Producer prices plunged sharply lower, dragging the Y/Y rate into negative territory for the first time in four years. However, a still bigger surprise was the sharp drop in core PPI. Looking into more detail, headline PPI dropped by 1.6% M/M and Y/Y. Energy prices (-5% M/M) and food prices (-0.8% M/M) drove the decline.

Core PPI declined by 0.9% M/M to be up only 0.6% Y/Y, the lowest reading since November 2003. Within the core sector, it was light truck prices down 9.7% M/M and passenger car prices down 2.3% M/M that were behind the sharp drop. These declines are a bit suspect and are probably due to the seasonal adjustment factors. Also in previous months these categories showed quite some volatility. Nevertheless pipeline price indicators such as intermediate and crude goods were also at very subdued levels, indicating the absence of any price pressures at the producer level.

October retail sales apparently were soft. Headline sales fell by 0.2% M/M, but the September figure was revised down to –0.8% M/M from –0.4% M/M previously.

Consensus was looking for a 0.4% M/M drop. However, also here sales at gasoline stations (-6% M/M) were the biggest drag on sales. Sales less cars fell 0.4% M/M (expected – 0.2% M/M) but the September figure was revised down to –1.2% M/M from –0.5% M/M. Car sales actually rose slightly (0.6% M/M). Building materials (-0.3% M/M) fell for the third consecutive month and furniture fell 0.7% M/M, the second consecutive month. So the decline in housing construction is having impact on consumer spending. Sales excluding cars and gasoline were up a moderate 0.3% M/M, similar to September. Overall, the headline sales figures were weaker than the underlying trend, as lower energy prices played a big role. So spending is not falling off a cliff, but also isn’t rebounding on lower energy prices. The October result and the downward revisions point to a downward revision in Q3 PCE and weak consumer spending momentum going into Q4.

EMU: Slightly weaker GDP growth, but….

Q3 EMU GDP rose by 0.5% Q/Q and 2.6% Y/Y, falling slightly shy of the consensus estimate (0.6% Q/Q and 2.7% Y/Y) and sharply down from the Q2 0.9% Q/Q increase. Looking to the geographic dispersion, GDP growth disappointed in the three main countries. German GDP rose 0.5% Q/Q, the Italian one 0.3% Q/Q and the French even stabilized. Spain (0.9% Q/Q) and the Netherlands (0.6% Q/Q did better. However, the slightly disappointing Q3 results were in a number of countries offset by upward revisions of Q2 data. As such, the slowing in Q3 shouldn’t be considered as an alarm signal. Q4 could be relatively strong as Germans may bring forward their spending.

German Q3 GDP was a bit weaker-than-expected, but upward revisions more than offset the shortfall. Q3 GDP amounted to 0.6% Q/Q and 2.8% Y/Y, the highest in six years and up from 2.7% Y/Y previously. Q1 and Q2 GDP growth was revised up to 0.8% and 1.1% Q/Q from 0.7% and 0.9% respectively. So overall, 2006 GDP growth looks to become slightly stronger than expected until recently. There was no breakdown available.

German ZEW economic sentiment survey continued to show two faces in November. The headline forward-looking, expectations index dropped further to a very weak –28.5 (from –27.4), while the current conditions index surged higher to a very high level of 53 (from 42.9). The good correlation between the current conditions index and GDP suggests that Q4 growth will be strong.

The expectation index is now at the lowest level since 1993, raising fears that the current strong momentum will soon slow down. Weaker global growth expectations and fears about the impact of the VAT tax rise in 2007 are probably driving this pessimistic view on the economy going forward. We think that the ZEW index is giving a too-dark picture of the outlook. We have more confidence in the IFO survey, which suggests some slowing in growth, but not to the extent the ZEW suggests.

October German HICP rose by 0.1% M/M and 1.1% Y/Y according to the final report. This was slightly lower than the preliminary report suggested.

Other news: Lower oil prices offset higher tuition fees

In the UK, annual CPI stabilized in October at 2.4% Y/Y, whereas an increase to 2.6% Y/Y was expected. The largest downward effects came from transport costs, due to lower oil prices, furniture and household appliances. The largest upward effects came from the increase in university tuition fees and food and non-alcoholic beverages. Underlying core inflation stabilized too at 1.4% Y/Y. Hence, annual headline remained above the Bank of England’s target of 2% for the sixth consecutive, which raises the concerns within the MPC as it happens just ahead of the main wage settlement round.