- Eurozone business sentiment on track to reach a six-year high in March
- Economists say Germany’s consumer price index will edge lower this month
- Any upside surprise in German CPI would drive hawks to call for rate rises
- US jobless claims projected to dip after touching a year-to-date high
Inflation in Europe is back in the headlines today with the March report on Germany’s consumer price index. We’ll also see new numbers on Eurozone business sentiment for March and the weekly update of jobless claims in the US.
Eurozone: Business Climate Index (0900 GMT): The macro trend in the euro area continues to impress, based on the latest survey data from Markit Economics.
“The Eurozone economy’s throttle opened further in March, with business activity and hiring surging higher,” said the firm’s chief business economist last week. “The March flash PMI rounds off the best quarter for six years and signals GDP growth of 0.6% in the first quarter.”
Estimates from other sources echo the upbeat forecast. The Euro-Coin Indicator (a GDP proxy) rose 0.75% for the three months through February, the strongest advance since 2010 and comfortably above the 0.4% rise in last year's Q4.
Today’s first look at business confidence for the Eurozone in March via the European Commission’s data isn’t expected to spoil the party. TradingEconomics.com’s consensus forecast calls for a rise in the Business Climate Indicator (BCI) to 0.9, the highest level since 2011. If accurate, the news will provide the bulls with another reason to assume that Europe’s recovery is ongoing.
Political risk may intervene at some point, starting with France’s presidential elections that begin next month. With erosceptic candidate Marine Le Pen leading in recent polls, the future of the euro may be hanging in the balance, depending on the outcome.
The data published to date, however, continues to paint an encouraging profile for the Eurozone's macro trend and today’s BCI update appears on track to support the upbeat outlook.
Germany: Consumer Price Index (1200 GMT): Import prices for Germany jumped 7.4% in February vs. the year-earlier level, a six-year high. Is that a sign that today’s consumer inflation report for March will head higher too?
Analysts think not. TradingEconomics.com’s consensus forecast sees the recent reflation trend taking a breather this month. The projected 1.9% annual increase, if accurate, will mark the first softer reading for the annual data vs. the previous month in nearly a year.
Even if the prediction is right, it’s clear that pricing pressures have been heating up, in Germany and across Europe. Headline inflation in the Eurozone reached 2.0% year-on-year in February, the most in four years and slightly above the European Central Bank’s target of just below 2.0%.
Monetary doves point out that core inflation (excluding food and energy) in the euro area is much cooler, advancing just 0.9% in annual terms. Central bankers pay closer attention to this measure of inflation, which is regarded as a superior predictor of pricing pressure. As a result, the higher rate of headline inflation isn’t expected to convince the ECB to raise interest rates in the immediate future.
Commerzbank last week advised clients that it doesn’t expect a rate hike for Europe until 2019. Meanwhile, the ECB will probably begin tapering its quantitative easing program at some point in early 2018, the bank predicts.
Nonetheless, an upside surprise in today’s inflation report for Europe’s biggest economy will give the hawks a new reason to call for tighter policy.
US: Initial Jobless Claims (1230 GMT): New filings for unemployment benefits remain close to multi-decade lows, suggesting that the economy will continue to mint new jobs at a healthy pace in the near term. But some analysts are beginning to wonder if the best days for this leading indicator have passed.
Granted, there’s nothing particularly worrisome in recent updates. But the jobless claims have increased sharply over the past month, rising to a seasonally adjusted 258,000 for the week through March 18. That’s still low by historical standards, but the upward trend of late that lifted filings to the highest level so far this year comes at a time when first-quarter GDP growth estimates looks soft.
The Wall Street Journal’s economic survey for March, for instance, expects that output will hold steady at a sluggish 1.9% increase in Q1, unchanged from 2016’s Q4. That’s enough to keep the US out of recession territory, but a roughly 2% pace of growth raises questions about the wisdom of additional interest rate hikes this year, which the Federal Reserve has recently signalled as a likely scenario.
Some analysts note that much of the revival in optimism about future economic activity in the wake of President Donald Trump’s election last November has been driven by so-called soft data, such as surveys. By contrast, the hard data in some corners, such as industrial production, has yet to confirm the rebound in the mood.
“The divergence is stunning,” a pair of economists at Morgan Stanley wrote on Monday. “Upside surprises appear to be completely driven by the soft data while hard data are simply coming in about as expected.”
Is the divergence an early sign that rosy expectations for the economy are headed for an attitude adjustment? It’s too soon to know for sure, but another increase in jobless claims in today’s weekly report wouldn't help.
For the moment, however, economists think that claims will turn lower. Econoday.com’s consensus forecast calls for a drop of 11,000 to a seasonally adjusted 247,000 for the week through March 25. If that turns out to be wrong, and claims post another rise, the news will raise new doubts about the strength of the US economy’s forward momentum.
Disclosure: Originally published at Saxo Bank TradingFloor.com