Grexit risk is still lurking as an end-of-week deadline for a debt repayment approaches, but Europe’s headline inflation trend is expected to co-operate today with the first positive year-over-year reading in six months. Meanwhile, the shaky second-quarter recovery in the US is in focus again today with two releases: retail spending via the Redbook Index and the monthly release on factory orders.
Eurozone: Consumer Price Index (09:00 GMT): Yesterday’s revised sentiment numbers for the Eurozone's manufacturing sector in May is a reminder that the economic recovery still faces challenges. The good news is that there’s still a recovery to speak of. Markit’s final estimate for last month’s purchasing managers’ index (PMI) for manufacturers in the euro block ticked down to 52.0 from 52.3 in the flash estimate. That’s still comfortably above the neutral 50.0 mark, but no-one will mistake the latest data as a sign that the recovery is accelerating beyond a modest bounce.
“The survey data point to a quarterly rate of industrial growth of approximately 0.5 percent,” said Markit’s chief economist. “This should help drive [Eurozone] GDP higher in the second quarter, perhaps matching the 0.4 percent rise seen in the first three months of the year."
In fact, now-casting.com’s latest estimate for second-quarter GDP growth is a bit higher: 0.5 percent. Meanwhile, the Euro Coin’s proxy of the macro trend is also looking brighter: this monthly GDP estimate for May ticked up to nearly 0.4 percent — the sixth rise in as many months.
The obvious risk factor, of course, is Greece. Various deadlines have come and gone, with yet another one due at the end of the week. Yet this soap opera has yet to unleash dire effects on the Eurozone, so far.
The potential for trouble, of course, endures and so it's not clear if the past is prologue. It’s anyone’s guess how this plays out as the potential for bankruptcy (and leaving the euro) marches higher. Whatever happens, the best-case scenario is a Europe that’s generally on the mend when or if the worst-case outcome arrives.
Today’s update on inflation is expected to make a contribution on the positive front. The flash estimate of headline year-over-year change for the consumer price index is on track to post its first positive reading since last November — a mild 0.2 percent rise, based on Econoday.com’s consensus forecast.
A minor victory, if today’s release confirms the prediction. As such, the news will offer more evidence that Europe is genuinely recovering. It’s unclear if that will soften the blow from a Grexit, although it will surely help if the currency union is pushed to the brink in the weeks ahead.
US: Redbook Retail Index (12:55 GMT): Consumer spending was flat in April, the Bureau of Economic Analysis advised yesterday, news that fueled worries anew that the US economy is still struggling to right itself after a decline in economic output in the first quarter.
“Consumer spending remains a bit restrained,” said a senior economist at Ameriprise Financial. “It suggests a weak start to the quarter and puts growth estimates at risk. I still think things will improve. We’re going to gain some momentum. All the fundamentals are in place for it.”
One reason for optimism: personal income posted a better-than-expected rise in April. The news suggests that consumption will soon revive. Based on the Redbook Index, however, the recovery in consumer spending remains debatable (if not elusive).
Indeed, Redbook’s benchmark of retail spending is still weak. A noticeable drop since April remained in effect through last week’s update. Another soft report would further weaken the case for expecting a second-quarter rebound in consumption. The firmer numbers for personal income suggest that spending on Main Street can accelerate at some point.
But so far the revival remains a forecast, at least by some accounts. Will today’s Redbook release provide more tangible evidence that spending is set to rise?
Maybe not, at least not yet. “It is becoming blatantly obvious that the so-called consumer gasoline price dividend is not motivating the average American household to increase their discretionary spending in any meaningful manner," the director of consumer economics at IHS Global Insight explained this week. "Most likely, Americans are using their pump price savings to pay down debt, increase the money they put aside, and for dining out.”
US: Factory Orders (14:00 GMT): Demand for durable and nondurable goods has been falling in recent months, but there’s a slight hint that a recovery may be bubbling. Factory orders posted a solid gain in March, rising 2.1 percent compared with the previous month — the best monthly gain since last July. The year-over-year trend remained negative, as it's been since November. But there’s a whiff of improvement in the air.
Or at least there was. But economists recommend managing expectations down for this indicator. Briefing.com’s consensus forecast sees orders as unchanged in April. Maybe so, but sentiment data for last month suggests that a weak April for orders will bounce back soon after.
Why? Yesterday’s updates on the mood in the manufacturing sector inched higher last month. The ISM Manufacturing turned higher May, rising to a three-month high. Markit’s PMI ticked down for last month, although it continues to reflect a solid pace of growth.
Does the sentiment data for May lay the groundwork for a stronger run of factory orders?Perhaps, although the positive clues are expected to be in short supply in today’s release for April.
Disclosure: Originally published at Saxo Bank TradingFloor.com