Oil hit hard as OPEC maintain production levels

• Crude prices fall by 7% in 24hrs as OPEC decides to keep the taps on

• Eurozone inflation numbers due at 10am, expectations key moving forward

• Bad news for producers and central banks, good for consumers

• Japanese inflation and retail sales elements miss estimates, yen slips further

It was the oil markets that grabbed all the headlines yesterday as a meeting of the countries that make up the OPEC cartel came together in Vienna and decided that, despite recent price falls in the value of a barrel of crude oil, production supply would not be cut. This only caused oil to continue lower through an illiquid session exacerbated by the US Thanksgiving holiday. The falls in the price of a barrel of oil mean that only the UAE, Kuwait and Qatar will still be able to balance their fiscal budgets on oil revenue. Other large petroleum exporting nations – Russia, Nigeria, Mexico, Saudi Arabia, and Norway – are underwater at the moment and their currencies paid the price in yesterday’s session. The Russian rouble hit fresh record lows against the USD and EUR, the main constituents of its currency basket, yesterday and has continued this morning.

While it is a nightmare for these oil producing nations, a lot of people will remain relatively sanguine about this. For you and me, and for a lot of consumers globally, this is a market operated tax cut and boost to disposable income and discretionary spending funds. It is all not all smooth sailing in developed nations and commodity importers however, as these moves will have a very real effect on near-term inflation measures and longer-term expectations of price rises.

Bank of England Governor Mark Carney has warned that inflation in the UK will fall below 1% in the coming 6 months, triggering a letter from him to the Chancellor to explain how and why the Bank has missed its target by so much. This time last week Mario Draghi was giving a speech that used the word ‘inflation’ 46 times and stated that CPI must be brought back towards the Bank’s target ‘without delay’. We viewed these movements as a signal of increased urgency on the part of the European Central Bank. Similar noises can be expected from other central banks in the coming months, in light of the news from Vienna.

Inflation was always going to be the focus today with the preliminary estimate of CPI through the euro area for November due today at 10am. Markets are looking for the estimate to remain at around 0.3/0.4% higher compared to this time last year but we will be playing the expectations game once again. It is not what inflation does this month or next that governs the ECB’s thoughts on stimulus but what effect this has on longer run expectations. A continual basing of inflation at current levels will eventually lead the longer term thoughts – 2 years, 3 years or 5 years from now – lower. It is the missing of the target here that will guide the ECB to direct additional policy stimulus.

We heard during the week from European Central Bank Vice President Vitor Constancio that the central bank will debate the launch of some form of additional policy easing in Q1 of next year. “We expect that the adopted measures will lead, within the time of the program, the balance sheet to go back to the size it had in early 2012,” Constancio said. ECB President Mario Draghi has set a target of bring the ECB's balance sheet back to its level of March 2012 - around 3 trillion euros compared with the current 2 trillion. Of course, the ECB has started buying covered bonds and asset backed securities but the markets for these are deemed too small to do all the lifting themselves.

All in all, we have to remain bearish on the euro as a result but maintain that the prospects for disappointment are always high with the European Central Bank. At the moment the Governing Council believe that the current level of stimulus is appropriate. They are not ones to rush however. They never have been, but I hope that it doesn’t take another significant deterioration in the European economy for them to pull their fingers out.

The yen has ended its recent run of strength overnight as both its latest retail sales and inflation measures missed estimates, raising the spectre of further loosening of policy from the Bank of Japan following the expansion of its monetary base in late October. Bank of Japan Governor Kuroda said there was no limit to steps the BOJ could take to reach its 2 percent inflation goal. Yen is down 0.4% on the session.

Have a great day.