If October's stunning(ly low) inflation print of 0.7% is what conventional wisdom believes is the reason for the surprising ECB rate cut (it isn't - the culprit was the record low increase in private loan creation), then the just released modest increase in Eurozone November CPI, which was expected to print at 0.8%, instead rising just above that, or 0.9%, will likely mean less surprises out of the ECB in the future. Core CPI (excluding food, energy, alcohol and tobacco) rose 1.0%, following a 0.8% increase in October and 0.9% expected, while the biggest headline bounce was in energy prices which rose from -1.7% to -1.1%, if still rather negative. Looking at the main components of euro area inflation, food, alcohol & tobacco is expected to have the highest annual rate in November (1.6%, compared with 1.9% in October), followed by services (1.5%, compared with 1.2% in October), non-energy industrial goods (0.3%, stable compared with October) and energy (-1.1%, compared with -1.7% in October).
The full breakdown is shown in the table below:
[6]
The market response to the better than expected print was subduded with the EUR going nowhere fast. Perhaps this is due to the complete impotence of the ECB to talk down the currency and the fact that it is now at a higher level than where it was when it announce the November 7 rate cut. Furthermore, with strong German inflation prints yesterday, the market may have been expecting an even larger number out of Eurostat [7].
Finally, what drives the ECB next will once again not be the rigged inflation print but other considerations. Deutsche Bank had a good summary of just these earlier today:
- ECB may choose to announce measures to alleviate concerns about year-end liquidity, Deutsche Bank strategists led by Francis Yared, write in a note.
- Liquidity measures may help accommodate the turn of the year and any cash hoarding from banks ahead of Asset Quality Review
- The fact ECB didn’t manage to fully sterilize SMP this week suggests some liquidity relief may be supported
- ECB could reduce reserve requirements further by 0.5%, generating ~EU50b additional liquidity
- Sterilization of SMP could be suspended which would temporarily add EU180b of liquidity
- Expect ECB to remain dovish but refrain from any material new easing decision