Today’s July release on producer prices for the Eurozone will test the view that the worst has passed for deflation risk. Later, two US numbers will offer new perspective for deciding if the economic outlook is deteriorating.
Eurozone: Producer Price Index (0900 GMT) Yesterday’s updates on the pan-European macro trend offered upbeat numbers. The jobless rate in the Eurozone, although still painfully high, posted a slightly-bigger-than expected dip to 10.9% for July – the lowest in three years. Meanwhile, the number of unemployed persons fell 213,000 in July vs. June – the biggest monthly slide so far this year.
Manufacturing activity in the euro area also enjoyed an encouraging update via Markit’s final release on its purchasing managers’ index for August. Overall, output continued to rise at a moderate pace last month, with the added bonus that employment increased at the strongest pace in four years. “The Eurozone manufacturing sector showed continued resilience in August, with output growth and inflows of new business both strengthening,” noted Rob Dobson, a senior economist at Markit.
The outlook, in summary, still looks comparatively bright, which suggests that the recent tick lower in the producer-price trend is noise. In June, deflationary winds in this corner blew a bit stronger as the year-over-year decline in the producer price index (PPI) inched down to a 2.2% loss. That’s the first instance of a slightly deeper shade of red for the annual comparison since March.
Is the mild reversal for PPI a sign that the recent progress in battling deflation in Europe is history? Yesterday’s upbeat numbers imply otherwise and economists are inclined to agree. Econoday.com’s consensus forecast calls for a slightly milder run of deflation in PPI for today’s July report: an annual decline of 2.1%, or a touch higher vs. June’s 2.2% drop.
Another reason for thinking that deflationary pressures are likely to ease in the months ahead: this week’s consumer price index remained stable, rising at a low but steady 0.2% for the year through August, according to Eurostat’s flash estimate.
US: ADP Employment Report (1215 GMT) The hard data published to date for the US still points to moderate growth for the near-term outlook, but the market’s confidence about the macro trend has been shaken lately.
The optimistic view is that the recent slide in US equity prices is largely due to worries about China, which is clearly going through a phase of slower growth. In any case, US market sentiment is suffering. The burning question: Will the economic data begin signalling trouble ahead?
No, at least not yet, although yesterday’s August update of the ISM Manufacturing Index was surprisingly weak. The benchmark’s slide to 51.1 last month – the lowest in more than two years – clearly reflects that decelerating growth continues to weigh on manufacturers.
“The renewed slide in oil, strength in the dollar and prospects for weaker global growth – China – all pose risks to a further slowing in factory activity in the months ahead,” an RBS (LONDON:RBS) Securities economist told The Wall Street Journal yesterday.
Deciding if a manufacturing slowdown is a real and present danger for the broader economy has become a priority for US analysis generally, and this week’s numbers on August payrolls in particular. Today’s estimate on the labour market via ADP will surely resonate far and wide as the crowd looks for clues about Friday’s official jobs report from Washington.
Today’s release, however, is expected to bring relatively good news. Private payrolls are on track to rise by 210,000 for August, according to Econoday.com’s consensus prediction—moderately above the previous month’s rise of 185,000. But in the current climate, a miss of any magnitude in today’s report will embolden the bears in no uncertain terms.
US: Factory Orders (1400 GMT) For another perspective on how the US economy is holding up (or not), don’t overlook today’s report on factory orders. Although the data is slightly dated – July – this numbers will provide useful context for measuring economic activity at the start of the third quarter.
Based on the Atlanta Fed’s latest nowcast (August 28), third-quarter GDP growth for the US is headed for a sharp slowdown – a 1.2% increase (seasonally adjusted annual rate) vs. Q2’s robust 3.7% advance.
Nonetheless, today’s factory orders are expected to deliver a mildly positive milestone: the second monthly increase in a row, which hasn’t happened since last October. But the consensus forecast for a 0.9% gain won’t be enough to keep the year-over-year decline from sinking deeper into the red.
Considering the rough ride in the manufacturing sector lately, it’s hardly a surprise that factory orders are looking wobbly these days. In any case, today’s report looks isn’t expected to be a catalyst for upgrading one’s economic outlook.
Disclosure: Originally published at Saxo Bank TradingFloor.com