When Good News Is Bad News

Germany avoids a recession, but fiscal stimulus is now unlikely; sterling grinds higher; US retail sales eyed today.

Previous Day's Market Highlights

The good news; Germany - the eurozone's economic engine room - avoided a recession in the third quarter.

The bad news; the chances of much-needed fiscal stimulus any time soon have diminished.

Thursday's much-anticipated third quarter GDP figures pointed to the Germany economy expanding by 0.1% QoQ, better than the expected 0.1% contraction and a rebound from Q2's contraction. However, with Q2's data being revised down by 0.1%, pointing to the economy shrinking by 0.2%, the economy has actually contracted by 0.1% over the past 6 months. While one may reasonably expect the data to be a positive, it may in fact prove to be a poorer outcome then if Germany had dipped into technical recession. This is due to policymakers' ongoing reluctance to loosen the purse strings, and deliver much needed fiscal stimulus - which is only likely to happen in the event of a recession. As if to typify this point, finance minister Olaf Scholz stated, after the release, that the German economy is not in crisis, and that there is 'no need for stimulus now'. 

This statement will likely disappoint many who were hoping for increased spending, and places the ball firmly back into the ECB's court when it comes to turning around the bloc's economic fortunes. Unfortunately, this will be no easy task, with policymakers' toolkit already severely depleted and rates deep in negative territory. Price action in the euro seemed to reflect this, with the common currency showing little reaction to the data, and settling unchanged on the day, evidencing these concerns.

Meanwhile, trade jitters continued, with a lack of impactful headlines leaving investors to ponder over the current state of play. The ongoing worries saw safe-havens remain well-supported, with the Japanese yen and Swiss franc adding 0.4% and 0.2% respectively. The dollar, however, struggled, shedding around 0.2% against a basket of peers.

Conversely, both antipodeans struggled, though for unrelated reasons. The Aussie dollar shed just shy of 1%, the currency's biggest 1-day decline since April, as fallout from a disappointing jobs report continued, and market participants priced in a greater chance of policy easing from the RBA. The Kiwi dollar, meanwhile, unwound almost all of its post-RBNZ decision gains, ending the day 0.7% lower.

Turning to the UK, October's retail sales data surprised to the downside, though had little immediate impact on sterling. Headline sales fell by 0.1% last month, the third straight month of either contraction or stagnation, perhaps indicating consumers' reluctance to spend amid ongoing political uncertainties. 

Sterling, however, was more focused on election developments, further pricing in a Conservative majority. This came as a handful of Brexit Party candidates unilaterally pulled out of key Labour marginal seats and polling expert Prof John Curtice indicated that if current polls played out on election day, the Conservatives would win a majority. The pound ended the day 0.2% higher against both the dollar and euro, pulling back from a fresh 6-month high against the latter, above the €1.17 handle.

In other markets, equities were mixed as trade tensions continued. In Europe, the pan-continental Stoxx 600 lost 0.2%; while the US benchmark S&P 500 gained 0.1%, eking out a fresh record close. Finally, oil prices declined after an unexpected draw on US inventories. Global benchmark Brent dipped 0.1%, while US WTI crude settled 0.6% lower.

Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.1685 1.1703 1.1525 1.52%
GBP/USD 1.2880 1.3012 1.2761 1.93%
EUR/USD 1.1025 1.1179 1.0989 1.70%
GBP/AUD 1.8950 1.9022 1.8546 2.50%
GBP/NZD 2.0155 2.0331 2.0002 1.62%
GBP/CAD 1.7035 1.7086 1.6724 2.12%

Today's Market Highlights

What's been another whirlwind week concludes with a relatively busy economic calendar, with the US consumer coming to the fore.

October's retail sales data is due this afternoon, set to show consumer spending bouncing back after a disappointing September. Headline sales are set to have increased by 0.2% last month, a strong rebound from the previous 0.3% fall, and more in line with the trend seen so far this year. Meanwhile, turning to the less volatile components, sales excluding autos are set to have increased by 0.4% MoM, while control group sales are set to have risen by 0.3% MoM. Of course, personal consumption remains the primary factor underpinning the current economic expansion in the US, hence a firm sales figure today would point towards a continuation of the recent pace of expansion. 

Elsewhere, today's other notable release comes from the eurozone, in the form of October's final CPI inflation figures. No revisions are expected to the previously released flash estimate, hence headline inflation is set to print 0.7% YoY, and core inflation is expected at 1.1% YoY. Both measures remain well below the ECB's close to but below 2% target, with the sluggish pace of price increases set to pose a headache for ECB President Lagarde for the foreseeable future.

Speaking of central banks, a few policymakers are set to make remarks today. From the ECB, governing council member Mersch will speak this morning, while German central bank President Weidmann is set to speak this evening. Today's only other speaker will be BoC Deputy Governor Lane.

Looking ahead to next week, monetary policy will remain in focus, as geopolitical issues rumble on. In the world of central banking, investors are set to closely examine the release of minutes from the latest RBA, FOMC and ECB policy meetings for hints on the policy outlook. Meanwhile, the data calendar is relatively light, with only flash eurozone PMI figures and Canadian retail sales of note.

Today's Economic Calendar

Time Currency Release Consensus Previous
10.00am EUR Final CPI (YoY - Oct) 0.7% 0.7%
10.00am EUR Final Core CPI (YoY - Oct) 1.1% 1.1%
1.30pm USD Retail Sales (MoM - Oct) 0.2% -0.3%
1.30pm USD Retail Sales ex-Autos (MoM - Oct) 0.4% -0.1%