Tumbling stockmarkets around the world continue to raise questions about the outlook for the global economy. The case for trimming China's macro projections is compelling, but how much damage will that bring to Europe and the US? Today’s numbers will offer some guidance, including the Ifo Institute’s update on the mood among German businesses. Later, two US numbers will be closely read: the preliminary data for Markit’s Purchasing Managers’ Index for the services sector and the monthly report on new home sales.
Germany: Ifo Business Climate (0800 GMT) No one doubts that China’s economy is slowing. The great debate is over the price tag for the rest of the world. Germany’s export-heavy economy is at risk. China, after all, is Germany’s third biggest export market.
"There are quite a few headwinds for the German economy, from China, but also because the consumption-driven recovery can’t last for long," advised the director of European economics at Action Economics UK. "China and the slowdown in the world economy will definitely have an impact."
Yesterday’s official line from the German government, however, offers a different spin. "We are following developments in China very closely," a spokeswoman for the Economy Ministry said. “The immediate consequences for the German economy should, however, be limited.” Although German exports to China represent 6.6% of the total, “the export dynamic is currently coming from the EU, from the EU-28 countries,” she noted.
Deciding if the government’s outlook is too rosy is a work in progress, although today’s sentiment update for August will offer some context for estimating the resilience (or lack thereof) in Europe’s main economy. For the moment, the mood among German businesses still looks encouraging. The Ifo’s data for both current and expectations indices perked up in July, marking a firmer profile after several months of weak readings.
Today’s update for August is expected to bring mixed news, however. Econoday.com’s consensus forecast calls an uptick in the current situation trend, but that will be accompanied with a mild retreat in the expectations’ index.
Even if the report delivers better-than-expected news overall, it’s best to take today’s results with a grain of salt. The bigger test lies in the days and weeks ahead, with numbers that reflect the changes, if any, that are compiled after the deteriorating outlook on China arrived.
US: Services PMI (1345 GMT) If the US macro trend is faltering, we may see an early clue in today’s flash data for the services sector. Based on expectations, however, the purchasing managers’ index for this slice of economic activity will offer encouraging news.
Econoday.com’s consensus view calls for a slight retreat in the PMI for August, but the projected 54.8 reading (against 55.7 for July) still equates with a solid rate of growth. A major downside surprise would, of course, be seen as an ominous signal in the current climate. But for the moment, that’s considered a low probability event.
Judging by last month’s surge in the ISM Manufacturing Index, the services sector is in no danger of stumbling in the near term. Indeed, this benchmark soared to a 10-year high in July. Considering that the services sector is the key source of economic activity generally, the latest ISM report tell us that there’s plenty of positive momentum in the economy to keep the expansion going for the near term. It would be surprising if today’s PMI release paints a materially darker outlook.
US: New Home Sales (1400 GMT) Recent updates for the housing sector suggest that growth is accelerating for this critical piece of the US economy. Sales of existing homes jumped to a new post-recession high in July, as did housing starts. But sales of newly built homes haven’t participated in the rebound. Is that about to change in today’s update?
Yes, according to Briefing.com’s consensus forecast. Economists see new home sales jumping to 511,000 in July (seasonally adjusted annual rate). If the prediction holds, new home sales will deliver a sharp U-turn from the previous month’s disappointing report, which revealed that demand slumped to 482,000 in June - the lowest level since last November.
More good news on the housing front will help soothe frayed nerves in the wake of the recent selling wave in US stocks. Granted, one good month for real estate sales is hardly the last word on where the economy’s headed. Then again, a solid rise in demand for houses suggests that the equity market’s implied forecast of macro trouble is excessive.
It remains to be seen if the housing market’s stronger run of numbers will endure in the months to come. A solid rise in today’s release, however, will at least keep hope alive.
Disclosure: Originally published at Saxo Bank TradingFloor.com