Yesterday’s markets were a microcosm of what investors can expect from the world’s developed economies into 2015. We started with poor inflation data from a Eurozone nation and ended with strong news from the US that also revealed an unwelcome surprise. Both led to overall pressure on the single currency throughout the session with the greenback able to benefit, although towards the end of the session, gains became hard to come by.
As has been the case with most data from the Eurozone’s largest economy, German inflation disappointed heavily yesterday. Five states – Brandenburg, Hesse, Saxony, Bavaria and North-Rhine Westphalia – all reported deflation in their month-on-month readings before the national average too was released with a reading below zero. The market is looking for today’s Eurozone-wide measure to increase from 0.3% to.0.4% year-on-year. I would have to think that the case for that has been severely damaged by this German reading.
I spent yesterday afternoon discussing what levels of inflation the European Central Bank would need to see before embarking on a full-scale quantitative easing plan. Leaving aside the difference between headline and core inflation, most now believe that it would have to be a combination of a negative year-on-year number combined with a pronounced drop off in the market’s medium-term expectations as measured by five-year swap contracts. We are not going to get said outcome today but one feels that momentum is indeed building in that direction.
News from the States was a lot more positive and reinforced the hawkishness of the Federal Reserve statement released less than 24 hours earlier. GDP in the three months to September rose at an annualised rate of 3.5% we were told yesterday, well above the 3.0% economists had been looking for. The internals of said growth, however, gave us pause. Consumption fell to 1.7% from 1.8% in Q2 and although exports and investment ran higher, the standout figure was the highest increase in government spending since 2009. Next week’s Midterm Elections are said to be the most expensive ever and we can see why. This left a slight sour taste in the mouth and took dollar off its post-FOMC highs.
As we said yesterday, the data dependency of the next step of Federal Reserve action makes each data release that bit more important than it was even two months ago. The dollar is counting on a strong run into the close of the year with the focus now very much on next week’s payrolls announcement.
As for today, the focus is on the Japanese yen which has slumped to its lowest level versus the USD since December 2007. Haruhiko Kuroda, the Bank of Japan Governor, led his troops to vote to increase the monetary base in Japan up to Y80trn – around $720bn – overnight. The increased stimulus to counteract the kick to growth that April’s sales tax increase caused is finally here. As much as we have talked about the divergence in policies between the European Central Bank and the Federal Reserve, the Bank of Japan has just shown Mario Draghi how it is done.
