Several key economic updates are scheduled today, including new factory orders for Germany. Later, the Bank of England releases its latest policy announcement, followed by the ADP Employment Report for the US. In addition, be mindful of the policy statement from the European Central Bank (11:45 GMT) and ECB president Mario Draghi’s subsequent speech (12:30 GMT).
Germany Factory Orders (10:00 GMT) Positive economic momentum continues to build, as the August updates on Germany’s purchasing managers indexes (PMI) in services (pdf) and manufacturing (pdf) suggest. Nonetheless, analysts expect that today’s July update on new industrial orders will show a retreat after June’s strong gain.
The consensus forecast sees a 1.0 percent decline in new orders for July versus a 3.8 percent rise in the previous month, which was somewhat skewed by the influence of strong demand for big-ticket items. As a result, the market is expecting a reversal after June’s gain. The PMI data for Germany will remain encouraging regardless, but a fall in factory orders in today’s release may still raise concerns. Recall that last week’s unemployment report showed that the number of jobless workers unexpectedly rose for the first time in three months. Some economists dismiss the rise as seasonal noise. But last week also revealed that retail sales in Germany were surprisingly weak in July. In turn, another weak report with factory orders will be considered in context with the downbeat news on unemployment and retail data.
Keep in mind that German federal elections later this month present another source of uncertainty and one that will increasingly weigh on market sentiment if the economic numbers look shaky. For good or ill, the September 22 parliamentary vote will decide if Angela Merkel will be re-elected as chancellor. What are the economic ramifications, one way or the other? Much depends on the incoming economic numbers, starting with today’s factory orders.
Bank of England Interest Rate Announcement (11:00 GMT) Almost no one thinks the Bank of England will raise interest rates today, but the persistent run of good news in economic reports lately has the crowd focusing ever more intensely on the day when monetary policy will be tightened. Judging by formal pronouncements from the Bank of England (BOE), that day is still several years in the future. Perhaps, but the private sector is convinced that we’ll see the policy rate - 0.50 percent currently - rise sooner than expected.
Nonetheless, analysts advise that BoE governor Mark Carney has made it clear via “forward guidance” that erring on the side of growth remains the priority for the foreseeable future, as opposed to keeping a lid on marginal increases in inflation before the economic recovery is on a solid footing. “The knowledge that interest rates will stay low until the recovery is well established should give greater confidence to households to spend responsibly and businesses to invest wisely,” Carney said last week. But with Britain’s recovery showing persistent momentum, it’s only reasonable to wonder if the BoE will be forced to modify its monetary plans. Accordingly, the market will be keenly focused on learning if today’s interest rate decision is accompanied by a statement that clarifies (or changes?) the bank’s outlook on monetary policy. Last month’s statement was brief, explaining only that the policy rate and asset purchases would remain unchanged. It’ll be interesting to see how today’s policy statement compares and how the markets react.
US ADP Employment Report (12:15 GMT) The US economy continues to grow at a modest pace, non-farm payrolls included. Nonetheless, if you’re looking for the weak spot in the recovery, the slow growth in employment surely ranks at the top of the list. After all, without a robust recovery in private employment, the prospects look dim for a sustained expansion of the overall economy. These issues moved to the fore again with the government’s July update on payrolls, which posted the slowest rise since March. Economists think we’ll see a slightly better gain in Friday’s August update. In the meantime, the market will be looking closely at today’s ADP release for guidance on tomorrow’s official news.
In the previous ADP report, private payrolls in July increased by 200,000, or roughly the same increase in the June report. In other words, the US economy created the most private sector jobs on a net positive basis in June and July since the first two months of the year. So far, however, there’s no confirming support in the government’s data. Is that a clue for thinking that the ADP numbers overstated the growth? Possibly, which is why today's report will be closely analysed for additional perspective. Unfortunately, any clarity is expected to recommend that we lower expectations. The consensus forecast calls for a 177,000 rise in the August report from ADP - a substantial drop from July’s 200,000 increase. If that prediction holds, it’s going to be quite a bit tougher to assume that tomorrow's government report is going to provide a hefty upside surprise.