Monday’s a light day for economic reports, but the crowd's still hungry for new macro perspective after last week's roller coaster ride in the capital markets. Today's main event for satisfying the demand for fresh data in Europe is an update on producer prices for Germany.
Later, we’ll see new numbers on factory orders in Italy. Meantime, keep an eye on the 10-year Treasury yield, which is on the short list for deciding if the revival in sentiment (and equity prices) that prevailed on Friday will survive the week ahead.
Germany: Producer Price Index (06:00 GMT) Deflation has been a recurring theme in the German economy as measured by the producer price index (PPI). On a year-on-year basis, this gauge has been sliding for more than a year and today’s update for August isn’t likely to tell us otherwise.
Producer prices fell 0.8% in August against the year-earlier level. That’s not surprising – PPI has been persistently declining in annual terms since last year. Given the wobbly macro trend for Germany lately, another round of deflation is widely expected for September.
It’s already clear that Europe’s main economy is stumbling. Formal recognition of what's been obvious for some time arrived last week when the Economy Ministry pared its outlook for growth. "The German economy is steering through rough foreign waters," explained Economy Minister Sigmar Gabriel. "Geopolitical crises have also increased uncertainty in Germany and moderate growth is weighing on the German economy."
Crisis, what crisis? Germans are convinced their slowdown will be painless. Photo: Thinkstock
The key issue now is deciding if the weight will lead to a mild contraction or something darker. The official view anticipates a relatively painless affair.
“German politicians are convinced that their slowdown will be modest and temporary,” according to The Economist. Meantime, the country’s weak economy has slowed to a degree that Germany is now exporting macro headwinds to its Eastern European neighbours. “Germany is by far the biggest culprit for the recent economic weakness in Central and Eastern Europe,” advised Capital Economics late last week.
Today’s PPI release will drop a new clue for deciding if the ill winds are likely to strengthen.
Italy: New Industrial Orders (08:00 GMT) Italy is firmly in the camp among Eurozone nations that are calling for looser fiscal policy, and for good reason – Italy’s economy is a shambles. It’s less about contraction per se against a simmering stagnation that never seems to end. Today’s update on new factory orders will likely provide a fresh dose of data that reminds the crowd that Europe’s third-largest economy remains trapped under a blanket of inertia.
The last three months clearly show that industrial demand is treading water at best. The year-on-year change for new orders has been oscillating between low levels of growth and decline for the past three months. The fact that there’s been sporadic bouts of expansion at all in recent history is something of a minor miracle when you consider that Italy’s economy hasn’t expanded since 2011, based on quarterly gross domestic product data.
Italy’s government is trying to engineer a new phase of fiscal stimulus via recent proposals for tax cuts for businesses and individuals in lower income brackets. But Germany remains opposed to bending the Eurozone’s budget rules or ramping up monetary stimulus, even though its own economy is looking challenged these days.
“The biggest bottleneck for growth in the euro area is not monetary policy, nor is it the lack of fiscal stimulus," insisted Jens Weidmann, president of the Bundesbank, last week. "It is the structural barriers that impede competition, innovation and productivity.”
The political atmosphere may not be conducive for juicing Italy’s economy, but today’s report on new orders will probably drive home the already obvious point that the status quo is a vote for allowing the current malaise to endure.
US: 10-year Treasury Yield Deflation fears took a breather on Friday as equity markets rebounded and the benchmark 10-year Treasury yield climbed over 2.2% after briefly dipping to around 1.94% on Wednesday on an intraday basis. The mystery, of course, is whether the latest round of stability is a sign that the worst has passed in terms of Mr Market’s fears? Or is the latest instalment of calm a temporary patch of composure that will soon give way to a renewed wave of selling? Whichever way the wind blows, the 10-year yield is sure to dispense an early clue.
A lower yield at this stage would signal more trouble ahead. Even so, deciphering the clues may be tricky in the current climate. Loading up on US government bonds has become a popular trade again amid fears that Europe is headed for a new phase of recession, with the added twist that Germany is no longer immune.
But US economic data last week betrayed few signs of trouble. Jobless claims dropped to a 14-year low and industrial production delivered a strong upside surprise in the latest releases. Meanwhile, housing starts climbed a respectable 6.3% last month against August. Last week’s retail sales numbers were unexpectedly soft, however, although the crowd seemed inclined to see three out of four updates in favour of growth as sufficient for assuming that US growth was intact.Influences on Treasury prices, of course, reflect events and expectations beyond the US, which is standard operating procedure for securities denominated in the world’s reserve currency. But there are costs, including the current challenge of deciding if lesser yields carry any bearish signals for the US economy.
Last week’s economic reports should keep the bears at bay for assuming that America is about to be sucked into Europe’s deflationary vortex. That seems to be the prevailing wisdom as of Friday’s trading session. If the crowd’s inclined to think otherwise, we'll likely see a renewed decline in the 10-year yield.