• Analysts expect Eurozone inflation rate of 0.8 percent
• US payrolls report for private jobs poised to advance by 213,000
• Q1 GDP figures will be bleak after bad weather, say experts
Wednesday’s a big day for economic news, including what's likely to be the main event for Europe today: the flash estimate for April inflation in the EU. Later, two US reports will draw close scrutiny for updating the outlook on the economy: the ADP Employment Report for April and the government’s advance estimate of GDP for this year’s first quarter. Keep in mind that we’ll also hear from the US Federal Reserve, which is scheduled to release an FOMC policy statement at 18.00 GMT.
Eurozone Consumer Price Inflation (09.00 GMT)
With annual inflation slipping to a mere 0.5 percent in the previous report, the market’s eager to learn if the worrisome deceleration in pricing pressure will roll on in April. If today’s data shows that inflation is still trending lower, will that trigger a change in monetary policy? Not necessarily, the European Central Bank’s vice-president told reporters earlier this week. Recent inflation data isn’t all that relevant, advised Vitor Constancio:
"It's an important information but not the only aspect that can lead to any decision. What we need is a more fundamental view on a possible revised medium-term path for inflation. It's not just one or two numbers that matter."
Maybe so, but the head of the French central bank is alert to the heightened risk at the moment. “Temporary and global factors are at play, with import prices declining, notably in the case of raw materials and energy,” said Christian Noyer, the governor of the Bank of France (BoF) and a member of the European Central Bank (ECB). Writing in an introductory letter to the BoF’s 2013 annual report that was released on Monday, Noyer warned that “there are also deeper and more permanent forces at work: spare capacity remains high and powerful deflationary pressures are emerging from the deleveraging of the private and public sectors and the restoration of competitiveness through wage and price cuts in the countries worst affected by the crisis.”
Noyer added that the strengthening euro was part of the problem. “An increase in the exchange rate is equivalent to an unintended and unwanted tightening of monetary policy.” Unwanted or not, the euro is up eight percent vs. the US dollar when measured from EURUSD's previous trough of last July.
Considering the current climate, another weak round of inflation data in today’s flash estimate for April would create pressure for the ECB to act, and quickly. That said, analysts expect a faster rate of annual inflation this month: 0.8 percent vs. 0.5 percent previously, according to a Reuters poll. A surprisingly soft report, however, should boost the odds that we'll soon see fresh policy action. Analysts at Roubini Global Economics (RGE) think that’s a strong possibility. In a note sent to clients yesterday, RGE reasoned that “the ECB will take the QE (quantitative easing) leap in June: We expect inflation to disappoint and (the possibility of opting for) negative deposit rates seem too little, too late.”
US ADP Employment Report (12.15 GMT)
The pace of jobs creation has rebounded a bit in recent months after taking a dive at the end of 2013. The revival has only brought growth back to a middling rate but additional improvement is coming, based on the consensus forecast for today’s ADP payrolls report for April. Economists expect a gain of 210,000, a respectable upgrade from the 191,000 advance in March.
If the prediction holds, ADP’s yardstick of employment will post its third straight month of stronger growth. In that case, the news will cast a positive aura over expectations for Friday’s official jobs report from the government. Not surprisingly, analysts are also looking for progress at the end of the week: the US payrolls report for private jobs is expected to advance by 213,000 this month over April.
By some accounts, the recent decline in the four-week moving average for initial jobless claims suggests healthy odds for an upside surprise in the April jobs numbers. “We are forecasting non-farm payrolls at +240k (for total payrolls, which includes government employees), because the four-week average on initial jobless claims reached a new post-recession low for the employment survey period,” the chief economist for Deutsche Bank Securities in New York wrote in a note to clients this week. “This is a positive sign for the labour market that is also being confirmed by employee tax withholding receipts, which are trending higher, as well.”
I’m also projecting a faster rate of growth in today’s ADP data, although the median estimate of 198,000 via my econometric modelling is slightly below the consensus estimate. Moving closer, if not exceeding, the 200,000 mark for monthly increases is certainly a positive sign but that would really just mean a return to the trend in recent history. Better, but not yet at a level for describing the jobs market as posting an accelerating rate of growth.
US GDP (12.30 GMT)
First-quarter economic growth is widely expected to suffer a hefty dose of deceleration in today’s “advance” GDP estimate for the first three months of 2014. The market’s looking for a 1.0 percent rise, or well below the 2.6 percent advance reported for last year’s fourth quarter. Many analysts blame the slowdown on a harsh winter, which is part of the reason why economists anticipate that growth will pick up in the second quarter.
Although the market's anticipating a big retreat in growth, it wouldn’t be terribly surprising to see today’s report surprise the crowd on the upside. “We are returning to an old normal,” the head of US economics at Renaissance Macro Research told Bloomberg this week. “A lot of the headwinds that are holding the economy back are beginning to abate, including local government spending, fiscal tightening and household balance sheet deleveraging.”
Some of the rebound was underway at the tail of the first quarter and so the revival could show up in today's data. In fact, the median estimate for my Q1 GDP nowcast looks considerably brighter vs. the consensus estimate: 2.4 percent, or more than twice as much as what economists generally are forecasting, according to Briefing.com data. But thinking positively for Q1 is a minority view. “The advance report on first-quarter GDP growth is going to look ugly, because of the severe winter weather and slower inventory accumulation,” warned IHS Global Insight.
The market may be willing to ignore a rough quarter on the assumption that it’s only temporary. Deciding if that’s plausible begins with today’s ADP Employment Report for April, which arrives 15 minutes ahead of the GDP data. If the labour market data is surprisingly weak, however, investors may have a hard time finding beauty in a soft GDP report.
