November Eurozone Inflation (Final)

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Once again the release of Eurozone Inflation data comes out along with other price-sensitive data, so we could be looking at some market volatility at 06:00 EST (12:00 CET). The other data to be released is the October Balance of Trade for the Eurozone.

While both are important data points, the CPI is the final number for November, following the release of the preliminary number which we discussed late last month. The trade balance is from the preceding month and does not have as much fresh data.

However, with liquidity winding down ahead of year-end, we could see some extra volatility, especially since this is the second to last major data release for the Eurozone before the upcoming holidays.

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Why the Numbers Matter

The Core CPI number is what the ECB uses as its inflation guide when evaluating their mandate to keep prices stable around a 2% inflation rate. With the ECB’s asset purchasing having wound down last week, the next issue we move on to is what the ECB means by not raising rates until “summer” of next year.

In addition, the ECB will have to shrink its balance sheet at some point. Before, we were looking to the core CPI number in order to figure out when asset purchasing was coming to an end. Now that it has ended, we need to gauge when the next rate increase will come.

The core CPI rate has been bouncing between 0.8% and 1.1% all year, and, to the chagrin of the central bank, not getting above even 1.5% since mid-2013.

In fact, we have to go back over a decade to early 2008 to find a core CPI at just about 2.0%. Arguably, inflation has plenty of headroom before it starts to make the ECB satisfied, let alone uncomfortable. And things are likely to stay in that vein given the current forecast.

The expectations for the core CPI is to not deviate from the preliminary 1.0%, which would confirm a drop from October’s 1.1%.

The total inflation rate isn’t expected to differ either, staying in line at 2.0%, still a drop, however, from October’s 2.2% Unlike the core number, this includes the effect of energy, food, alcohol, and tobacco. Specifically, the decline in crude prices is expected to have weighed on this number, and nothing in the data we have gotten since suggest that there would be revision higher.

On the components side, what is likely to continue to frustrate citizens is that the upwards drive in the inflation comes from consumer-sensitive areas, especially for the time of the year.

Energy, expected to have risen 9.1% year-on-year, and food is expected to have risen 2.0% year-on-year. This would continue to heighten the price deviation between consumer-facing goods which have been experiencing inflation, compared to industrial goods that are feeling some deflationary pressures.

It could be interpreted as further solidification of the trend illustrated in the recent lackluster PMIs and in European corporate reports. Life is getting more expensive, but businesses aren’t making more money. Analysts will be keen to see if Christmas trading reports will dispel this notion, which might be further exacerbated by a policy change in the ECB.

At the same time, we also have the balance of trade being released. The last reported number for September broke a three-month slump in surpluses, but only by a little. Twice in a row the data has missed forecasts, and this time around analysts aren’t venturing a guess.

The last release was just a small improvement over the worst surplus since February 2017, which was itself an anomaly. A larger trade surplus is seen as positive for the Euro, as exporters repatriate their profits; and a smaller surplus (or deficit) could weaken the Euro.

Since early November, the EURUSD has been somewhat stuck in a sideways move between the 62 and 50 Fibonacci retracements, between 1.1210 and 1.1440.

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