Euro Area inflation data to heap pressure on the ECB

• Another decline in euro area inflation will heighten disinflationary concerns
• Ifo to provide a further gauge of the German economy after disappointing PMIs
• Q3 GDP growth in US and UK likely to be unchanged from initial estimates

With the US workweek cut short by Thanksgiving, attention in financial markets in the coming week is likely to be dominated by events in the euro area. If, as we expect, headline inflation drops in November and the forward- looking surveys point to continued economic weakness, ECB President Draghi will come under further pressure to announce additional stimulus measures at the December ECB meeting rather than wait to see the outcome of the TLTRO allocation on December 11th.

The first estimate of November CPI inflation in the euro area (Fri) is forecast to show further slippage. In the run up to this, inflation data for Germany and Spain (both Thurs) will provide some hints on the outturn. ‘Headline’ euro area inflation is expected to fall to 0.3%, from 0.4% in October. This drop is predicted to be primarily due to the lower oil price and the core rate (excluding food and energy) is forecast to be unchanged from last month. Nevertheless, a weak outturn will inevitably highlight concerns about disinflationary pressures.

Economic activity data for the euro area will also be watched closely. While the 0.2% Q3 GDP growth was modestly stronger than expected, more timely data for November were disappointing. In particular, the euro area ‘flash PMIs’ fell to new lows for the year. While euro area industrial and consumer confidence (Thurs) are forecast to be little changed from October, the coming week’s German IFO (Mon) is expected to post its seventh consecutive monthly fall. Weak data risks heightening expectations of continued below ‘trend’ growth and fuel concerns that inflation could fall further.

The coming week will be a holiday-shortened one in the US. The second estimate of Q3 GDP (Tues) is expected to show a small downward revision to 3.3% annualised from 3.5% previously. However, this is likely to be seen as dated with little implication for the outlook. There will also be plenty of new data for both October and November. October personal spending (Wed) will provide an initial reading on consumer spending growth in Q4, and is expected to pick up following September’s drop. The October personal expenditure deflator, as the Fed’s preferred inflation measure, will also be watched closely. Already released CPI data suggests that the annual headline inflation rate could hold steady at 1.4%, while the core rate may rise modestly to 1.6%. Durable goods orders, pending and new home sales (Wed) will also provide updates on activity in other parts of the economy. Meanwhile, the Thanksgiving holiday marks the start of the Christmas shopping season, so reports of “Black Friday” sales will be awaited as a bellwether indicator.

In the UK, the second estimate of Q3 GDP growth (Wed) is expected to be unchanged from the preliminary reading at 0.7%. The second estimate will contain the expenditure breakdown of GDP. This is likely to show a similar composition to recent quarters, with private sector domestic demand the primary driver of growth. The GfK consumer confidence indicator and the Lloyds Bank business confidence barometer for November will be watched as forward-looking readings. We expect consumer confidence to be a little stronger.

Finally, China’s decision on Friday to cut its key interest rates for the first time since 2012 was not a major surprise given recent weak data. Nevertheless, it is significant. Until now the Chinese authorities had favoured more targeted stimulus measures rather than risk adding to already inflated debt levels. The cuts suggest the PBOC believes the economy is now sufficiently weak to make that a secondary concern. With the Bank of Japan having recently increased its asset purchases, monetary stimulus in the world’s second and third largest economies is providing a partial offset to the end of the Fed’s QE programme.