Risk on today. What is it? Falling yields in Europe? More likely China Q4 GDP report which was good enough to allay hard landing fears and/or low enough to make people expect government stimulus programs. This against a background of continually better U.S. economic data and cheap equity prices.

But curb your enthusiasm a little: First, we’re having a big earnings week. Two, Europe is not out of its problems just yet. Three, China’s property market remains problematic. Forth, the Saudis did their coming out last weekend, making oil price forecasting much easier, but also life more difficult for most people except theirs. Read on.

   Yields Drop, Easing Heat On Europe

Some of the weakest European government borrowers found encouraging support in debt markets as they auctioned treasury bills, brushing aside recent credit-rating downgrades.

The Spanish treasury sold €4.88 billion ($6.18 billion) in 12-month and 18-month treasury bills, near the upper end of its target range of €4 billion to €5 billion. Bids totaled €16.714 billion, more than three times the amount actually sold, a sign of strong demand. The treasury paid an average yield of 2.049% on the 12-month T-bills, down from 4.050% at the previous sale Dec. 13, and an average yield of 2.399% on the 18-month T-bills, down from 4.226% previously.

   ECB Seeks Plan B

The European Central Bank is looking for a possible alternative to its current bond-buying program, Governing Council Member Ewald Nowotny told The Wall Street Journal.

“We are discussing other possible alternatives. This discussion is however not so far along that we could do without the SMP program,” said Mr. Nowotny. “That is a discussion that includes all monetary-policy instruments.” There is a certain amount of doubt concerning the SMP in the ECB’s council, Mr. Nowotny said.

“There is indeed a skepticism about the Securities Markets Program because there is the fear that the market imperfections that we want to correct could possibly appear in other places,” he said.(…)

   “What is for me personally serious is Italy’s downgrade of two notches. Without question, refinancing for the public finances as well as for the banking sector will play an important role in 2012. And this action certainly didn’t help.” Mr. Nowotny suggested that he doesn’t see a larger role for the ECB in solving the euro zone’s debt crisis.

   China’s Growth Slows

China’s GDP growth slowed to 8.9% in the last quarter of 2011, compared with a year earlier, showing that the world’s fastest engine of growth is downshifting.

When measured on a quarter-on-quarter basis, China’s growth fell much more rapidly to 8.2%, reflecting slower growth in exports and weaknesses in the country’s property market.

   Investment, the main engine of the economy, slipped from 25 per cent year on year in October to 18.5 per cent in December.

   The main risk in China is in the property market. And property data was ugly, for the fourth quarter. From SocGen’s Wei Yao (FT Alphaville)

As we expected, property sector data headed further south. Total December property sales contracted 6.7% yoy in volume and 1.3% yoy in value. Total investment in this sector grew 12.3% yoy, compared to 20% yoy in November and 27.9% in 2011 – most troubling, new property starts declined 18.9% yoy and new residential starts dropped 24.8% yoy in December. Unsold units jumped  26.1% in 2011, 18ppt faster than that in 2010. A large inventory and tight liquidity led developers to drag the pace of construction, with project completion decelerating to 8.9% yoy in December from an average of 36.4 in the last three months.  The tension in the property sector almost reached the level in late 2008, and we expect more headwinds in H1 2012. It is not a cheerful picture.

Fortunately, if we can rely on these stats, China’s retail sales up 18.1% in Dec  China’s retail sales rose 18.1 percent year on year in December 2011, accelerating from the 17.3 percent growth in November.

   EUROZONE INFLATION +2.7% IN DECEMBER

Euro area annual inflation was 2.7% in December 2011, down from 3.0% in November. Monthly inflation was 0.3% in December 2011. Core inflation was +1.6% YoY in December, unchanged from the previous 3 months. It rose 0.4% MoM, however.(Eurostat)

U.K. Inflation Drops Sharply

Falling petrol prices in December caused the steepest drop in the U.K.’s annual rate of inflation in more than two years, giving the Bank of England more breathing room to bolster its stimulus program. The consumer price index rose 4.2% in December from the same month a year earlier. In month-to-month terms, overall consumer prices rose 0.4%. “Core” consumer price inflation slowed to 3% year-on-year from 3.2% in November. An alternative measure of inflation, the retail price index, slowed to an annual 4.8% rate from 5.2%.

   Saudi Arabia targets $100 crude price

Oil minister raises goal to offset state spending

Saudi Arabia is aiming to keep oil prices at about $100 a barrel, a third above its previous public target, in a sign that Riyadh needs higher oil revenues to sustain a big rise in public spending.

Ali Naimi, the Saudi oil minister, on Monday for the first time said the world’s largest oil producer aimed to keep oil prices at the triple-digit level.

EARNINGS WATCH

Burberry Sales Surge

The company said sales rose to £574 million ($879.7 million) from £480 million from the year-earlier period in the three months to Dec. 31, a rise of 21% at constant currencies. The company reiterated its guidance for the full year, with wholesale revenue expected to increase by mid-single digit percentages at constant exchange rates.

BY THE WAY

China’s urban population outnumbers rural for first time  The number of people living in China’s cities for the first time exceeded those living in the country’s rural areas as of the end of 2011, the National Bureau of Statistics (NBS) said Tuesday.

The number of urban dwellers increased by 21 million to hit 690.79 million as of the end of 2011, accounting for 51.27 percent of the country’s total population, the NBS said. Meanwhile, the rural population fell by 14.56 million to 656.56 million as of the end of 2011, the NBS noted. The nation’s total population increased by 6.44 million over the past year to 1.34 billion, it said.

FYI, cities accounted for 36% of the population in 2000, 11% in 1949 when Mao took control.