Oil and European inflation are not unrelated

Outlook:

Of the long list of releases today (see below), three are generally considered the key factors—durables, jobless claims and personal income and spending. We worry that if un-expectedly good GDP yesterday could not provide the dollar with support, today’s data can be brushed off, too.

Durables for October probably reversed Sept’s dip and may be up 3.5%. Jobless claims are forecast to drop 3000 to 288,000, down 20% y/y. And consumer income is forecast up 0.3% with spending up 0.4%. We also get the University of Michigan consumer sentiment index and pending and new home sales.

Today's economic calendar:

7:00 MBA Mortgage Applications

8:30 Durable Goods

8:30 Initial Jobless Claims

8:30 Personal Income and Outlays

9:45 Bloomberg Consumer Comfort Index

9:55 Reuters/UofM Consumer Sentiment

10:00 Pending Home Sales

10:00 New Home Sales

10:30 EIA Petroleum Inventories

12:00 PM EIA Natural Gas Inventory

1:00 PM Results of $29B, 7-Year Note Auction

3:00 PM USDA Ag. Prices

Probably the more important releases will be tomorrow’s OPEC meeting announcement and the ECB’s flash inflation number on Friday. Eurozone inflation was 0.4% in Oct and Nov is expected to soften fur-ther to 0.3%. Last week Draghi railed against disinflation: “It is essential to bring back inflation to target and without delay.”

Oil and European inflation are not unrelated—falling oil prices contribute to disinflation in Europe and give opponents of QE a reasonable cause to urge delay. Constancio may be sure that the ECB has the authority to study and implement QE, but skeptics abound on a number of fronts—the BBK opposes, there is not enough qualified paper out there, and/or it’s not actually mandated. We have yet to hear from the Court, the German court having thrown it upstairs earlier this year.

It could come down to Draghi’s credibility—he repeated the equivalent of “whatever it takes” regarding sovereign QE, and if the ECB chickens out or is refused the authority, what happens to Draghi? Extrem-ists speak of resignation and Draghi going back to Rome to help Renzi run Italy, but that is not con-sistent with how European bureaucrats behave. Another option would be the existing programs being judged as working and likely to work ever-better as time goes on, obviating the need for the sovereign option. After all, the ECB has already taken many actions to discourage parking and boost lending. We don’t need vast new amounts of credit creation—maybe a marginal improvement will suffice. All the same, next week’s ECB policy meeting will have everyone on edge.

And let’s not forget the Pope. Yesterday Pope Francis called Europe “elderly and haggard,” in front of the European Parliament, no less. When Rumsfeld referred to “old Europe,” officials were offended by American arrogance, but so far no one dares criticize the Pope. And he has a point. The president of Ita-ly is 90 and would really, seriously like to retire, but Italian politics can’t deliver another compromise candidate.

We guess that economic data and institutional considerations are taking a back seat to the relative yield story. As noted above, US yields are now the highest among G7, whose average 5-year yield ex-US is 0.704%. Thus the US 5-year yield yesterday at 1.595% is the best of the bunch. As long as global inves-tors like US yields better than anyone else’s, the yield cannot reflect rate-hiking intentions at the Fed—Greenspan’s conundrum.

You’d think that foreigners would have to buy dollars to buy Treasuries, but it doesn’t work that way—the boost in dollar-buying is minor compared to big-player positioning. And the big players are having fun toying with the euro in the range depicted on the mini-chart. We are still in search of a lasting, bind-ing catalyst. If ECB QE is the only one out there, it’s not very binding so far. As usual around major holidays, we advise against taking any bold actions. In fact, try to take no action at all. You want to be square by noon today and unless something Big occurs tomorrow or early Friday, stay away until Monday.

Note to Readers: Tomorrow, Thursday (Nov 27), is Thanksgiving in the US, a national holiday. We will not publish any reports on Thursday and only the traders’ reports on Friday.