The crowd’s hungry for fresh data to assess the rising risk of recession in the Eurozone, but today’s schedule offers light fare. The leading contender for hard data is an update on Germany’s trade statistics for August.
Meanwhile, the Bank of England is widely expected to leave interest rates unchanged in today’s monetary policy statement. Later, the weekly update on US jobless claims will probably reaffirm the outlook for ongoing growth in the labour market.
Germany: Trade Balance (06:00 GMT) The market’s on high alert for recession signs in the Eurozone. We’ve already had several warnings so far this week with the discouraging updates on Germany’s factory orders and industrial production for August. Will today’s data on the country’s trade balance make it three in a row?
The key issue is the export numbers. Germany’s export-driven economy is clearly under pressure these days due to sluggish demand growth for the country’s goods. Several factors are at work, including the macro blowback from the Russia-Ukraine crisis and the ongoing troubles in the Middle East due to the latest phase of Islamist terrorism in Iraq and the surrounding region.
Adding to the current woes is the outlook for slower global growth. World output for 2014 will be 3.3%, the International Monetary Fund advised on Tuesday – down slightly from the 3.4% estimate in July. Next year is on track for a moderately faster pace of 3.8%, although that’s also a bit slower than the IMF’s previous forecast.
Keep an eye on today’s year-on-year numbers for German exports in unadjusted terms, a comparison that keeps the short-term noise and seasonal distortion to a minimum. Recent history shows that this vital source of economic activity has been robust for Germany lately. In the July report, exports rose more than 8% in unadjusted terms vs. the year-earlier level – dramatically faster than the 1.2% annual gain through June. Recent economic news suggests this is unsustainable and so it would be surprising if we don't see a hefty deceleration in today's annual pace.
Yesterday’s update on leading indicators by the Organisation for Economic Co-operation and Development showed that Germany’s economy is “losing momentum”. It’ll be interesting to see if today’s numbers on exports can buck the trend, although recent figures suggest otherwise.
Germany’s “external trade sector will contribute very little to growth over the next few quarters", predicted a recent BNP Paribas report. The first instalment on testing that view arrives in today's trade data.
UK: Bank of England Monetary Policy Announcement (11:00 GMT) Europe’s outlook is wobbly, but Britain’s economic recovery is intact, according to recent data. Tuesday’s update on industrial production, for instance, reflects year-on-year growth of 2.5% through August, a touch higher than the 2.4% annual rise through the previous month.
Nonetheless, some analysts see a softer trend for the UK in the near-term future. "Year-on-year growth for manufacturing and total industrial output is satisfactory, but the more recent figures show clear signs of a slowdown,” observed the chief economist at the British Chambers of Commerce.
Nonetheless, the IMF said this week that the Bank of England may need to hike rates to slow Britain’s booming housing market. Yet this week’s update of the Halifax House Price Index suggests that the market may already be slowing. “Annual house price inflation may have peaked around 10%,” according to Halifax’s economist. “A moderation in growth looks likely during the remainder of 2014 and into next year as supply and demand become increasingly better balanced.”
In any case, the market’s reaction seems inclined to push UK yields lower at the moment, in part because of the risk-off trade in the wake of discouraging news this week for the Eurozone’s macro trend. “There’s now a realisation that this is going to be a very low and slow cycle and that means the curve still looks pretty steep,” noted the director of fixed income at Smith & Williamson Investment Management in London yesterday. “The market has got too much priced in” expecting a rate increase for the UK.
An interest rate hike for Britain probably awaits sometime next year, assuming the economic recovery holds up. But for the moment, that’s still a distant concern. A bit more distant, in fact, compared with recent history.
US: Initial Jobless Claims (12:30 GMT) The Eurozone’s ongoing slide into stagnation or worse increases the headwinds for the US economy, but only on the margins. That, at least, is the optimistic view. Much depends on the depth of Europe’s troubles, which will be revealed in the weeks to come. But for the moment, the US trend remains upbeat, including a robust gain for payrolls in September.
Last week’s initial jobless claims report – a valuable leading indicator for the labour market – continues to point to growth. If this rosy outlook is destined to change, new filings for unemployment benefits will likely deliver an early warning.
Analysts don’t expect any spoilers in today’s release, however. Claims are projected to inch higher to 293,000 for the week through October 4, according to the consensus forecast by way of Econoday.com. That’s above the previous week’s 287,000, although any reading below 300,000 still looks bullish.
Indeed, claims at the end of September were near a 14-year low. That’s a solid signal for expecting that the economy will continue to mint jobs at a moderate pace if not more so. In turn, that’s one reason why William Dudley, president of the New York Federal Reserve, predicted this week that the timing of the first rate increase for the US is still on track for mid-2015.
He conceded that the dollar’s rally and slumping growth prospects abroad will ease pressure for raising rates earlier vs. later. Nonetheless, he said that expecting a rate hike around the middle of 2015 still "seems like a reasonable view to me". Today’s claims data isn’t expected to conflict with Dudley's outlook. 