- Germany’s revised inflation data to confirm a slight rebound in pricing pressure
- UK inflation is on track to tick higher in March, posing rates question
- Sentiment among small companies in the US set to rebound from two-year low
- But seasonal factors associated with the first quarter may distort sentiment
The schedule for economic releases picks up today, including several updates on inflation: Germany and the UK publish new numbers on consumer prices in March. Later, fresh data on sentiment for small US companies in March will be widely read after last week’s dark estimate on first quarter GDP.
Germany: Consumer Price Index (0600 GMT): Is Europe’s recent deflation scare easing? Today’s update on pricing pressures in Germany for March is expected to support the case for arguing “yes”. News of slightly positive headline inflation in Europe’s biggest economy in year-on-year terms will certainly be welcome.
The German 10-Year yield yesterday touched the lowest level in a year, close to the record low 0.05%. For a variety of reasons, there’s renewed demand for safe haven assets and Europe’s de facto benchmark yield is the main recipient of the heightened inflows.
Today’s question: How much of the rising appetite for the safety of government bonds is due to increased anxiety about the return of deflation risk?
In the preliminary inflation estimate for today’s harmonised year-on-year inflation rate, Germany’s data office projected a 0.1% advance through March. The news, released late last month, came as a mild surprise to analysts, who were expecting no change in headline prices for Germany in March, based on a Bloomberg survey.
The modest increase for last month is even more striking against February’s 0.2% decline against the year-earlier level.
If today’s revised numbers for March confirm the previous estimate of a 0.1% increase, the news will support the view, ever so slightly, that inflation is firming in Germany. In that case, there will be more scope for expecting that the mild deflation in the Eurozone data will ease in the months ahead.
UK: Consumer Price Index (0830 GMT): The Bank of England is widely expected to keep its policy rate unchanged at 0.5% in Thursday's monetary meeting, but some analysts say the recent firming of inflation is laying the groundwork for tightening in the months ahead.
On the surface, nothing much has changed. Headline consumer inflation continued to print at a 0.3% year-on-year pace through February - far below BoE’s 2% target.
The low and stable CPI trend convinces some analysts that the prospects are still low for expecting a rate hike any time soon. “At this stage, a 2016 rate hike is wishful thinking given the headwinds that currently face the UK economy,” a 4CAST analyst told Reuters last week.
But the last several updates show a degree of upside bias that’s likely to keep the annual rate in the positive column. Today’s release is expected to see the year-on-year pace inch higher, to 0.4%, according to Econoday.com’s consensus forecast.
Meantime, keep your eye on core inflation, which has been rising above 1% in annual terms since last October. If core CPI continues to tick higher in today’s report, the pressure will increase on the BoE to begin squeezing policy.
Thursday’s monetary announcement is unlikely to see any changes, but the prospects for a rate hike may be closer than currently expected if today's update delivers an upside surprise.
US: Small Business Optimism Index (1000 GMT): Last week’s first-quarter nowcast of US GDP dipped to a virtually flat reading of 0.1% by the Atlanta Fed’s econometric reckoning.
The prospects for a stagnant economy in the government “advance” GDP report that's due later this month has inspired a new round of recession talk. But some analysts recommend looking through the weak estimate.
Barron’s, for instance, quoted a report from Goldman Sachs that raises questions about the GDPNow model’s validity.
Seasonal peculiarities linked to the first quarter may be skewing the numbers, we're told. In any case, the firm’s economists sees GDP advancing at nearly 2%. If true, that’s enough to keep the US out of the business cycle ditch.
Today’s update on sentiment in the small-business sector - a key provider of jobs - will offer another clue for deciding if the Atlanta Federal Reserve's disappointing estimate for Q1 GDP is the real deal.
Unfortunately, the trend in this corner doesn’t look productive. The mood among small business owners has been deteriorating this year, slipping to a two-year low of 92.9. Keep in mind, however, that employment growth in small firms in March perked up, posting the best monthly gain this year. That’s probably one reason why analysts are looking for a modest rebound in today’s sentiment data.
Econoday.com’s consensus forecast sees the small business benchmark ticking up to 93.6. That alone doesn’t mean that Q1 won’t be weak.
But a higher number in today’s March report will help reaffirm the outlook for ongoing employment growth in this critical corner of the US economy. In turn, the case for a recession will fade, if only slightly.
Disclosure: Originally published at Saxo Bank TradingFloor.com