Eurozone PMI readings plummet again despite hopes of stabilisation

Good morning,

• UK retail sales accelerate at fastest pace in six months;

• Eurozone PMI readings plummet again despite hopes of stabilisation;

• US CPI in focus as FOMC shows concern of falling inflation;

• Manufacturing, labour market and housing data also being released.

It’s been a mixed morning in Europe this morning as the latest PMI readings spell further doom and gloom for the eurozone, while in the UK, retail sales were far better in October than expected in a welcome boost to consumer spending ahead of the important holiday season.

The monthly increase in sales was the highest since April and it could come at a better time. The holiday period is so important to the UK, an economy that is very reliant on the consumer, and data like this that suggests the consumer is feeling a little flush is very welcome. There had been signs of late that the economy is cooling a little but this would suggest that it is not being felt by the consumer. The strong monthly performance gave us the nineteenth consecutive month of year-on-year growth and the highest in six months. The improvement was also broad based which is an encouraging sign, with only non-store retailing failing to record growth.

The news was less good for the eurozone, with the PMI data once again reminding us that not only are current conditions poor as the economy barely avoids stagnation, but also that confidence in the economic outlook is continuing to diminish. There was hope today that we were going to see marginal improvements across the board, maybe showing signs of stabilisation, but that certainly didn’t materialise with the French services sector was the only one to beat expectations and even that was from a low base in contraction territory.

There’s still plenty of data releases to come today from the US, starting with the latest CPI inflation and jobless claims figures before the opening bell on Wall Street. Inflation has been a global concern this year, although some countries like the US are faring much better than others, namely the eurozone. That said, as the FOMC minutes showed yesterday, the potential for falling inflation is a concern for the Federal Reserve and it is something that could delay the first rate hike. Narayana Kocherlakota, one of the most dovish FOMC members, wanted to delay the end of quantitative easing last month on fears of low inflation. If prices continue to decline, he could gather support and at the very least push back the first rate hike to the end of next year, or even 2016.

One thing that may make this less of a problem for the Fed though is that the country is nearing what it deems full employment. At this point, the availability of qualified personnel is low and companies therefore have to pay more to attract or retain staff. It’s this wage growth that causes upward inflationary pressures in the economy which is what the Fed is banking on and why it believes the 2% target will be achieved in the medium term, allowing them to raise interest rates for the first time since May 2006.

Being released alongside this is the latest jobless claims number which is expected to be below 300,000 for a tenth consecutive week which is incredibly rare and shows just how strong this recovery is. The flash manufacturing PMI is also being released shortly after the open and is expected to rise to 56.2 from 55.9 last month, as is the Philly Fed manufacturing index and existing home sales for October so there’s still plenty to come today.

The S&P is expected to open 8 points lower, the Dow 64 points lower and the Nasdaq 17 points lower.