The Ifo Business Climate Indicator for Germany is a key release for today's Eurozone economic news. Later, we’ll see another early estimate of the October macro profile in the US via the flash data for the services sector purchasing managers' index.
Soon after, the Pending Home Sales Index for the US will be published, offering another perspective on the outlook for the housing sector.
Germany: Ifo Business Climate Indicator (09:00 GMT) Consumer sentiment strengthened a bit, according to Friday’s survey update from Gfk. The mild improvement provided some much-needed relief from the constant drumbeat of negative economic news in recent weeks.
“In October, German consumers were evidently less affected by the continued problematic geopolitical situation and the resultant economic slowdown than they had been in the previous month,” Gfk noted.
Is that a sign that the latest slide in the macro trend for Europe’s main economy is over? Probably not, although the latest reprieve suggests that the current economic stumble will be modest.
But let’s not assume too much just yet. Today’s update on sentiment in the business sector will offer another perspective for looking ahead. Economists, however, are expecting that the mood will sour again in October based on data from the Ifo Institute.
In contrast with the stabilising news on the consumer front, sentiment among Germany’s business executives is expected to decline for this month’s reading, according to the consensus forecast via Econoday.com. Notably, Ifo’s benchmarks for current conditions and expectations for the economic climate are projected to show ongoing deterioration.
If the crowd is right about today’s survey, the case will strengthen for assuming that the macro trend in Germany is still deteriorating. In that case, the pressure will rise on Berlin to bend its commitment for fiscal rectitude and embrace a degree of stimulus to soften the darkening clouds on the business cycle horizon. “It is dangerous to balance the budget now, as it sends a bad signal to the economy," advised Marcel Fratzscher of the German Institute for Economic Research.
US: Services PMI (13:45 GMT) The economic trend in October for the US continues to look encouraging, based on last week’s flash estimate of Markit’s survey data for the manufacturing sector. The initial data for the manufacturing purchasing managers' index eased to 56.2 for this month, but that’s still well above the neutral 50.0 mark. Growth is slightly slower in this cyclically sensitive corner of the economy, but the rate of expansion still looks healthy.
“Although output growth slowed to the weakest since March, the pace of expansion remains robust," said Markit’s chief economist. "Even expanding at this slower rate, the goods producing sector should help drive another solid upturn of the economy in the final quarter of the year.”
It’s still early for evaluating October’s macro profile, although today’s initial PMI estimate for the services sector will provide another clue. Here, too, the numbers look upbeat lately, albeit a bit softer compared with the data published in the summer.
Nonetheless, business activity in the services sector expanded at a robust pace last month. Indeed, the PMI’s September reading of 58.9 reflected a “strong upturn”, according to Markit Economics. Although that’s down from the recent peak of 61 in June, it’s clear that there’s still a high degree of positive momentum coursing through this sector, which dominates economic activity in the US.
It wouldn’t be surprising, however, to see today’s initial estimate for October to dip slightly, which is what the market's expecting. But considering manufacturing’s continued growth, and a healthy tailwind in last month’s overall trend, it’s likely that the US services sector will remain a bullish factor for the US for the foreseeable future.
US: Pending Home Sales Index (14:00 GMT) Housing continues to present a mixed picture in the US. It’s not terrible, but it’s clear that modest growth has become the best-case outlook lately.
Last week delivered a couple of numbers that suggest as much, including Friday’s news that September’s new home sales increased marginally in comparison with the hefty downward revision of the August data. Meanwhile, existing home sales posted substantially stronger growth in September, rising to the best level so far this year.
Nonetheless, with the recent volatility in the capital markets amid heightened worries over a fragile global economy, the US housing sector remains vulnerable. How vulnerable? Today's update on pending home sales will offer a fresh dose of guidance.
It’s instructive to note that the number of newly signed contracts to purchase residential real estate has been sluggish lately. In the previous update for August, an index of pending sales of existing homes slipped 1%, according to the National Association of Realtors.
“Fewer distressed homes at bargain prices and the acknowledgement we’re entering a rising interest-rate environment likely caused hesitation among investors last month,” NAR’s chief economist explained. “With investors pulling back, the market is shifting more towards traditional and first-time buyers who rely on mortgages to purchase a home.”
Maybe so, but the much-anticipated rise in rates is on hold for now. In fact, the national US average for a 30-year fixed mortgage rate slipped below 4% earlier this month for the first time in more than a year. The slide in the cost of financing home purchases seemed to give a boost to mortgage applications, which surged 11.6% in the week through October 17.
It’s debatable if the increased appetite for purchases will last, particularly if rates creep higher at some point. But for the moment, there’s a slightly stronger tailwind blowing for housing, and the trend is expected to continue in today's report. The consensus forecast sees pending home sales rebounding in September with a 0.8% rise, according to Econoday.com.
