Monday’s a slow day for economic news, although the monthly update on the Eurozone’s current account data will provide additional perspective for considering the trend in exports. Meanwhile, the market will be watching GBP/USD to see if the pound can hold on to its recent gains after last week’s softer-than-expected labour market report for the UK. In the US, chatter about a rate hike has been topical, but the benchmark 10-year Treasury yield has been treading water lately. Is that about to change as the market anticipates next week’s “advance” GDP report for the second quarter?
Eurozone: Current Account (08:00 GMT) Finance ministers last week agreed in principle to provide Greece with a new round of bailout money. As a result, Grexit risk, which recently brought the currency union to the brink of disaster, continues to fade into the history books, at least for the moment. As a result, the focus turns back to the Eurozone’s real economy, starting with the main question: Is the recovery still intact?
There's a bit more uncertainty in the air. Now-casting.com's revised estimate for second-quarter GDP dipped below 0.5% for the first time since early May in Friday's update. Meanwhile, European Central Bank President Mario Draghi remains optimistic, which is no surprise. But in last week’s press conference he also noted that there are still headwinds lurking. “The ongoing slowdown in emerging market economies continues to weigh on the global outlook and economic growth in the euro area is likely to continue to be dampened by the necessary balance sheet adjustments,” he advised.
Is that an early clue for managing expectations down when it comes to exports? The next clue arrives in today’s monthly update of the Eurozone’s current account, a broad measure of a broad measure of trade and investment flows. A mild pullback is in store for today’s update, based on last week’s numbers for merchandise trade. Eurostat reports that the trade surplus for May fell to a seasonally adjusted €21.2 billion in May, down modestly from $23.9 in the previous month.
Meantime, the euro is stumbling again after showing some strength earlier this month. The EUR/USD slipped below 1.083 as of yesterday (July 19) — the lowest in nearly three months. To the extent that a weaker euro will boost exports with competitive pricing, Europe’s current account surplus may run higher in the months ahead. The question is whether a weaker currency can offset some or all of the softer demand that may be lurking in emerging markets?
GBP/USD Last week’s labour market report for May was unexpectedly soft. The number of unemployed increased for the first time in two years, advised the Office for National Statistics (ONS). But optimists said this was no cause for worry about the near-term outlook. One reason: wages excluding bonuses rose 3.2% during the three months through May. Excluding bonuses, wages jumped 2.8%, the strongest gain in over six years.
The robust gain for wages suggests that the underlying dynamic in the labour market remains healthy. The pace of jobs creation on the margins may be cooling, but the demand for workers is still strong.
Nonetheless, some economists aren’t quite sure what to make of the combination of a rise in the number of jobless workers and solid wage gains. “There’s a few ways to interpret this and I’m not quite sure which is the right one,” a UK economist at Deutsche Bank told FT last week.
“It is possible that the rate of improvement in the labour market that we have seen over the last three years may have eased off, though it is much too early to be certain,” an ONS statistician said via Reuters.
The currency market, however, seems inclined to interpret Britain’s macro profile as positive these days. The GBP/USD continues to hold on to its recent rise from the early July lows. As of yesterday (July 19), the GBP/USD was slightly above the 1.56 mark, which is to say comfortably above the roughly 1.53 trough that was set on July 6.
A key source of support for the pound came from Bank of England Governor Mark Carney's comments last week, when he hinted that the first interest-rate increase could come as early as the new year. “In my view, the decision as to when to start such a process of adjustment will likely come into sharper relief around the turn of this year,” he said.
US 10-Year Yield The Federal Reserve wants to raise rates, but figuring out the timing is tricky because of mixed economic numbers. As one example of the contrasting profile of late, nonfarm payrolls in June posted a solid gain of 223,000 while retail sales slumped 0.3% last month.
Nonetheless, Fed chair Janet Yellen anticipates that growth will prevail for the near term. Last week she noted that “the labor market is getting demonstrably closer, in my view, by almost any metric to a more normal state.” But in a sign of the time, she added that “there are risks to the recovery of tightening too soon.”
Jim Bianco of Bianco Research last week advised that the Fed is eager to raise rates as a first step in correcting market imbalances that are a byproduct of years of dovish policy. “They're raising rates because of their words, ‘financial stability.’ They are worried that the markets have been distorted,” he told CNBC.
Maybe so, but the trend for the benchmark 10-Year Treasury yield is looking indecisive lately. The 10 Year T-Note closed at 2.34% on Friday, according to Treasury.gov data. That’s roughly midway for the range over the past month. More of the same in the days ahead is a reasonable forecast, in part because the schedule for US economic releases is relatively light this week.
Next week, however, brings the first official estimate of second-quarter GDP. The Atlanta Fed’s GDPNow estimate is currently projecting a 2.4% gain for Q2, which represents a sizable if unspectacular rebound from the 0.2% decline in Q1. Will a modest revival in Q2 GDP growth suffice to convince the Fed to raise rates at the subsequent FOMC meeting in September?
For the moment, the crowd’s still pondering that question with an open mind. But if the 10-year yield starts creeping higher in the days ahead, that’ll be a sign that confidence is growing for expecting that Yellen and company are ready to roll out the first round of tighter monetary policy in nearly a decade.
Disclosure: Originally published at Saxo Bank TradingFloor.com