With an early close in the US after Thursday’s Thanksgiving holiday, liquidity should be lower, as many market participants take a long weekend off. Today is also the last trading day of the month. The Japanese economic data from last night, yesterday’s plunge in oil prices, and new lows in European government bond yields could provide plenty of trading opportunities today.
All eyes are turning toward the next week’s meeting of the European Central Bank’s governing council. Today’s flash estimate of Eurozone inflation for November is the key event, but next week the purchasing manager indexes (to be released on Monday) and the weekly ECB financial statements (due Tuesday) could also affect last-minute expectations of the ECB meeting.
If Italy's CPI figure slides into negative territory, then two Eurozone crisis countries will have slipped into deflation. Photo: Thinkstock
Germany October Retail Trade (07:00 GMT)
German retail trade is expected to increase by 1.7% both from a month ago and in year-on-year terms. German consumer trends are supposedly an important influence on Eurozone monetary and fiscal policy, as Germany usually opposes deficit-financed budget spending and unconventional monetary policies deemed as risky, or that invite moral hazard and threaten to make the sky fall in.
According to this line of thinking, bad news from Germany is good for the Eurozone as a whole, as it would make Germans more willing to allow more reflationary economic policies. Still, given the volatility in monthly retail trade figures, and the grim outlook for Europe, I do not think even large surprises here would have a notable effect on policy expectations or financial asset prices.
UK November House prices (07:00 GMT)
UK house prices are expected to show only a slim 0.4% rise over the previous month and an 8.6% increase over the same figures for year ago. The annual growth rate has been declining from the 11.8% high seen in June, and the lower rates of increase is due to recent negative price action, as evidenced by the falling monthly rate-of-change. 
Cooling housing markets are good news for the Bank of England, which has been worried about frothy house prices, but recent calls for more austerity and the weak European outlook have served to counter any BoE haste to increase interest rates.
The latest GDP figures for the UK suggest that economic growth is still based on high government spending, and not consumer spending. So the market is not expecting rate hikes any time soon, and if house price changes turn out more negative than the consensus expects, the pound could suffer a little. A cursory look at recent price changes suggest that on a mean-reversion basis a small negative surprise could be in the cards.
Eurozone November flash estimate, harmonized index of consumer prices (10:00 GMT)
After a small blip higher in October, the flash estimate for November inflation is expected to slump to September’s low of just 0.3%. The national inflation estimates for Germany and Spain were published yesterday, and while Germany’s inflation rate was as expected, Spain’s inflation rate fell further into negative territory, hitting minus 0.5% in year-over-year terms.
While positive surprises in other countries could help lift the overall Eurozone estimate, the talk now is that a 0.2% rate would not be far-fetched. After Thursday’s carnage in oil markets following the OPEC decision to keep production steady, the inflation outlook remains even more miserable.
The core inflation rate (less energy, food, alcohol and tobacco) is expected to remain unchanged at 0.7%, but even that is far below the ECB's target. The inflation rate with constant taxes, which eliminates the effects of tax changes, was 0.2% in October, suggesting that the “true underlying” inflation rate is 0.2% lower than the standard indicators show.
A low inflation number should take the EURUSD lower in anticipation that the ECB will have to hint at further easing measures at its meeting next week. ECB vice president Vitor Constancio said on Wednesday that the ECB would review the outcome of the current measures during the first quarter of 2015 and then decide whether new asset purchases – possibly including sovereign bonds – would be in order (see Reuters, Bloomberg).
The allotment of the second targeted longer-term refinancing operation (TLTRO) will be made on December 11. After Constancio’s remarks it would be surprising if the ECB really does announce anything new next week, so the EURUSD could be close to its near-term bottom after today’s inflation numbers.
Italy’s inflation rate is perhaps worth a look. It will be published at the same time as the Eurozone number. Italy’s consumer price index showed a year-over-year increase of 0.1% in October, while the harmonized index of consumer prices rose 0.2%. After Spain’s numbers showing up as worse than expected and given the latest oil price drop, a nasty headline mentioning Italian deflation is possible. That would mean two of the crisis countries considered too big to fail would be in deflation. A low number for the Eurozone overall could be more palatable to Brussels and the ECB than two crisis countries showing red flags.
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