- Factory orders in Germany projected to fall in January after strong run
- Eurozone Q4 GDP growth to hold steady at 0.4% in today's revision
- Will the US 10-year Treasury yield break out of its trading range?
Germany’s economy is in focus today with the January report on factory orders. Later, the Eurozone publishes revised Q4 GDP data. Meanwhile, keep your eye on the US 10-year Treasury yield, which has been stuck in tight trading range despite expectations for stronger economic growth and another interest rate hike at next week’s Fed policy meeting.
Germany: Factory Orders (0900 GMT): Europe’s biggest economy edged out the UK last year as the fastest growing country among the G7 nations. German output rose 1.9% in 2016, slightly ahead of the 1.8% advance for the UK.
Will 2017 bring a repeat performance? Possibly, although political risk on both sides of the English Channel will keep economists guessing for much of the year ahead.
Navigating Brexit promises to keep uncertainty high for the British economy while upcoming elections throughout the Eurozone could topple governments and bring economic fallout.
Meantime, the incoming numbers for Germany continue to point to solid growth. The manufacturing sector is certainly running hot these days.
The Markit/BME Germany Manufacturing PMI increased in February to a six-year high, reflecting a sharp rise in exports and employment. Rising work backlogs suggest that the positive momentum will roll on in the near term.
“The survey results suggest that manufacturing will contribute to a strengthening in overall economic growth in the first quarter,” an economist at IHS Markit said last week. The PMI data implies that Germany’s GDP growth for this year remains on track to hold at 1.9%.
Today’s update on factory orders, however, is expected to show a pause in the growth trend. Econoday.com’s consensus forecast sees orders sliding 2% in January, although the projected decline follows an unusually strong run of numbers - orders rose 5% in two of the previous three updates.
Meanwhile, the year-on-year trend is expected to remain firmly in the black, with the implied annual pace for orders running at a healthy 5%.
Political factors could create turbulence later in the year. The possibility of higher trade barriers in the wake of populism’s ascent in the US and elsewhere could bring headwinds too.
But for the moment, Germany’s economic engine is humming and a degree of payback in factory orders after a strong run doesn’t threaten the upbeat outlook.
Eurozone: GDP (1000 GMT): Economic growth for the countries that share the euro is expected to hold at a moderate rate in today’s revised data for 2016’s fourth quarter.
Econoday.com’s consensus forecast sees output advancing 0.4% in last year’s Q4, unchanged from the previous estimate.
If today’s results match or beat expectations, the news will boost confidence in recent forecasts that an acceleration is brewing for this year’s Q1.
Investors seem to be pricing in a stronger macro trend for Europe in 2017. The Sentix Investor Confidence Index for the Eurozone rose in this month’s reading to the highest level in ten years.
Meanwhile, the Stoxx 50 Index, a benchmark of blue chip Eurozone stocks continues to hold near its highest level in more than a year, as of midday trading on Monday.
Investors are wary of political risk, but for the moment optimism prevails.
“Political uncertainty is here to stay, given elections in three key [European Union] member states and the dawn of the Brexit negotiations,” the head of multiasset strategy at Union Investment in Frankfurt said on Monday.
“At the same time Europe's cyclical growth outlook is better than ever since the outbreak of the euro crisis.”
Today’s GDP report isn’t expected to change the bullish view. Meantime, Now-casting.com’s estimate of a near-doubling of GDP growth to 0.7% for Q1 suggests that the best is yet to come. In short, this is Europe’s game to lose.
US: 10-Year Treasury Yield: The recent euphoria in the US stockmarket implies that growth will soon accelerate in the world’s biggest economy.
But as an analyst noted over the weekend via the FT, “the bond market is taking a totally different view from the equity market” and “blowing raspberries” at the bulls.
In theory, bond prices should fall (and yields should rise) commensurately with higher stock prices on expectations that economic activity is picking up.
That was true directly following Donald Trump’s election last November. But the initial advance in Treasury yields has stalled this year, raising questions about the prospects for a firmer macro trend.
Although key rates jumped last week, Monday’s early trading suggested that the 10-year yield isn’t set to break out of the low-to-mid-2% trading range that’s prevailed through most of the year to date.
Perhaps the Federal Reserve’s monetary policy meeting next week will jolt the bond market out of its stupor.
Fed funds futures are pricing in an 84% probability that the central bank will lift the current 0.50%-to-0.75% target rate on March 15, based on CME data for Monday.
This Friday’s update on payrolls for March could also change sentiment in the bond market.
Economists are expecting that growth will decelerate from February’s strong gain, but the projected rise of 195,000 (based on Econoday.com's consensus forecast) still falls comfortably into the category of a healthy increase.
Nonetheless, the Treasury market seems to be in a holding pattern.
Is that due to skepticism about economic growth? Or perhaps the old worries about secular stagnation in the wake of the Great Recession are still lurking just below the surface.
Whatever the reason, the benchmark 10-year yield continues to tread water. A sustained rise above 2.60% (the recent high mark reached in December) would signal a change in sentiment.
Meantime, the Treasury market appears reluctant to fully endorse the stock market’s latest attitude adjustment.
Disclosure: Originally published at Saxo Bank TradingFloor.com