France Business Climate Indicator (06.45 GMT): Business activity in the Eurozone touched a three-year high in the April flash estimate of Markit’s Composite PMI. The upbeat report doesn’t remove the deflation threat that’s still stalking the Eurozone although the latest survey numbers suggest that the overall risk may be receding. In fact, the latest Markit report strengthens the argument in some circles that lower inflation in Europe is actually a plus because it promotes competitiveness in the business sector in the global marketplace. "You may even say this is good deflation as it goes hand in hand with a recovery in profit margins," said Jörg Kramer, chief economist at Commerzbank.
The data on the jobs front was certainly encouraging in yesterday’s PMI news. As Markit explained: “With backlogs of work rising, albeit only modestly, firms took on more staff to expand capacity. The increase in employment was the largest since September 2011, and only the second since 2011.” Overall, the rise in the composite PMI implies that second-quarter GDP will grow at a slightly faster rate: 0.5 percent vs. 0.4 percent in Q1, according to Markit’s chief economist, Chris Williamson. “The return to job creation across the region is also very encouraging news in respect of companies believing that the recovery has legs and is looking increasingly sustainable,” said Williamson.
One worrisome sign, however, is the deceleration of growth in France. Europe’s second-largest economy has been struggling all along and there’s nothing in the latest PMI numbers that tells us otherwise. Although the numbers for France still point to growth, the comfort margin remains thin. Markit describes the trend as stable.
We’ll have another perspective with today’s April release of the French government’s Business Climate Indicator (BCI) for manufacturers. In last month’s update, BCI ticked up to its highest level in nearly three years. If the PMI data is a guide, however, the BCI estimate for April will weaken. In that case, we’ll have a fresh reminder that France’s tepid recovery remains vulnerable.
Germany Ifo Business Climate Indicator (08.00 GMT): Germany is still leading the upturn, which means that Europe’s macro prospects are still closely linked to its largest national economy. That’s good news in the sense that Germany’s strength has kept the Eurozone from suffering an even deeper crisis than the one we’ve seen in recent years. But relying on one economy for support is risky. If Germany stumbles, the blowback for Europe could be severe. That’s a remote possibility at this point, although a slight downturn in the macro outlook lately in the German business sectors isn’t helpful at a time when growth elsewhere in Europe is still a work in progress.
The recent declines in Ifo's yardstick of business expectations is mild so far, but continued weakness could be an early sign of trouble for Europe’s growth engine. The soft data may be less about macro issues per se vs. worries over the Russia-Ukraine crisis. That’s a smouldering risk factor and one that’s likely to linger for the foreseeable future. But as noted above, the latest Markit numbers suggest that there’s no immediate threat. Nonetheless, it’ll be useful to see how today’s Ifo release compares.
US Initial Jobless Claims (12:30 GMT): Today’s durable goods report will draw considerable attention but today’s jobless claims number may offer a more timely update on the economic trend. Indeed, new filings for unemployment benefits have recently fallen to seven-year lows. That’s a powerful signal for expecting growth in the labour market to accelerate — assuming, of course, that the recent falls in the claims data holds.
The week-to-week numbers for this leading indicator are notoriously volatile and so it’s best to focus on the four-week average and the year-over-year change for more reliable signals. On both counts the trend looks encouraging. The four-week data have been falling since February while the annual change dropped to a negative 14 percent for the week through April 12 — the biggest rate of descent since last November.
Economists think we’ll see a pause in the falling rate of layoffs. The consensus forecast calls for a modest rise to 313,000 claims in today’s weekly estimate - up a bit from the previous week’s 304,000 (seasonally adjusted). But given the encouraging numbers from other economic reports lately (housing being the main exception), it would take a substantial upside surprise to cast aspersions on the bullish trend we’ve been seeing lately for this data set. On the other hand, a surprise drop in today’s data would be a powerful signal for thinking that the US economy is on the cusp of a substantially faster rate of growth.
