Following subdued trading over Thanksgiving in the US, attention this week is largely focused on the ECB meeting on the 3rd of December. Draghi and several board members have remained very dovish and signalled that the central bank is working on a number of different options to ease policy. Markets are now expecting a mixture of a cut in deposit rates, an extension of the quantitative easing programme and potentially a two tier system for charging banks that park money with the ECB. Several analysts voiced concerns that there is a risk now that the ECB disappoints the market, given the very high expectations as the 10bps deposit rate cut looks fully priced in.
Inflation data in the US was softer than consensus expectations with headline PCE rising 0.1% m/m and core PCE nearly flat (0.05%) on the month. This leaves headline and core PCE inflation up 0.2% y/y and 1.3% y/y respectively. Services inflation at 1.9% y/y was steady relative to prior months, but insufficient to offset further weakness in core goods. The bulk of the FOMC committee continues to expect that improvements in labor markets will support a return of inflation to the Fed’s target, once transitory shocks from the exchange rate and energy prices fade. As such, a solid November employment report should be sufficient to keep expectations of a December lift-off in place.
Core CPI in the US indicates a slightly higher level of inflation at 1.9%. The large difference between the CPI measure and the PCE, centres on the one off falls in elements of medical costs which are not included in the CPI and will drop out of the PCE calculation in the months ahead.
US Q3 GDP was revised higher to 2.1% QoQ (SAAR) in line with consensus expectations. The source of the upward revision was growth in private inventories, while the update also showed that stronger residential and non-residential fixed investment was offset by a downward revision to net exports. The upward revision to private inventory accumulation does add further risk to a future drag on GDP.
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