- Eurozone industrial production for September to deliver a mixed message
- US Treasury yields jumped to a 10-month high last week. Will the surge continue?
- Treasury market is predicting inflation will rise during a Trump administration
The September report on industrial production is the main event for economic news in Europe today. Meanwhile, all eyes will be on the US Treasury market in the wake of last week’s sharp rise in yields.
The main point of reference: the benchmark 10-year yield. Meanwhile, the Treasury market’s implied inflation forecast has shot higher after Donald Trump’s election victory last Tuesday.
Eurozone: Industrial Production (1000 GMT) The European Commission trimmed its 2017 economic forecast for the Eurozone last week, blaming higher political uncertainty and softer global trade.
The EC said in its autumn outlook that it expects GDP growth for the euro area will increase 1.5% next year, down from 1.8% in the spring forecast.
Will today’s update on Eurozone industrial production support the case for managing expectations down?
The consensus forecast via TradingEconomics.com calls for a slide in output for the monthly comparison: A sharp decline of 1%, a hefty reversal after the 1.6% increase in the previous month.
A Trump presidency is now being seen as financial-market friendly.
The one-year change is on track to remain positive, although the crowd is looking deceleration that compresses year-over-year growth to 1%, down from 1.8% previously.
Sentiment data, however, looks considerably brighter via the manufacturing profile. The Markit Eurozone Manufacturing PMI shot up to a 33-month high in October, which suggests that industrial activity will firm up in the fourth quarter.
An IHS Markit economist said earlier this month,
Output, new orders and new export business all rose at some of the fastest rates achieved over the past three years, building on the solid increases in quarter three and underpinning the steepest jobs growth since mid-2011
If the PMI data is right, perhaps the EC’s downgrade is premature. Now-casting.com’s current GDP estimate for the fourth quarter certainly looks encouraging.
The consultancy is projecting that Eurozone output will expand at a quarterly rate of 0.55% in Q4 - a modest improvement over the expected 0.3% rise for tomorrow’s Q3 GDP update.
But first, will today's September numbers for industrial activity help or hinder macro expectations?
US: 10-Year Treasury yield Last week’s election of Donald Trump to the US presidency has many implications for policy and economics, but for the moment the biggest change is centered in the bond market.
US Treasuries endured heavy selling in the the days following last Trump’s surprising victory. The bearish tone pushed the benchmark 10-year yield to 2.15% at the end of the week, the highest since January.
What’s behind the sudden rush to dump Treasuries and send yields higher? Some analysts point to expectations that a Trump administration will push for stronger fiscal stimulus to raise economic growth.
A rates strategist at Macquarie wrote last week in a note to clients,
What traders saw was a far more expansive fiscal policy than what they had imagined under Hillary Clinton...Moreover, with the Republican sweep of the House and Senate, the prospect that President Trump will actually enact low tax/high-spending policies was seen to have gotten credible and valid.
Indeed, Trump reaffirmed plans last week to rebuild infrastructure in a bid to put millions to work. That may be good policy from a political perspective, but the bond market reacted by dumping Treasuries.
Was last week’s jump in yields just a temporary knee-jerk reaction? Or are we looking at a new regime for interest rates?
It’ll be easier to assume that the latter theory is in force if the 10-year yield continues climbing in the first full week of trading following last Tuesday’s political earthquake.
US: Treasury Inflation Forecast Another reason for the sharp rise in yields last week is the perception that President-elect Trump’s focus on fiscal stimulus will drive economic reflation.
According to Alberto Gallo, a partner and portfolio manager at Algebris Investments,
Trump has promised a combination of lower taxes, higher issuance of public debt and more spending. All of those are inflationary...On top of that, tariff increases and restrictions on immigration also create inflation.
The Treasury market has taken the hint and repriced the outlook for inflation at 1.90% at the end of last week's trading - the highest level since June 2015, based on the yield spread for the nominal 10-year Note less its inflation-indexed counterpart via daily data from www.treasury.gov.
One of the policy levers that Trump is expected to favour is the reduction of regulations in the financial sector. In turn, a kinder, gentler regulatory climate for banks could induce more lending, which could juice inflation.
It’s all speculation at this point, including the Treasury market’s latest attitude adjustment. But for the moment, bond traders are betting that the official data on consumer prices and the like is headed higher.
A fixed-income strategist at DZ Bank advised last week,
Inflation is rising worldwide, and we see the Fed hiking interest rates next month...The election has just added to that
Disclosure: Originally published at Saxo Bank TradingFloor.com