the NY ISM, typically not of a market moving nature, and auto sales, which have been an important bright spot of the economy. The 16.31 mln unit pace reported in November, was the strongest in six years. A modest pullback is expected in December.

Separately, we note that auto inventories have also been rising and this may be something to keep an eye on in the coming months. More generally, inventory accumulation appears to be continuing in Q4 after what appears to be a near record increase in Q3. With the recent string of data, including yesterday's construction spending figures, estimates for Q4 US GDP are likely to be revised higher, from around 2.0% (Bloomberg has 1.5%) toward 2.5%.

Meanwhile, several Fed officials scheduled to speak at a conference in Philadelphia today, including Plosser, Stein and Bernanke. Lacker speaks separately in Baltimore. Tomorrow more Fed officials speak in Philly. Next week, the minutes to the December meeting at which tapering was agreed upon (and Yellen is likely to be confirmed).

Besides the weaker equity and bond markets, the main news from Asia was China's official non-manufacturing PMI. It eased to 54.6 from 56. Although it declined, the general sense is that it is still consistent with the continued expansion of the world's second largest economy. The Dec reading was also largely in line with the 6-month average; underscoring the take-away of a largely steady situation.

However, rather than this news sparking a recovery in the Aussie and Kiwi, it appears that unwinding cross positions that also are helping the yen firm, is the main force at work. That said, there is some speculation that the Reserve Bank of New Zealand could change the official cash rate at its late-Jan meeting.

In Europe, the ECB reported November money supply growth ticked up to 1.5% from 1.4%, which is really inconsequential. The three-month annualized rate slowed to 1.7% from 1.9%. Moreover, and more importantly, private credit contracted for the 19th consecutive month. This partly reflects the continued de-leveraging of European banks. The 2.3% year-over-year decline was a bit more than the consensus expected, but better than the 3.7% decline seen in October. This coupled with soft inflation (flash December CPI due next week), is the basis upon which many expect additional measures by the ECB in the first part of 2014.

The rally in Italian and Spanish bonds is taking place amid improving economic data. Spain's PMI moved back above 50 (yesterday) and today reports indicate a large drop in December unemployment queues (-107.6k or around 2.2%). Separately, its preliminary December harmonized CPI remained at 0.2% on a year-over-year basis. For its part, Italy reported a 0.6% year--over-year increase in its EU harmonized CPI measure, down slightly from the November reading. Even more surprisingly, Italy reported a 1.4% increase in auto registrations (sales). Spanish bonds are outperforming Italy.

Source: Winter Storm Makes For Light North American Session