Inflation Estimates Support EUR

European equities seem content to shrug off some of the dour economic data that has failed to inspire confidence in the region, and instead are trading higher midway through their session just before Bernanke’s speech in Jackson Hole.


German retail sales for the month of July imploded from last month’s gain to resume their downward trend, as rising fuel prices hit consumer’s pocketbooks, forcing them to rein-in consumption.  Retail sales declined by 0.9% on a monthly basis in July, missing economists' expectations for a 0.2% gain by a wide margin. The one positive piece of information from the report was that June’s reading was revised up to +0.5% from a prior reading of -0.1%.


The employment picture out of the euro zone was mixed, with unemployment for the area remaining flat as June’s reading was revised higher by to 11.3%.  Stabilizing at 11.3%, unemployment is now at a record high for the zone, with the divergence between the core and periphery continuing to be a worrying factor.  With unemployment in Germany and Finland running around 5%, the respective 15.7% and 25.1% levels of Portugal and Spain are largely viewed as extreme examples of an unsustainable gap between the core and periphery countries.  The positive development was that unemployment in Italy remained flat as well, beating expectations that things would become worse for the region and the unemployment rate would rise past 10.7%.


After three months of remaining stuck at 2.4%, the CPI Flash Estimate for the euro zone on an annualized basis showed a pick up in consumer prices.  Inflation is expected to have accelerated by 2.6% from August of 2011 according to initial estimates, besting analysts’ forecasts for a rise to only 2.5%.  The warmer-than-expected price-level reading reduces chances of an interest rate cut at the ECB’s next meeting on Thursday, as the ECB’s main policy mandate is to maintain price stability.
In other news, the Spanish government has approved a decree for banking reform and the creation of a bad bank to clean up the banks’ toxic assets and get credit flowing again.  Finance Minister Luis de Guindos says that the bad bank will be in place for 10 to 15 years and seek private investor capital in order to absorb the questionable real-estate assets currently bogging down bank balance sheets.  The EUR has responded positively to the inflation print and developments out of Spain, rocketing through the 1.26 handle against the USD.  Yields on the ten-year Spanish benchmark debt security are largely unchanged, pivoting around the 5.79% level.