Monday’s a slow day for scheduled economic releases, but macro risk will be front and centre as the market focuses on Greece as it struggles to satisfy its creditors ahead of Friday’s meeting of Eurozone finance ministers. Meantime, Eurostat releases new data today on Eurozone construction activity. We'll also see the monthly update of the US macro trend via the Chicago Fed National Activity Index. On an otherwise light day for economic updates, keep an eye on the 10-year Treasury yield for clues about what the crowd's expecting for the US economy.
Eurozone: Construction Output (10:00 GMT) Europe’s recovery is fragile but ongoing. Now-casting.com’s projections for GDP in Q1 and Q2 are sticking close to their recent gains. For example, first-quarter growth is expected to increase nearly 0.4% on a quarter-over-quarter basis. That’s only a mild rise, but it’s an encouraging improvement over the slightly negative outlook for Q1 as of last November.
The rebound will roll on, although the improvement may not be obvious in today’s update for construction activity for February, or so the hefty declines in Germany, France and Spain suggest via Eurostat data. As a result, the upbeat comparisons for January may suffer a retreat in today’s release for Europe overall. But a setback in construction output should be greeted as noise, based on the generally upbeat trends in other indicators for the currency bloc.
In any case, the crowd will be focused on more pressing matters today, namely, Greece and several approaching deadlines that could turn out to be crucial events for the evaluating Grexit risk.
US: Chicago Fed National Activity Index (12:30 GMT) Last week’s economic news all but confirmed that US growth decelerated in the first quarter. The tell-tale signs include a bigger-than-expected slump in industrial output and a tepid rise in housing starts in March. Retail spending rebounded at the end of Q1, but the overall picture is one of sluggish growth. No wonder that Atlanta Fed President Dennis Lockhart last week said that a “murky economic picture” may delay the first interest rate hike. Quantitative support can be found in the Atlanta Fed’s GDPNow projection for virtually flat economic output in this year’s first quarter – sharply below Q4’s moderate 2.3% rise.
Lockhart is looking past the weak data of late and anticipates that the macro trend will improve in the months ahead. “On balance, I expect that after a weak first quarter, US economic growth will strengthen, averaging about 3% over the remainder of this year and next,” he explained.
Meantime, the rear-view mirror will continue to inspire muted expectations. Today’s big-picture update via the March report for the Chicago Fed National Activity Index (CFNAI) will probably reaffirm that growth was relatively weak at the end of the first quarter. My econometric estimate for CFNAI’s three-month average anticipates an incremental rise to negative 0.07 vs. negative 0.08 in February. In other words, US growth will remain mildly below the historical trend.
The prospect that growth will pick up in the months ahead is still a viable if somewhat challenged view. That is, unless today’s release suggests otherwise by way of a hefty drop in CFNAI’s three-month moving average.
U.S. 10-Year Treasury Yield.
The IMF’s new economic projections still show that the US economy will remain the world leader for growth among the advanced economies. The US GDP forecast for this year is a solid 3.1% rise, or slightly more than double the IMF outlook for the Eurozone's increase in 2015. But if the world’s largest economy is still headed for a leadership role for growth in the developed world, it’s not obvious by the latest run of economic reports, which have been mixed.
March data on retail sales and industrial production, for example, reflect sharply different trends. Spending on Main Street posted a strong rebound last month, rising 0.9% while industrial output slumped a hefty 0.6%. Most economists say any weakness in the macro data is due to a harsh winter and temporary glitches, including the now-resolved West Coast port strike that interrupted economic activity recently.
Perhaps, although the Treasury market’s having a hard time digesting the latest data. The benchmark 10-year Treasury yield closed last week at 1.87%, the lowest since the start of the month. Part of the decline is due to comments by some Fed officials who suggest that the central bank may delay the first rate hike in the US. “Data available for the first quarter of this year have been notably weak,” noted the president of the Federal Reserve Bank of Atlanta last week.
Meanwhile, inflation ticked up in March despite slower growth. The consumer price index rose for the second month in a row last month after falling in each of the three months through January. The news helped to raise the Treasury market’s implied inflation forecast to 1.89%, based on the yield spread for the nominal 10-year Note less its inflation-indexed counterpart. That's the highest estimate for inflation since last November.
The market’s inflation outlook is inching higher while the benchmark 10-year’s nominal yield is slipping. The market, it’s fair to say, is struggling to figure out what comes next. Incoming economic data will ultimately provide the answer, but the schedule’s light for the next several days. In the meantime, keep a close eye on the 10-year yield. A sharp change, up or down, may signal that the crowd’s focusing on a definite change in the trend, for better or worse. In particular, a decisive break lower in the 10-year yield below Friday's 1.87% level would indicate the market's expecting more bad news for the next round of economic updates.
Disclosure: Originally published at Saxo Bank TradingFloor.com