The Wait Is Nearly Over, And The Dollar Catches A Bid

The anticipation is nearly over. The softer than expected preliminary EMU inflation figures encourages expectations for the more aggressive range of actions by the ECB tomorrow. Draghi has claimed that movement toward the inflation target was too slow. Today’s data showed a 0.1% increase year-over-year in the headline rate. The market had anticipated a 0.2% increase. Although the ECB targets headline inflation, it clearly also tracks core inflation. Core price increases slowed to 0.9% from 1.1%. 

The anticipation is almost over in the US as well. The November employment report is seen as the last hurdle to a mid-December Fed hike. Although the ADP estimate has some tracking error with the BLS estimate, and there have been some significant divergence in some months, an as expected increase of 190k jobs would strengthen expectations that slack in the labor market continues to be absorbed.  

The market has largely shrugged off yesterday’s dismal US manufacturing ISM. The 48.6 reading was the first below the 50 boom/bust level since late-2012 and was the lowest since 2009. It was so poor that it offset the somewhat larger than expected increase in construction spending (1.0% vs 0.6%), and prompted the Atlanta Fed’s GDPNow to cut its Q4 growth tracker to 1.4% from 1.8%. 

On the other hand, US November auto sales were the third month above 18 mln unit annual pace.  Barring a major disappointment in December, 2015 is set to be a record year of sales, edging out the previous peak in 2000 at 17.4 mln vehicles. Americans bought roughly a million more vehicles this year over 2014. Yet the news is thought to be too good to be sustained, and some slowing next year is being built into forecasts.  

Sterling had been resilient in the face of yesterday’s disappointing UK manufacturing PMI. However, this seemed to be more a reflection of the general corrective pressure on the US dollar. Sterling is heavier today following the disappointing construction PMI, even though it is a smaller part of the economy than manufacturing. The construction PMI fell to 55.3 from 58.8.The market anticipated a smaller pullback.It is the weakest report since April. The services PMI will be reported tomorrow.