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Will the EU heads of state summit ease the debt crisis?

Will the EU heads of state summit ease the debt crisis?

The second day of the EU Heads of State Summit is supposed to save the euro. We shall see. Indeed sentiment and the overnight comments from the summit suggest there is unlikely to be a quick fix with news headlines sending out mixed and somewhat confusing signals The main focus prior to that was the ECB’s expected easing of monetary policy to 1.00% and additionally reduced the reserves ratio to 1.0%, and would accept bank loans as collateral as well as easing the collateral rules while there would be two longer dated issues at 36 months on fixed rate and full allotment.

Today sees in the UK the release of trade deficit which typically narrows in October, even though the usual pre-positioning of stores for the Christmas sales season should see imports rise. The market is looking for the visible trade deficit to narrow from £9.8 billion to £9.4 billion, but given the weakness of manufacturing output in the month, we suspect that import volumes could have fallen much more sharply than anticipated leaving a visible trade deficit of £9 billion. The services surplus has been rising in recent months, but market volatility in the eurozone could well have led to a sharp reduction in October, so even if we see a fall in the total trade balance, it will be smaller than the decline in the visible trades balance.

November producer prices are published at the same time and the market is looking for a small fall in input prices, which presumably reflects a view that energy prices were flat on the month. Output prices are expected to remain flat on the month, but given the squeeze on margins that manufacturers have been suffering recently, we would be surprised if they did not try to raise prices, even if there is resistance from retailers. The fact that the BRC shop price index showed food prices rising by 4%yoy in November suggests that retailers have been able to lift prices in spite of the announcement of price wars.

The preliminary estimate of the University of Michigan’s consumer confidence survey is expected to show a fourth consecutive monthly increase, helped by a small improvement in the labour market as well as the modest bounce on Wall Street. The series troughed in August but has since recovered in line with other economic indicators. Should that trend continue then markets could become more comfortable with the idea that the US economic recovery is gaining momentum.

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