01/11/2013 11:57 GMT | Updated 23/01/2014 10:52 GMT

Shocking Eurozone Figures Could Be a Turning Point

The last week has brought news of dangerously low inflation in Germany, and we learnt that German retail sales had plunged in September, Eurozone unemployment edged up by 0.2% to 12.2%, and the Consumer Price Index across the Eurozone is estimated to have risen only 0.7% in the last year.

The Euro has always had the potential to become a deflationary disaster and now it looks like Japanisation is upon the continent. Zombie banks are kept alive via the pernicious LTRO Ponzi, so that they can buy their national governments' bonds, labour reforms are proceeding at a snail's pace and meanwhile the scourge of unemployment spreads - most sadly youth unemployment, condemning a generation to a soul-destroying, meaningless existence.

Japan now has higher inflation than the Eurozone!


With even Germany's current account balance in decline and growth barely above zero, and the Euro's strength representing a very visible tightening in financial conditions, maybe the stars are finally aligning to allow the ECB to act, by cutting the Main Refinance Rate and introducing a new LTRO, with full allotment and a fixed rate. Even a negative deposit rate must now be back on the agenda.

In its own words, the ECB judges the recovery in the Euro area to be "gradual", while "risks surrounding the economic outlook... continue to be to the downside". At the last post-meeting news conference, Mr Draghi described the recovery "as weak, as fragile, as uneven".

Tactically, one can see the Governing Council starting to turn the supertanker at the November 7th meeting, perhaps only via use of 'codewords' by Draghi that would indicate the ECB is getting close to further easing. This would then buy time to see more economic data before the December 5th meeting, before which they will also have seen new ECB staff quarterly economic projections.

The Fed tried to keep a low profile

If nothing else, I think we'd all agree that drafting the post- FOMC statement must surely be a huge lexicographical challenge, with tens of thousands of teenage scribblers, traders, investors and politicians crawling over every word to try and discover significance where, in many cases, none may exist. In this sense Wednesday night's statement was a little classic of the genre.

Some were surprised to see the pace of expansion of economic activity still described as 'moderate', rather than 'modest'. True, the housing sector had now "slowed somewhat", whereas last time it had "been strengthening", there was even debate over whether the inclusion of the word 'some' in the FOMC's assessment of the labour market as having "shown some further improvement" was a downgrade.

The truth is, this was just a holding statement, and we should watch their lips - any change in policy will be data dependent. They dropped the previous comment which suggested that tighter financial conditions could damage the recovery - hardly surprising since 10-year yields had virtually doubled from the Spring's low of 1.6% to 3.0% just before the last meeting, but they have since dropped to 2.5% and the stock market has resumed its climb.

It's also possible that the FOMC was keen to sound tough in advance of Yellen's confirmation hearings. Not all members may like her dovish stance, but she's one of theirs, and they certainly don't want to encourage the sort of uncomfortable scrutiny of the Fed advocated by Senator Rand Paul and his father. Hence their assiduous and conspicuous failure to suggest tapering would be further delayed.

The week of November 4th will be key, recent data having been somewhat contradictory, with weak consumer confidence, but a rather robust Manufacturing ISM Survey. The former may portend a weak non-Manufacturing ISM report - much the larger part of the economy - and then of course, the most important data of the week, October's employment report, due on November 8th. We may see some asymmetry in market reaction here again, with a strong report being dismissed as distorted by the shutdown, whereas weak data would support a further delay in tapering.