European Stocks are Mostly Higher Led by Gain in Spain

European stock markets mostly higher. The FTSE 100 underperformed and was down as Sterling strengthened, but elsewhere in Europe markets moved higher. Spain and Italy outperformed, the former jumped more than 1% as Catalonia tensions eased somewhat, amid a calm start to Madrid’s direct rule and as polls suggest rising support for Spanish unity in Catalonia, with pro-independence parties set to lose their majority in a new election. There are still risks of a setback, but at least for now Spanish markets are taking a breather and outperform. The Italian MIB meanwhile got some support from S&P’s ratings upgrade, which also saw yields heading south. The broadly optimistic session in Europe, followed cautious trading in Asia overnight, as a selloff in Chinese bonds spread to stocks amid concerns that the government will make further efforts to reduce leverage in the financial sector. The CSI 300 managed to claw back some of its losses but still closed down -0.30%, the Hang Seng lost -0.36%. The Nikkei moved sideways and the ASX managed a 0.27% gain ahead of key earnings reports this week.

German State Inflation Was Lower than Expected

German state inflation data lower than expected, pointing to a deceleration in the German, but likely also in the Eurozone HICP rate in October. Annual rates in German states declined between 0.2-0.5% points, leaving the pan German number on course for a deceleration to 1.5/1.6%. Vindication then for the doves at the ECB council, who argued against a firm end date for QE. Still, details for NRW, the most populous state, showed prices for package holidays falling -7.1 years over year, highlighting that the decline in the headline number is partly a reflection of base effects from the different timing of holidays, rather than an a declining trend. Meanwhile Spain reported a dip in the headline rate to 1.7% year over year from 1.8% year over year, likely due to oil prices. Elsewhere in the Eurozone inflation rates are even lower and while PMIs point to capacity constraints, which are starting to have an impact on selling prices, wage growth so far has remained modest across the Eurozone.

German September retail sales rebounded, and sales rose 0.4% month over month, while the August number was revised up slightly to -0.2% month over month from -0.4% month over month, which helped to lift the annual rate to a very healthy 4.1% year over year in September. The September reading left sales up 0.2% quarter over quarter a marked slowdown from the 1.4% quarter over quarter reported in the second quarter of the year, but retail sales cover less than 50% of overall private consumption and are not always the best indicator of consumption trends. Consumer confidence remains at very high levels and the willingness to buy is also upbeat as the labor market continues to improve.