Markets

As we showed last week, the fall of oil prices by more than 30% over the past 2 months is having a bearing on inflation and the PCE deflator. The CPI figures released last week for Germany, France and Spain were softer than analysts’ expected and the core rate for the European Monetary Union fell to 1%, a level it was last at in January. In the US, the core PCE deflator eased to 1.8% and the 3 month annualized rate, a useful trend indicator fell to 1.2% in October from 2.2% in May. While this is good for household spending, capital spending might fall as the energy sector, one of its largest contributors cuts back on planned investments.

One element of our analysis highlighted since the start of the year is the breakdown of global synchronized growth as Europe and Emerging economies took a breather and the US powered on (see chart of Manufacturing PMIs above). Last week Switzerland and Sweden joined Germany, Italy and Japan in reporting contracting Q3 GDP. In the US we are following retail sales for any indications of a change in momentum as the series is close to cyclical highs. Although the sequential rate of change has weakened, it is too early to categorize this as a trend change.

Global markets are cheering the trade ceasefire between China and the US and an output cut by oil producers in Vienna on Thursday should also provide a tailwind for risk assets. The average hourly earnings data in the US which reached a cyclical high of 3.1% in October will be scrutinized on Friday as the comparative base effect of Nov 2017 is steep. In Germany, industrial production data to be released on Friday should show if there is any improvement and focus will be on the auto sector.