After this week’s Federal Reserve Bank’s policy-setting meeting that ended the monthly asset purchases, market focus has shifted to the timing of the its first rate hike (supposedly mid-2015) and what the other central banks are up to. The biggest question marks are over the European Central Bank (ECB) and the Bank of Japan (BoJ), as is the Ukrainian crisis – after yesterday’s gas deal for Ukraine, we might see a positive market reaction in the stock- and bond markets as this is a sign that Russia is becoming more accommodative as the economic sanctions have begun to hurt its economy.
Today’s data calendar has many items, but most of them are of secondary value. Most important will be the euro area’s inflation estimate, but I suggest taking a look at the calendar and keeping an eye out for the other European data releases today.
Germany September Retail Sales (07:00 GMT)
The monthly retail sales are expected to have plunged by 0.8% in September, following a brisk increase of 1.5% in August. The German retail sales are notoriously volatile on a monthly level and consumer sentiment and activity tend to be late to the party during turning points. The German Ifo business climate index released last Monday confirmed that the economic outlook continues deteriorating, as it has done since the April highs. It took two months more for the retailing sector’s sentiment to sour, but consumers have apparently not noticed the fall in business sentiment yet. 
We will soon know better how German economic problems affect retail sales. Photo: Thinkstock
I have said this many times, but I’ll say it again: as the European Union’s and ECB’s economic policies are largely dictated by Germany, the euro area’s biggest hope is that Germany’s downturn is prolonged and its effects extend to the voters. The fear of political damage could lead to a shift in the Berlin’s policy stance. Unfortunately, things are a bit different now – the rise of the political party Alternative für Deutschland (known as the AfD) makes transfer union and easier fiscal and monetary policies much harder to implement. 
Chart source: Saxo Bank
Euro area Flash October Harmonised Index of Consumer Prices (10:00 GMT)
The October inflation rate is expected to have increased a bit to 0.4%, after falling to 0.3% in September. The core inflation has held up reasonably well, and is expected to increase to 0.9% from September’s 0.8%. Obviously, the fall in oil prices is a big factor behind the low inflation, but it only explains part of the story.
While the outlook for Europe remains relatively grim, and a notable pickup in inflation is still far in the future, there are several developments that would suggest the inflation is nearing a cyclical bottom. The euro area’s M3 monetary aggregate has improved a bit recently, as the annual rate-of-change has climbed from last April’s 0.4% low to 2.5% in September.
While lending to the private sector continued decreasing, there is some hope for the future: the ECB’s third-quarter bank lending survey stated that banks have eased their credit standards in all loan categories, while the demand for loans increased across all loan categories.
Now that the ECB’s stress test of the European banks is behind us, perhaps banks’ interest in acquiring additional liquidity from the ECB, developing the asset-backed securities market and lending, will improve. The road to an inflation rate closer to the ECB’s target will be long and rocky, as high unemployment guarantees that wage inflation will not be an issue.
Given the above, the ECB’s meeting next week is coming into focus. It will be the first opportunity for journalists to ask about ECB's next steps after the stress tests were published last weekend - but more on that next week. Meanwhile, a low inflation print could push markets to think that the ECB will be forced to step up its act in early 2015, which could open up the EURUSD for further falls.
Chart source: Saxo Bank
US September Personal Income & Spending (12:30 GMT)
Personal income is expected to post an increase of 0.3% for September, while consensus sees personal consumption increasing by 0.5%. These monthly changes are very much within the range of what we have seen since the financial crisis, and of much bigger interest will be the PCE price index, which is also the preferred inflation gauge of the Fed. Both the headline and core price indices are seen to show an increase of 1.5% from a year ago – well below the Fed’s target. The price index bottomed out at the end of 2013, but peaked in last May, and has fallen somewhat since. This just shows that the US is not immune to a slowing China and a deteriorating Europe.
The third quarter’s employment cost index is published at the same time, and it is expected to show an annual increase of 2% – higher than the second quarter’s 1.5%, but not enough to cause worries of wage inflation. Notice that a stable situation would probably keep the Fed on track for an interest rate hike in mid-2015, barring even further damage from Europe.
Chart source: Saxo Bank
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