Immediate inflation risks for the Eurozone look to be moderating

• Inflation in Germany eased somewhat in November, slowing to 11.3% y/y from 11.6% a month earlier. Along with declines in Spanish and Belgian inflation, the German number should set the Eurozone data on a path for a general decline when it is released later today. With energy costs sliding further into the month and likely to extend their weakness into December, the immediate inflation risks for the Eurozone look to be moderating and markets are shifting more to expecting a 50bps hike at the December ECB meeting.
• US consumer confidence was marginally lower in November with the Conference Board’s measure falling to 100.2 from 102.2 a month earlier. Assessment of current conditions as well as future expectations both dipped but only marginally from month-earlier readings. There doesn’t appear to be much pass through from higher rates onto the labour market as 45.8% of respondents suggested jobs were “plentiful,” actually increasing month/month while those saying jobs were “hard to get” was stable at 13%.
• Official PMI numbers out of China fell sharply for November as the rise in Covid-19 cases in recent weeks and subsequent restrictions on activity take their toll. The manufacturing PMI dropped to 48 from 49.2 in October while the non-manufacturing PMI dropped to 46.7 from 49.2 previously. The weakness in the economy along with social unease with Covid-19 restrictions looks as though it is prompting some adjustment from the government in its stance on the pandemic. China outlined steps to increase uptake of Covid-19 vaccines among its elderly population and also wind back some of the more excessive lockdown measures taken in individual cities. Expanding vaccine coverage is a key metric likely to allow a push away from the country’s strict Covid-zero policies which have been acting as a major drag on both domestic and global growth while also fomenting social unrest. Officials in China are also noting that the virulence of Covid-19 has lessened, thanks to vaccines and previous infections, perhaps as a step to getting more acceptance of living with the virus.
• Turkey’s trade deficit narrowed in October to USD 7.87bn, its smallest level since April this year. Exports of USD 21bn, up 3% y/y, were offset by a 31% increase in imports to USD 29bn as Turkey endures the impact of high commodity prices and a weaker currency. Fuel imports rose by 37% y/y while precious metals imports also jumped sharply.

Today’s Economic Data and Events

• 11:00 TU GDP y/y Q3: forecast 4.4%
• 11:45 FR CPI y/y Nov: forecast 6.1%
• 14:00 EC CPI y/y Nov: forecast 10.4%
• 17:15 US ADP employment report Nov: forecast 200k
• 19:00 US JOLTS job openings Oct: forecast 10.3m

Fixed Income

• US Treasury markets closed weaker overnight ahead of comments expected from Fed chair Jerome Powell later today. Yields on the 2yr UST added 3bps to 4.4732% while the 10yr yield added 6bps to 3.7441%. Powell’s commentary and the non-farm payrolls later this week will set up the next trajectory for rates in the US.
• European markets were broadly stronger as the slowdown in German inflation helped to soften rate hike expectations for the ECB. Yields on 10yr bunds fell almost 7bps to 1.914% while both French and Italian bonds also rallied. Gilt yields dropped almost 3bps at 3.089%.

FX

• Currency markets endured another choppy day of trading with initial gains against the dollar spurred by an early risk-on tone. Those gains faded for the most part later in the session though movements against the dollar were generally mild. EURUSD dropped 0.1% to 1.033 while GBPUSD fell less than 0.1% to 1.1952. JPY benefitted from a haven bid with USDJPY down 0.2% to 138.63.
• Commodity currencies had a bit more to show for themselves. USDCAD added 0.6% to 1.3579 as the near-term oil outlook remains clouded. Both AUDUSD and NZDUSD rallied, with the Aussie up 0.6% at 0.6688 and Kiwi gaining 0.6% to 0.6201.

Equities

• After strong gains in Asian markets on the back of hopes that China would ease some of its more onerous Covid-19 rules, US and European markets failed to carry the momentum forward. The Dow Jones closed unchanged while the S&P 500 and NASDAQ dropped 0.16% and 0.59% respectively. European markets were more mixed with a gain of 0.5% in the FTSE and basically flat close in French markets offset by a 0.19% drop in the DAX.

Commodities

• Oil prices closed mixed overnight as there is still no clarity on the status of the EU’s price cap plan while market attention shifts to OPEC+ next week. Brent futures fell 0.19% to USD 83.03/b, their fifth day in a row of declines while WTI added 1.24% to USD 78.2/b.
• OPEC+ has reportedly changed its plans for next week’s meeting to be an online event, prompting speculation that no major decision will be taken and that output targets will be rolled over. OPEC+ may included language suggesting that the meeting remains “open”, however, giving themselves leeway to intervene on short notice.
• The API reported a drop in US crude stockpiles of 7.8m bbl last week, a large draw if confirmed by the EIA later today. According to the API both gasoline and distillate stockpiles were higher.

Click here for charts and tables