Good morning,

  • FOMC minutes offer nothing new and get muted market reaction;
  • HSBC PMI points to stalling in Chinese manufacturing activity in November;
  • Japanese trade deficit shrinks as exports surge on weaker yen.
  • Eurozone PMIs and UK retail sales in focus this morning.

Europe is seen opening a little flat on Thursday as last nights FOMC minutes and the data from China and Japan overnight fails to provide much direction for the markets.

There wasn’t really anything in the minutes that the markets weren’t expecting. The Fed’s concern about disinflation risk is nothing new, as is the expectations among most members that inflation will return to the 2% target in the medium term. There was no discussions regarding interest rate hikes but no timetable was given, which doesn’t help us. The only potentially surprise was Narayana Kocherlakota’s vote against ending quantitative easing, although even this isn’t that big a deal as he is a strong dove and therefore such a move in perfectly in line with his outlook, especially given his concern over inflation.

Once again overnight we got a very disappointing data release from China and the markets shrugged it off. This time it was the HSBC manufacturing PMI that declined further, narrowly avoiding falling into contraction territory with a 50 reading for November. Regardless of what the market response is, we’re seeing a worrying trend here and the markets confidence that we’re going to see some targeted stimulus is being tested. While Chinese growth looks almost certain to miss the 7.5% target set earlier this year, it appears the government is comfortable as long as it doesn’t fall below 7% and as long as that’s the case, it’s willing to accept some weakness.

As for Japan, we saw the greatest increase in export last month since February , while imports were below expectations resulting in an overall trade deficit of 977 billion yen. It appears Japanese exporters are benefiting from the weakness in the yen that we’ve seen in recent months, although this can work against the country as well at a time when it is importing large amounts of energy. That said, energy prices are very low right now which must be helping matters.

There is lots of economic data being released on Thursday so we shouldn’t be surprised if we see a substantial pick-up in market volatility throughout the European session. First up we have the manufacturing and services PMI readings for the eurozone, Germany and France. These are all preliminary readings for November and are expected to show marginal improvements on the month. While this may be seen as a positive as the bar has been set very low in recent months, I think we’d have to see more of an improvement to get investors excited.

We’re expecting a good month in October for UK retail sales which are seen rising by 0.3% on a month by month basis, which would mean a 3.8% improvement on last year, or 4.2% on the core reading. This is very encouraging as we enter a very important holiday season, a time of the year when the consumer is particularly important. In recent years we’ve seen retailers starting the sales period earlier and earlier as they strive to shift as much of the holiday stock as possible. These figures suggest this won’t be as much of an issue this year although it’s something I’ll certainly be keeping an eye on.

The FTSE is expected to open 4 points lower, the CAC 3 points higher and the DAX 9 points higher.

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