3 Numbers to Watch: Eurozone CPI, US output, Ecofin summit
Today’s data calendar is light, with the US industrial production data being the most important item. The Eurozone consumer price index should just confirm the earlier terrible flash release, while on the political front the banking union and budget news from Europe are all that matters. I also expect the markets to try digesting how the Federal Reserve’s Janet Yellen performed in her testimony to Senate Banking Committee — watch out for influential comments hitting the headlines.
October's Eurozone CPI shocker should be confirmed today. Pic: Lutya
Eurozone October Consumer Price Index (10:00 GMT): After the shocking advance estimate showed that the euro area’s inflation fell to 0.7 percent in October, it will be interesting to see if there are any adjustments to the final number. The consensus does not see any changes to October’s reading, but remember to keep an eye on possible revisions to previous months.
Source: Saxo Bank
The reaction to the flash estimate already came from the European Central Bank (ECB), which last week cut the refinancing rate, mentioned that its toolbox has many tools and that interest rates could be lowered even further. But on balance, there is not much that can be done. As long as the Germans are without a government and the banking union’s most important question after the single supervisor — the resolution authority — is not agreed upon, the ECB will resent further action.
The German camp already opposed the rate cuts, so opposition to ECB’s asset purchases would be strong. Even though the ECB’s Peter Praet promised last Wednesday that such measures are on the table, the The Telegraph’s Ambrose Evans-Pritchard reminded us that economic sense will lose to political reality. The ECB could easily launch another round of LTRO-loans, but since the European banks’ balance sheet are to be reviewed at the end of this year for the coming comprehensive assessment, the banks would not necessarily be inclined to pick up the LTRO, or increase their lending and holdings.
If the European monetary policies are not softened further, and the Fed’s next chairman Yellen is seen be slow on the tapering of the Fed’s asset purchases, the EURUSD could begin moving higher again. That would be another headache for Europe and a reason to ease policy, but the German camp of camels needs plenty of straws before their backs will be broken. Perhaps a solution will be found when countries like France, Holland and Finland realise that economically they are moving toward the periphery, and tighten their ranks against Germany and Austria.
US October Industrial Production & Capacity Utilisation (14:15 GMT): After increasing by 0.6 percent in September, industrial production is expected to show a more modest growth of 0.2 percent in October. The consensus forecast sees capacity utilisation remaining unchanged at 78.3.
Source: Saxo Bank
Earlier this month, the October ISM manufacturing index indicated robust output growth, beating expectations and alleviating fears that the US government shutdown could have dented the economy. ISM’s data suggested that new orders were very positive, but manufacturing was somewhat slower. Thus, the less-than-stellar production growth in October should not cause major changes to the current story of US growing and outperforming most of its peers, as the order log should guarantee higher production activity in the coming months.
A relatively strong number could lead to speculation of an earlier tapering, especially as the capacity utilisation is now at post-crisis highs and near levels where employment data and perhaps even fixed investments should start accelerating. But as long as there are uncertainties over the debt ceiling and budget negotiations in the US, the Fed might postpone the tapering.
Ecofin meeting and European Commission’s budget draft views
Today’s meeting of EU finance ministers was originally supposed to come up with concrete final plans for the European banking union’s second pillar, the single resolution mechanism (SRM). The first pillar, the single supervisory mechanism (SSM) is already agreed, but it is critical that the open questions over the resolution process are answered before the SSM completes the assessment of the banks.
The plan was for the European Commission to be the resolution authority, but that was opposed by Germany and Finland. As recently as last week the ECB wanted the SRM to handle all bank failures, but that is not what Germany wants. Then Reuters reported that the German coalition partners have decided that the SRM decision making should be done by a body attached to European finance ministers and not the Commission. The German coalition also does not want the European Stability Mechanism to be “directly available” for closing up failed banks.
Everything was supposed to be in place and ready for the December summit, but it does sound that the finalisation of the banking union will take a lot longer than was planned. They don't know who will decide about the fate of banks, which banks are included and where the money would be coming from. The Ecofin press conference will be available here. For the confused, Open Europe’s quick analysis of the banking union from last July is still relevant reading.
Also today, the European Commission will as part of the European Semester and the new Two Pack-legislation publish its views on the national budget drafts for the 2014 period, to be followed by a press conference. Expect several countries to be lectured on their excessive deficits, but with the usual European optimism and promises. I believe in the short term markets will focus more on the budget recommendations, with France probably being most embarrassed. But in the long run, the banking union is more important. Silence without real progress would be the worst result.
3 Numbers to Watch is published Monday-Friday on TradingFloor.com. You can choose to be notified whenever a new piece is ready if you become a TradingFloor member - it's free, and you can sign in with Twitter, Facebook, Google or LinkedIn. You can also follow all the news from our macro team on our Macro Page.
—Edited by Clare MacCarthy