ECB Got Nervous But Don't Fear Deflation‏

China will release most hard economic data for October and we expect this to confirm that the economy is in a moderate recovery.

At the Third Plenary Session of the Central Committee of China's Communist Party (CCP), we expect the CCP leadership to present an ambitious economic reform programme underscoring that structural reform is now the main focus.

The Bank of England will release its November inflation report and we expect the updated forecasts to show a faster adjustment to the unemployment threshold.

In the euro area, Q3 GDP data is due to be released and we estimate growth of 0.3% q/q, helped along by a less severe slowdown in the peripheral countries.

US industrial production data has grossly undershot indications from the ISM manufacturing and we expect the gap to persist with the release of October data.

In Scandinavia, we expect focus to be on inflation data. In Sweden, we expect inflation to run a little weaker than the Riksbank's forecast, which would add pressure to cut the interest rate. In Norway, we expect inflation to run above Norges Bank's forecast as the weaker NOK adds upward pressure on import prices.

Global macro and market themes:

Low inflation in the euro area has again put deflation risks on the agenda. We argue that not all price declines are bad. In particular, the most recent fall in inflation is driven by positive supply factors and thus supports real income growth.

The ECB surprised by cutting the refi rate earlier than expected and risk markets have performed very strongly this week. Central banks may be at the peak of their dovishness, which implies that in the very short term risk markets could be vulnerable. We also see little value in core bond markets, although we do not expect another leg in the broader sell-off until next year.

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