US inflation data and Kocherlakota speech in focus today

Good morning,

• Confidence in German economic outlook on the rise;

• UK inflation rises but remains well below target;

• Shinzo Abe confirms delay in next sales tax hike and new elections;

• US inflation data and Kocherlakota speech in focus today.

The latest ZEW economic surveys showed analysts and institutional investors are more optimistic about conditions in the eurozone’s largest economy than they’ve been since July and far more so than the markets had expected. Of course these surveys can change quite dramatically from month to month so I don’t think anyone is going to get too carried away with it, but it’s certainly encouraging. There was also a marginal improvement in the current situation measurement, despite expectations for another decline so there’s definitely positives to take away from this. That said, it did come with a warning on the fragility of the economic environment, with geopolitical tensions continuing to weigh on the economy.

We’ve seen further evidence of the low inflation environment that Bank of England Governor Mark Carney addressed last week, from the October CPI reading which rose slightly to 1.3%. Core inflation remained at 1.5%, below expectations of a small rise to 1.5%. Given that Carney last week claimed that he will soon have to write a letter to Chancellor George Osborne, as inflation is expected to fall below 1% and only return to 2% at the end of the forecasting period of three years, this can’t come as a surprise to anyone. With Carney claiming that inflation will return to 2% in three years, it’s very unlikely that any further loosening of monetary policy is planned.

Japanese Prime Minister Shinzo Abe called a surprise press conference this morning in which he confirmed the rumours that have circulated in the markets over the last week. In response to the poor showing in the third quarter, which drove Japan into technical recession, Abe pushed back the next sales tax hike, from 8% to 10%, by 18 months to April 2017. Abe claimed that the delay was necessary as a second hike could threaten the exit from deflation. He also stated that it would not be delayed a second time which I’m not sure anyone is going to buy as doing this at the wrong time will do more harm than good, hence today’s announcement. Abe also confirmed that the lower house will be dissolved on 21 November, with elections taking place in December. There wasn’t a huge reaction to this though because as already stated, it’s been rumoured for a week and therefore as far as the markets are concerned, it’s old news.

Next up we’ll get inflation data from the US, in the form of the October PPI readings. The amount paid by producers gives a strong indication of future consumer price inflation and these can therefore be viewed as a good leading indicator. Both the PPI and core PPI readings are seen pulling back slightly in October, potentially highlighting future disinflation in the US at a time when the Fed is looking to raise rates and the rest of the world is experiencing difficulties with inflation.

We’ll also hear from FOMC voting member Narayana Kocherlakota, who is due to speak at the St Paul Rotary in Minnesota. Given that these speeches can invite questions, we may get some hints over future Fed policy which have the potential to move the markets.

The S&P is expected to open 1 point lower at 2,040, the Dow unchanged at 17,647 and the Nasdaq 3 points lower at 4,210.