It’s a light day for major economic releases, which means that Spain’s update on industrial production for August will draw close scrutiny as a means of estimating recession risk in Europe in the wake of this week’s dark numbers out of Germany.
Later, the Federal Reserve Bank will release the minutes for its September Federal Open Market Committee meeting, although the potential for a deeper shade of trouble in the Eurozone suddenly transforms this month-old discussion on monetary policy to the central banking equivalent of a fossil.
For a more timely proxy for estimating the evolving state of macro, keep an eye on the US 10-year Treasury yield, which continues to slide as the crowd becomes more fearful about growth.
Spain: Industrial Production (07:00 GMT) In the wake of this week’s surprisingly weak numbers on Germany’s factory orders and industrial production, Spain stands out as the strongest player among the Eurozone’s big four economies. But the tide may be turning. Although output has remained positive so far this year on a year-on-year basis, the growth rate in Spain's industrial output slowed sharply in the last two releases.
Production increased a sluggish 0.8% in the year to July, down from the recent peak of nearly 4% in April. A stronger rate of growth would be especially welcome in today’s August report, but with Germany’s economy on the skids that’s probably asking too much.
Even if today’s data reflects a rebound in the pace of growth, no one can ignore the gravitational effects that will surely weigh on Europe via Germany’s latest troubles. Yet some analysts still say that’s it’s premature to assume the worst. “The setback in industrial production in August was a massive one,” noted UniCredit MIB’s chief German economist in Munich. “German industrial activity will soften in coming months as already indicated by business sentiment but not tumble into the abyss. And no, there is no reason to dig up the R-word again.”
Maybe so, but if today’s industrial data for Spain shows continued weakness, the news will deepen the gloom for considering the Eurozone’s future. Spain, after all, has been Europe’s leader in recent history when measuring the degree of its economic rebound. That’s partly due to the depth of the country’s previous recession – Spain suffered the most among Europe’s big economies, which laid the foundation for a relatively strong recovery. In any case, if Spain can’t hold on to its growth trend of late, it’s going to be that much harder to assume that the R word still isn’t applicable to the Eurozone.
US: Federal Reserve FOMC Minutes (18:00 GMT) In last month’s Federal Open Market Committee statement, the Fed emphasised that it was in no hurry to begin tightening monetary policy. The central bank explained that “it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the committee's two-percent longer-run goal….”
Consumer inflation in August fell short of that tipping point, running at 1.7% on a year-on-year basis. Meantime, the economic news of late has been encouraging, including a better-than-expected gain for payrolls last month. But this week’s disappointing numbers for Germany suggest that Europe’s in recession again. If so, the Fed has a new reason to delay raising interest rates and begin the delicate task of squeezing liquidity.
Suffice to say, the dovish view for monetary policy is in no danger of giving way to the hawks in the immediate future. Even if today’s minutes from last month’s FOMC meeting suggest otherwise, the latest macro figures for Germany imply that any nascent move to accelerate the first US interest rate hike is on hold until it’s clear how, or whether the blowback from Europe will affect the American economy.
The current thinking has been that the first round of rate hikes would arrive in mid-2015. That’s in no danger of migrating to next year’s first quarter, even if today’s minutes deliver a hawkish surprise. The new new uncertainty tied to Germany and Europe is sure to reshuffle assumptions and timing for US policy. As a result, today’s minutes are probably a lot less relevant for looking ahead compared with the impact this release would have unleashed if the news hit the street last Friday.
10-Year Treasury Yield The risk-off trade is on again. Actually, it’s been on for the better part of the past month, albeit with a few temporary reversals here and there. In any case, there’s no mistaking the trend of late for the benchmark 10-year Treasury yield. This key rate for the world’s reserve currency has fallen persistently since mid-September, dipping below the 2.4% mark this week for the first time in more than a month. The fear that Germany and the Eurozone are in recession again have certainly stoked demand for safe havens, treasuries in particular.
As of midday in yesterday’s trading session New York time, the 10-year slipped to 2.37%. There’s a decent possibility that we’ll see even lower yields in the days ahead if the crowd assumes that the state of macro is destined to deteriorate further.
Downsizing expectations clearly has momentum at the moment, as suggested in yesterday’s downgrades for economic projections by the International Monetary Fund. In its new World Economic Outlook report, the IMF reduced its 2014 forecast for Eurozone growth to 0.8%, down from 1.1% in July’s estimate. For 2015, the IMF now projects the Eurozone will expand 1.3%, a bit slower than the 1.5% prediction from three months earlier.
Given the dark numbers out of Germany this week, even the IMF’s newly diminished outlook for growth may still be overly rosy. If the 10-year Treasury yield continues to fall, that’s a rough proxy for assuming that the decline foreshadows a similar directional change in the next round of macro estimates.