EUR Bull Blinded by Flash Numbers

• Fed reinforces “normalization”

• China flash manufacturing PMI dips to 6-month low

• Weak Flash numbers has EUR hobbling

Fed announcements usually end up having the largest market impact, and yesterday’s FOMC October minutes were trying not to be “the” exception. Nevertheless they seem to have failed, ending up be “non-event” as currency prices remain contained in limbo status range looking for a meaningful impetus.

The minutes from last month’s critical meet, when the Ms. Yellen and company formally concluded their QE3 program, again reinforced market expectations for the beginning of “normalization” of policy sometime in the middle of 2015 – which came as no surprise. The Fed now heads the BoE ‘normalcy’ timetable.

Since the release, investors and dealers have witnessed U.S treasury yields backing up a tad (10’s +2.33%), the “mighty” dollar finding some traction, while gold prices attempted to fall into yesterday’s close as U.S policy makers remain mindful of improving both U.S labor conditions and economic growth. Fed members remain concerned that “measures of inflation compensation had declined somewhat” but also added “longer-term inflation expectations had remained stable.”

The markets conclusion is that there is little in the minutes to prevent the latest projections for interest rates despite the uncertain inflation outlook. The market will want to take a closer look at this morning’s US CPI figures for further individual clarity.

China flash manufacturing PMI dips to 6-month low

Softer data from the world’s second largest economy continues to worry everyone. The leading assessment of China’s economy this month via the HSBC flash manufacturing PMI was not particularly impressive as the index missed estimates to hit a six-month low of 50.0 (on the cusp of expansion/contraction divide). The reading is the latest evidence that the world’s second biggest economy continues to lose traction.

Digging deeper amongst the most notable components:

• Chinese employment deteriorated at a faster rate

• Output turned to expansion from contraction

• Export orders increased slowly

• While input prices decline receded

On the first go around, economists note that Chinese “disinflationary” pressures remain strong, capacity utilization point to insufficient demand in the economy, and more monetary and fiscal easing measures are justified given the “significant downward pressures” on growth. Reports like this will weigh on regional commodity sensitive currencies (NZD and AUD). China remains the Aussies largest trading partner and until Australia manages to change their business mix (relying too heavily on commodities extraction/production), they will always be one of the most susceptible to Chinese growth worries. The AUD has eased against the greenback on the news, trading at AUD $0.8607.

Weak Flash numbers has EUR hobbling

The 18-member single currency’s fragility is once again highlighted by this morning’s economic data. With another disappointing report, perhaps the EUR bear may want to consider holding off booking profits just yet?

The single currency squeeze to its recent lofty heights (€1.2540-70) is trying to be reversed by some poor regional reported PMI’s. The Eurozone’s November composite PMI came in at 51.4 this morning vs. the 52.3 consensus and worse than last months 52.1 print. Data like this would suggest that only +0.1-0.2% GDP growth for Euro Q4. The initial currency price action was rather choppy and to be expected on the back of French manufacturing and services remaining in contraction and with Germany’s 50 neither expansion or contraction print.

The eurozone weakness highlights the fragile and uneven growth and certainly helps to keep ECB easing very much in play. Some dealers will try to shift gears and expect to see a more proactive ECB over the coming months. Will Euro policy makers be capable of sweetening Decembers TLTRO program (long-term refinancing operation) in a fortnight? There is a strong chance of full-blown QE in Q1 2015, but Draghi needs to convince the Germans.

To date, the ECB has had the minimum of success in expanding its balance sheet. In fact, it has actually declined -€11b since the beginning of September. The EUR will remain very sensitive to short interest rate trends, with further downside very much on the cards. However, be mindful of the Swiss “floor.”

This morning’s U.K October retail sales (+0.8%, m/m and +4.3% y/y) handily beat expectations. Unfortunately, it was driven by the steepest fall in store prices as the price deflator registered its sharpest decline (-1.5%) in a dozen-years. It’s not a surprise to see that the fall was led by petrol stations, backed by plummeting crude prices this year.

On the plus side, the BoE’s Governor Carney will be happy to see the U.K consumer, who are the main driver behind U.K growth, are willing to keep spending. Many had feared that a fall in wages would have a material negative impact, obviously not yet.

Cable has risen; further backing away from its 14-month lows on the strong October sales headline. It’s trying to take out the Asian overnight high, but seems to be lacking the stamina at the moment. There are market touted offers at £1.5700 (near yesterday’s London high) and £1.5720 (post-FOMC minutes high).