Tuesday’s a busy day for economic releases, including an update on business expectations in Germany via Ifo’s monthly report. Later, US GDP for the third quarter is due for a revision, followed by another update on US manufacturing activity via the regional report from the Richmond Fed.
Germany: Ifo Business Climate Indicator (0900 GMT): Business survey numbers for the euro area indicate that economic activity is heating up in November. Eurozone growth and job creation touched four-and-a-half year highs, according to Markit Economics in yesterday’s flash estimate of the composite purchasing managers’ index for the nations that use the euro.
Using the latest PMI data as a guide for estimating fourth-quarter GDP also provides an encouraging forecast. "The data are signalling GDP growth of 0.4% in the closing quarter of the year, with 0.5% in sight if we get even just a modest uptick in December,” said Markit’s chief economist.
Perhaps, but the upbeat glow via the PMI release has yet to show up in projections from other sources. Last week’s estimate for Eurozone GDP in Q4 was still a tepid 0.29%, based on Now-casting.com data. The weekly forecasts for Q4 have been inching higher, but the current data is still unchanged from Q3’s sluggish 0.3% quarter-over-quarter advance.
The PMI numbers imply that we’ll see evidence of a stronger macro trend in the days and weeks ahead. The update inspired some analysts to advise that the European Central Bank should ease into a new round of monetary easing at next week’s policy meeting rather than provide a dramatic change.
Another data point that may influence what’s appropriate for the December 3 ECB announcement: today’s Ifo economic survey numbers for Germany in November. The outlook, however, anticipates a more or less unchanged report.
Econoday.com’s consensus forecast sees Ifo’s current expectations index ticking lower, to 112.3 from 112.6 in the previous month. On the other hand, the expectations data is on track to rise slightly: 104.0, which would be the highest level in 16 months.
It all adds up to a view that Germany’s macro trend remains steady. As such, the Ifo numbers will offer a bit of support for the upgraded outlook via the PMI data. A more convincing round of confirmation, however, will have to wait for another day … unless today’s Ifo report delivers a substantial set of upside surprises.
US: Q3 GDP – 2nd estimate (1330 GMT): The tepid GDP growth rate that was initially reported for the third quarter is on track for a moderate upgrade today. The crowd’s looking for revised growth of 2.0% for Q3, according to Briefing.com’s consensus forecast. That’s a moderately stronger pace vs. the initially reported 1.5% gain.
If the outlook is accurate, the news of a firmer pace of output will fuel more confidence that the Federal Reserve will start raising interest rates at its policy meeting that is scheduled for December 16. The Fed funds futures market estimates the probability of a hike next month at over 70%, based on yesterday's data from CME.
Meantime, some analysts are looking for even stronger growth in Q4 GDP. BMO Capital Markets, for instance, anticipates that economic activity will accelerate to 2.9%.
“The underlying trend in the US economy is still positive,” the economics team at Wells Fargo wrote last week. But the firm is currently looking for Q4 growth of 2.2%, which is effectively unchanged from today’s expected revision for Q3 growth.
The risk of a recession for the US is still a low-probability event, but the case for anticipating a meaningful upgrade in the macro trend via the hard data remains open for debate. The bulls arguably have a stronger case, but first let’s see if today’s upbeat expectations for a Q3 revision are grounded in more than wishful thinking.
US: Richmond Fed Manufacturing Index (1500 GMT): The US Manufacturing PMI posted a surprisingly sharp setback in the flash data for November. Markit’s preliminary estimate of the headline benchmark for the sector slumped to 52.6 from 54.5 in the previous month. The decrease was unexpected – the crowd was looking for a slight gain – but the latest reading still points to modest growth.
“November’s flash PMI survey indicates that the manufacturing sector lost some growth momentum after the nice pick-up seen in October, but still suggests the goods-producing sector is expanding at a robust pace which should help support wider economic growth in the fourth quarter,” said Chris Williamson, chief economist at Markit.
The deceleration in the PMI data contrasts with last week’s regional Fed data that hints at the potential for a rebound in the US manufacturing sector. After a year of disappointments, three updates from Federal Reserve banks reflect a firmer trend for this month.
Will today’s release from the Richmond Fed make it four in a row? Yes, according to Econoday.com’s consensus forecast, which sees the headline benchmark in November rising slightly to 1.0, which would mark its first positive reading since July. In that case, the outlook for manufacturing will brighten, if only on the margins.
The weaker PMI report effectively tells us to keep expectations in check for anticipating anything beyond modest growth for the near term. On the other hand, the regional Fed numbers suggest that the sector’s outlook looks slightly brighter these days.
Disclosure: Originally published at Saxo Bank TradingFloor.com