- The official "robust" description of the German labour market is debatable
- The expected 0.3% Eurozone inflation rate will add to deflation fears
- Moderate gains are likely in US home prices
The statistical machinery will be in high gear today for turning out economic data, including a new monthly release on unemployment figures for Germany. Soon after, new Eurozone numbers will grab the market's attention with the flash estimate on consumer price inflation. Later, US home prices will arrive, and the market will be watching closely for deciding what’s in store for residential real estate after a run of mixed data in recent weeks.
Germany: Unemployment (07:55 GMT) Political pressure from near and far is building on Germany to step up growth. Although modest growth is still the likely path for Europe’s largest economy, the pace is widely expected to remain sluggish for the near term.
Managing expectations downwards has become familiar lately. “We could see growth this year lower than our forecast of 1.8%,” Germany’s economy minister Sigmar Gabriel said on Sunday. “But we still have very strong growth momentum and the labour market is robust."
That’s a debatable view, given the 0.2% slide in second-quarter GDP, down from a 0.6% rise in Q1. The case for Gabriel’s optimism will be further tested with the release of today’s monthly unemployment report. Although Germany’s official 6.7% jobless rate is expected to remain unchanged, the number of unemployed workers may offer insights into whether the labour market can reasonably be described as robust.
Recent updates in the ranks of jobless persons suggest a bit of turbulence at the margins. After five straight months of decline through to this past April, stagnation has returned. There’s no acute risk here for Germany, at least not anytime soon. But the prospect of a slow-moving economy reflects unfortunate timing now that the Eurozone economy overall is again in danger of flat-lining or worse. In turn, that outlook raises the stakes for managing the blowback from a decelerating German economy.
“The economic climate is still characterised by great uncertainty,” noted the president of ZEW with the latest release of the group’s Indicator of Economic Sentiment for Germany, which slumped for the ninth straight month in September. “The risk of a sanction spiral with Russia continues to exist and economic activity in the Eurozone remains disappointing,” he advised earlier this month. The question now is whether Europe’s macro foundation is headed for even slower growth. Today’s unemployment release may provide a new clue.
EU: Consumer Price Index (09:00 GMT) For an economy that’s struggling to keep even modest growth afloat, the front line of defence is keeping deflation from gaining a foothold. That’s getting harder, according to official numbers for Europe's year-over-year comparison with consumer prices. Eurozone inflation is running at just 0.4% through to August compared with the year-earlier level — a world below the European Central Bank’s (ECB) 2.0% target.
The already wide chasm is expected to get a bit wider in today’s release. Economists think that initial estimate for consumer inflation will dip to a 0.3% annual rate for September, according to Econoday.com’s consensus forecast. The news won’t tell us anything we don’t already know, although the sight of slower inflation will again reinforce the perception (and reality) that the European Central Bank is losing its battle to keep the broad economy at a safe distance from deflation risk.
Although there’s much debate about what the ECB can do at this late date, it seems clear that one trend that’s likely to roll on is the weak euro. The single currency has been at or near a two-year against the US dollar lately, and that’s probably no accident from the perspective of official policy.
Inflation and the euro
“As a rule of thumb, each 10% permanent effective exchange rate appreciation lowers inflation by around 40 to 50 basis points,” ECB President Mario Draghi explained back in March. “So we can say that between 2012 and today about 0.4 or 0.5 percentage points of inflation was taken out of current inflation because of the exchange rate appreciation.” Six months later, the EURUSD has fallen by 8% and yet the macro outlook has weakened and inflation is still falling.
Although no one at the central bank will say so explicitly, devaluing the euro looks like official policy these days. That’s less a decision about the potential for traction with repairing the economy, versus focusing on at least one aspect of policy over which the ECB has direct influence with minimal political interference. As such, today’s inflation report will be widely read for guidance about the deciding where the euro goes from here, regardless of whether it's an effective macro lever or not.
US: S&P Case-Shiller Home Price Index (13:00 GMT) Last week’s surprisingly strong jump in new home sales for August eased fears that the housing market is stumbling. Although the news is encouraging, sales of newly built units are a fraction of the much-bigger market for existing home sales, which fell moderately last month.
The overall trend suggests that slow growth will likely prevail in terms of estimating the appetite for housing. Nonetheless, the fundamentals that typically factor into home sales suggest caution. Notably, the rate of household formation in the US, a key driver of housing activity, continues to slow at a substantial rate.
An annual report released last week by the government reveals that the number of households created in the year through this past March slumped to 476,000, down sharply from 1.3 million at the same point in each of the past two years. The prospect that interest rates are also on track to start rising as the Federal Reserve winds down its stimulus program will add another speed bump to the housing sector's recovery.
Today’s update on housing prices will be read with these and other concerns in mind. As such, no news is good news in terms of the data pf the day. Ideally, housing will see a moderate trend in pricing — enough to keep the animal spirits alive and inspire confidence that the sector remains on the mend.
The torrid 10%-to-15% year-over-year gains in 2013 are ancient history now. In fact, the deceleration is still under way in terms of the unadjusted annual pricing data. The consensus forecast calls for a 7.5% rise for today’s July report, according to Econoday.com. That’s down from 8.1% in July.
The outlook for a relatively moderate rate of price gains doesn't pose a threat, assuming that the correction is stabilizing. But at this late date, a downside surprise of any magnitude will be seen as a warning sign. Last year’s red-hot rebound in housing was always destined to cool. The issue is deciding if the there’s more than a natural ageing process underway in the cycle. That’s still a low-risk threat at this stage, although an unexpectedly soft batch of numbers in today’s pricing report would suggest otherwise.