- Sliding Eurozone confidence makes ECB quantitative easing more likely
- The consensus view sees a rebound in US income and spending
- Economists are upbeat on US housing, despite wobbly labour data
The weak Eurozone economy will be in focus again today, with the release of the European Commission’s monthly data on business sentiment, along with revised numbers that track the mood among consumers. Later, we'll see a couple of US releases: personal consumption spending and income, and an estimate of demand for residential real estate in the Pending Home Sales Index.
EU: Business Climate Indicator (09:00 GMT) The Eurozone’s benchmark interest rate — the yield on the 10-year German government bond — slipped under 1% at the end of last week ... again. The yield previously fell below that psychologically crucial level for the first time in late August and remained there in early September before moving above 1% in recent weeks. But there’s a renewed appetite for a safe haven, and for an obvious reason: Europe’s slow growth is at risk of grinding to a halt, and perhaps the state of the European economy will become even worse than that if the deceleration is allowed to fester.
It may be hard to tell where recovery stops and another downturn begins these days, but the odds for anything better than sluggish growth are a long shot for the foreseeable future. Now Casting.com’s current estimate for the quarter-over-quarter change in third-quarter GDP in the Eurozone is a feeble 0.17% again. Sure, that’s up a touch from estimates in previous weeks and it's a step up from the flat performance shown in Eurostat’s official data for Q2 GDP. But diminished expectations are becoming the norm again for Europe overall, even if some corners — Spain, in particular — are bucking the overall trend.
Indeed, last week’s flash update of the Markit Eurozone Composite Output Index for September reflected the slowest growth so far this year. “The survey paints a picture of ongoing malaise in the Eurozone economy,” said Markit’s chief economist last week. As a result, familiar worries are on the march again, including deflation — a reasonable concern with consumer inflation rising by a thin 0.4% on a year-over-year basis through to August.
Today’s update on business and consumer sentiment from the European Commission (EC) will provide fresh numbers to analyze. Last week’s initial estimate on consumer confidence for September dipped to a seven-month low, which implies that today’s first look at the EC measure of the mood in the business sector will weaken as well. In the search for good news, one can point to the slower descent in business sentiment relative to the slide for consumers.
Given the latest PMI figures for September, however, even this thin hope may fade in today’s release and so it’s reasonable to assume that the gloom will deepen in the business sector. If so, the odds will firm for the view that the European Central Bank will soon launch a large-scale bond buying program, also known as quantitative easing.
US: Personal Income & Spending (12:30 GMT) Friday’s revision to second-quarter GDP reflected a stronger pace of growth: 4.6% (real seasonally adjusted rate). That's the best quarterly gain, in fact, since late 2011 for GDP. The data suggests that the US economy is accelerating. Maybe, but a weak batch of monthly numbers for several indicators in August leaves room for doubt. It’ll be interesting to see how today’s spending and income release stacks up.
The previous report certainly fell short of encouraging. Personal income for July decelerated to the slowest gain — 0.2% — so far this year. Personal consumption expenditures (PCE) fared even worse, contracting 0.1% — the first batch of red ink for the monthly comparison since January. Are these signs that the surge in the latest Q2 GDP estimate is misleading us about the strength of the US economy?
Encouraging sign
In search of an answer, the crowd will focus on today’s update for spending and income in August. One clue for thinking that we’ll at least see a decent pace of growth for spending: the recently released August numbers on retail sales, which represent the bulk of the PCE report. Headline retail spending picked up last month, increasing 0.6% in the monthly comparison.
That’s the best increase since April, and supports the view that today’s PCE release for August will post a rebound. In fact, that’s exactly what the crowd’s projecting. The consensus forecast sees both income and spending posting stronger numbers, according to Econoday.com. In particular, PCE is projected to increase 0.5%, a handsome revival after July's slight decline.
For the bigger picture, keep an eye on the year-over-year trends. Note that personal income ticked up to a 4.3% annual gain — the biggest jump since December 2012. PCE’s annual rate of increase, however, has been softer lately. But if the economic projections for today are correct, the year-on-year comparison for spending will tick up as well. In that case, maybe Friday’s upward revision in Q2 GDP really is a sign of things to come.
US: Pending Home Sales Index (14:00 GMT) Recent numbers on the housing industry have been a mixed bag for evaluating the overall trend in this crucial slice of the economy. Although confidence in the home building sector reached a nine-year high this month (on the NAHB Housing Market Index) and new home sales surged to a post-recession high, residential construction activity has been treading water this year and existing home sales were unexpectedly soft in August. All the more reason to watch today’s release of the Pending Home Sales Index (PHSI) for sorting out the trend in housing.
By the standard of PHSI, demand for real estate is improving. This benchmark rose in July to its highest level in 11 months. Considered a leading indicator of demand, PHSI is signalling growth for the housing sector in the near-term future.
Critical jobs factor
The upbeat outlook is predicated, however, on the continued improvement in the labour market, which is a critical factor for housing. The August payrolls report was surprisingly weak, although one wobbly month after a run of stronger data is hardly a smoking gun. The September jobs report may tell us otherwise when it’s release this Friday. Meantime, another rise in the PHSI will help tip the balance of opinion on housing toward a bullish interpretation of recent releases.
On that note, economists think we'll see more improvement today. The consensus forecast for PHSI calls for an 0.8% rise for last month, according to Econoday.com That's well below July's 3.3% jump. Nonetheless, another rise would signal that housing is still on track for moderate growth in the months ahead.