3 Numbers: Eurozone CPI Set To Reach 3-Year High

The preliminary December estimate for consumer inflation is the main event for economic releases in Europe today. Later, the final update for 2016 auto sales in the US will be widely read. Meanwhile, today’s first look at Brazil’s Composite PMI for December is expected to throw cold water on expectations that the country’s escape from recession is near.

Eurozone: Consumer Price Index (1000 GMT): Reflation in the euro area is expected to make a stronger footprint in today’s flash data for consumer inflation.

The crowd’s looking for the consumer price index at the headline level to accelerate to a 1.0% year-on-year rate, the fastest pace in three years, based on TradingEconomics.com’s consensus forecast. Meanwhile, CPI’s core rate, which is generally viewed as a more reliable measure of the trend, is on track to hold steady at a 0.9% annual increase.

The headline projection, if accurate, will mark a regime shift to a degree in that the broad measure of pricing pressure is now hotter than the core trend. As long as headline inflation has been rising at a lesser rate vs. core, the central bank has had a fair amount of support for maintaining an aggressive policy of monetary stimulus. But if headline inflation is running ahead of core inflation, debate will intensify about the wisdom of the European Central Bank’s current policy status.

All the more so when you factor in the latest GDP estimates. Now-casting.com is currently projecting that Q4 growth for the Eurozone will rise to roughly a 0.5% quarterly advance – up from Q3’s 0.3% pace. This year’s Q1 outlook is even stronger at a 0.7% increase.

A firmer rise in inflation will fuel speculation about potential changes in ECB policy in the weeks ahead. The main question: will the central bank leave crisis-era monetary policies in place if reflation is gaining traction?

US: Auto Sales (TBD): Last year is expected to mark another record-breaking year for auto sales, but the monthly data for December that’s due today will probably strengthen the view that the cycle has peaked.

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Econoday.com’s consensus forecast for light vehicle sales in December is expected to ease for the second month, dipping to an annualised rate of 17.7 million. If the prediction is right, sales will dip to the softest pace since September. That’s still a healthy number, but analysts have been advising that the bull market for the auto industry will probably fade a bit in 2017.

Or maybe not? “In 2017, tax cuts, new fiscal stimulus, as well as improved ‘animal spirits’, could strengthen consumer spending and effectively extend the auto cycle,” a Barclays analyst wrote.

The incoming Trump administration has inspired economists to raise growth expectations for 2017, based on a policy mix of lower taxes, lighter regulation, and increased infrastructure spending in the new year. Does that mean that the bull run for auto sales can be extended?

Perhaps, but the evidence on that front will likely be weak in today’s December update. The year ahead, however, is still open for debate on the warm and fuzzy topic of how (or if) a political brain transplant in the White House can make a difference in the macro trend.

Brazil: Composite PMI (1200 GMT): The economic outlook for Latin America’s main economy, which has been mired in a deep recession, has deteriorated in recent weeks, dealing a setback to recent forecasts that a rebound is near. Today’s PMI update, however, isn’t expected to provide any relief for the optimists.

Brazil’s central bank this week published a survey that found economists trimming expectations for GDP's growth for 2017 to 0.5%, down from 0.8% a month ago. Meanwhile, the government’s statistical agency reported last week that the unemployment rate continued to tick higher, reaching 11.9% for the three months through November – almost three percentage points higher vs. the year-earlier level.

Nonetheless, the country’s president, Michael Temer, insisted last week that 2017 “will be the year that we defeat the crisis” and “it is very likely unemployment will fall as a function of the measures we are taking.”

Today’s first look at the country’s Composite PMI for December, however, isn’t expected to support Temer’s optimism. TradingEconomics.com’s consensus forecast sees the PMI slipping to 44.5 for 2016’s final month – deep in contractionary territory (below the neutral 50 mark).

“The economic malaise that has plagued Latin America’s largest economy since the beginning of 2015 showed no signs of abating,” IHS Markit advised in early December. A month later, it seems that nothing much has changed.

Disclosure: Originally published at Saxo Bank TradingFloor.com