Eurozone Moving In The Wrong Direction

There is plenty of data out today and it is generally reinforcing our three main thematic points: divergence, weak commodities—especially energy—and the slowing of the Chinese economy. This is helping the US dollar and global bonds, but weighing on equities.

HSBC's flash manufacturing PMI for China slipped to 50.0 from 50.4. It is a six-month low. The output sub-index fell below 50 for the first time since May.

The flash eurozone November composite PMI fell to 51.4 from 52.1. This is the lowest since July 2013. The disappointing data can only play up expectations that the ECB staff will cut its forecasts next month, setting the stage for the ECB to expand the assets it is purchasing.

Any hope that the ZEW survey for German presaged a recovery for the European locomotive were dashed with the PMI reports today. Manufacturing slumped to 505 from 51.8 and services fell to 52.1 from 54.8. While the French readings improved, both remain in contraction mode. That said, recall that the French economy did expand 0.3% in Q3 (Germany 0.1%). French manufacturing PMI rose to 47.6 from 47.3 and services rose to 48.8 from 48.1

The UK offered a positive surprise. October retail sales jumped 0.8% which is more than twice the gain the consensus expected (0.3%). It completely offsets the 0.4% decline in September retail sales. The year-over-year rate stands at a respectable 4.3%, up from 2.3% in September. The cloud in the silver lining is the price deflator, which fell in every category for the first time in over a decade. Even though CPI ticked up in October, the disinflation risks, as highlighted by the BOE's Quarterly Inflation Report, will dominate price trends in the coming months.

Following the FOMC minutes yesterday, the dollar pushed through the JPY118 level. It stretched to almost JPY119 before some profit-taking was seen. Look for support near JPY118 now. Japan did report a smaller than expected trade deficit for October. The shortfall was JPY710 bln. The market had expected deterioration to JPY1.2 trillion from JPY961 bln in September.

The key may not be the balance, but the fact that exports jumped 9.6% year-over-year from a 6.9% pace in September. This is the fastest pace since February. Clearly, the BOJ's actions at the end of October were not the catalysts for the improved exports. Still, what many observers seem to be missing is that Japanese companies have offshored much of their industrial activity. The overseas earnings are translated for accounting purposes into yen. The decline in the yen translates into higher yen value of those overseas earnings and that is what is helping to boost profits. Are these accounting profits more a reflection of economic prowess or rekindled animal spirits?

The US has a full data calendar today, with weekly initial jobless claims, CPI, existing home sales and the Philadelphia Fed survey (November). Although the Fed puts more emphasis on the core PCE measure of inflation, investors are especially sensitive to inflation as that seems to be the component of the Fed mandate that poses the most significant obstacle to tightening scenarios. The labor market is healing, even if not healthy yet. Projecting 7-8 months out, there is likely to be continued gradual improvement. However, measured inflation remains tame, and it is not clear that it really is moving toward the Fed's target.

We continue to expect that Q3 GDP is revised down when announced next week to something closer to 3.0% from the initial reading of 3.5%. It appears that Q4 GDP is tracking around 2.5% growth.

There has been no follow-through euro or sterling buying after firming in the North American afternoon yesterday. Both are well within this week's relatively narrow trading range. The dollar-bloc is little changed. Look for more of the same in North America.