When there is good news in Europe, expect the bad to follow soon after. We can be thankful that the eurozone GDP this morning did not contract by as much as many of us had been expecting. The bad news is that -0.1% print in Q3 after the -0.2% contraction in Q2 technically has the region in a recession. With soft data seemingly a prerequisite for the core countries nowadays, including the recent PMI weakness, now suggests that we should be expecting another quarter of accelerating GDP weakness being reported in Q4. In reality, the eurozone has been in recession since Q3 of last year, following the shortest recovery from a previous recession.
Breaking it down within the region, France is giving a sense that it is muddling through, the Iberian Peninsula; closely watched by the globe, displays very low levels of employment and GDP, while the opposite is true for the usual stalwarts of Germany and Austria. However, the core, which seems to be getting smaller all the time, cannot remain the euro backbone alone forever. Regional elections on next year’s agenda may influence Germany on how accommodating she will be over the longer term.
Other released data shows that the annual rate of inflation in the eurozone eased in October as the price of gas fell, but remained well above the ECB’s target. Consumer prices rose by +0.2%, m/m, and by +2.5%, y/y. Despite the annual rate of inflation being down from +2.6% in September, it still remains well above the CBanks' inflation threshold of +2%. Policymakers do not seem that worried, recent data suggest that inflation should fall below their desired level by the mid of next year. This should then give euro policymakers the green light to apply further stimulus to their flagging economies. Regionally, there are wide disparities of inflation rates. Spain +3.5%, Germany +2.1%, the differences are driven by the varying sales taxes and an austerity measure adjustment to help the prevailing government to cut their budget deficit. Core-CPI was +1.5%, unchanged from the previous month.
Some analysts do not agree with the ECB’s prediction for inflation or its pace for next year. It’s no surprise that economists have cut their growth forecast for the eurozone, but some are raising their inflation expectations. They have revised them up by +0.2% to +2.5% and +1.9% for both 2012 and 2013 respectively, mostly reflecting higher than expected increases in commodity prices and indirect taxes. Most all agree that this year's euro contraction could end up being sharper than originally predicted and that next year would be rather muted. The eurozone’s GDP is expected to shrink by -0.5% this year and expand by +0.2% next year. The downward revisions are taking into account the “persistence of uncertainty as well as the continuation of fiscal consolidation.”
This morning’s U.K. Retail Sales release has sterling under pressure outright and on the cross so far in the European shift. The headline print for October fell sharply -0.8%, m/m, while the core managed -0.7%. Expectations were for only a modest retreat as many accurately predicted that September print was supported by the back to school brigade. The decline was relatively broad-based. Making it harder is the fact that recent releases have been trending sideways and this more negative release needs a few similar to suggest a trend occurring.
Other quick snippets around the globe have China successfully electing Xi Jinping as general secretary of the Communist Party, succeeding Premier Hu Jintao. He will also hold the position as the head of the military commission. Finally, this appointment will be able to take some of the regional uncertain premium out of the market. The IMF continues to push, push for the good or is it more airtime? They want Greece’s creditors to forgive a portion of the country’s debt, a move which could cost Germany up to +€17.5b. Chancellor Merkel is on the campaign trail, and she will not want to stall out of the gates. This will become more of a hard sell now that the euro’s core country is "spluttering." Say it’s so Olli: Monsieur Rehn believes that Spain will need no further austerity measures until the end of next year even though it will easily miss its deficit targets. Is Brussels for real? Are they backing down from their austerity focused crisis response? If that’s to be true those weak EUR shorts could be in trouble.
Stateside, we get to see the November data beginning to roll in, with the release of the Philly and NY Fed manufacturing surveys. Expect Miss Sandy to have greatly impacted the outcome. It’s going to be difficult to read through the hurricane numbers over the next few weeks. Analysts warn too that today’s claims will need to be treated with caution for similar reasons. October CPI is also released and is likely to show a slowdown from September to October on both headline and core.
Where does that leave the single unit? The EUR continues to edge higher, squeezing the weaker short. The reasons for the underlying bear trend remaining in play are beginning to thin. Weaker euro data has been used as a sell single thus far. Market continues to use upticks as fresh opportunities to set short traded. Being short may not be wrong, however, these may be the wrong levels to enter. One gets the distinct feeling that the market wants to see better levels to short the single unit. The stop-losses above the psychological 1.28 level continue to look enticing for most option players.