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Worrying German CPI trend, US jobless, Rising 10 Year Yield

Published 09/11/2014, 01:58 AM
Updated 03/19/2019, 04:00 AM

Inflation, or the lack thereof, drives the macro agenda for Europe today with the August update on Germany’s consumer price index (and the equivalent for France as well). Later, the weekly data on initial jobless claims for the US will grab the market’s attention. Meantime, keep a close eye on the benchmark 10-year Treasury yield, which has been rising consistently so far in September after a summer of rate declines.

Germany: Consumer Price Index (06:00 GMT) The topic of deflation risk is on the agenda with today’s update of consumer inflation. Although a general price decline is still considered a low-probability event for Europe’s main economy, the continued deceleration in the country’s already low level of inflation serves as a reminder that the general trend in Eurozone heartland is moving in the wrong direction.

Even German Finance Minister Wolfgang Schäuble — a monetary hawk who wrote in 2011 that fiscal austerity is the “only cure for the Eurozone” — now recognizes that the macro climate is “deteriorating” while “persisting high deficits and big Eurozone countries’ poor competitiveness and economic weakness are increasingly a burden on the German economy.”

One facet of the weakness is reflected in the consumer price index, which is projected to remain at a four-year low for the second month in a row, according to the preliminary August estimate from the National Statistics Office that was published late last month. Economists expect no change in the 0.8% year-on-year increase through last month in today’s revision, according to the consensus forecast from Econoday.com. But in the current climate, a downside surprise would shake the increasingly challenged outlook for Germany and the rest of Europe.

If you think that low/decelerating inflation and a softer economy might convince Schäuble and his minions to rethink their support for austerity, think again. If he's a reformed austerian, the attitude adjustment is well hidden. “We mustn't allow ourselves to entertain the illusion that we can solve our problems using more and more public funds and ever higher deficits,” Schäuble advised yesterday. “Calls in Europe to use ever more public funds and higher deficits and debts are misleading. Growth and jobs are not created through ever higher deficits - otherwise we would have no problems now.”

Keep in mind that France is also scheduled to release new inflation data for its consumer sector at 06:45 GMT. Pricing pressure is even weaker in Europe’s second-largest economy, which is flirting with a new recession. No wonder that an even lesser rate of inflation in year-on-year terms is expected in today’s August CPI report for France.

de.cpi.11sep2014

US: Initial Jobless Claims (12:30 GMT) New filings for unemployment benefits have been trending lower this year — a bias that's been and remains a crucial source for optimism. The upbeat numbers are expected to remain so in today’s release. The crowd’s looking for slight decline of 2,000 to a seasonally adjusted 300,000 for the week through September 6, according to Briefing.com. If that comes about, then claims will be stick close to a post-recession low, providing fresh support for optimism about the economy.

Last week’s lower-than-expected rise in August payrolls raised concerns that the macro trend was faltering. But there’s been minimal turbulence in the claims data, which has a relatively reliable history as a leading indicator of the business cycle. With new filings sticking near the 300,000 mark these days, which translates into a roughly 10% annual decline rate, the outlook is encouraging.

If and when there’s a genuine change for the worse in the macro weather, the odds are good that we’ll see an early warning in an upward spike in new claims. For the moment, however, the horizon still looks moderately bullish.

us.icsa.11sep2014

US: 10-Year Treasury Yield Interest rates are on the rise again after a summer of risk-off sentiment left the yield plumbing a 14-month low in late August. It’s anyone’s guess if the latest reversal will roll on, but so far in September there’s a convincing run of upside momentum to consider. That’s a sign that the market’s focus has turned again to improving macro numbers for the US and the Federal Reserve, which has a policy meeting next week — a confab that some observers say will highlight hawkish sentiment.

Heightened geopolitical risk is still bubbling away in the Middle East and Ukraine — regions that drove the benchmark 10-year yield lower in recent months through warfare waged by militants. But for the moment the market seems to be saying that economics trumps fear. Adding to the sense that the summertime decline in US rates was excessive is a study published this week by the San Francisco Fed — "Assessing Expectations of Monetary Policy" — that “indicates that the public seems to expect more accommodative monetary policy than the [Fed’s macro outlook] suggests.”

After dipping to 2.34% on August 28, the 10-year yield jumped over the 2.50% mark this week for the first time in nearly two months. Dark headlines could easily drive US rates lower again if events on the ground in the usual hotspots take a turn for the worse. Then again, if the news cycle sticks to a low burn on matters of geopolitical risk, a decent batch of economic reports for the US economy could be an excuse to keep selling Treasuries, which of course would raise yields further.

The next major test will come tomorrow, with the monthly report on retail sales for August. The consensus view sees growth picking up, which may provide new incentives for bond bears. This assumes, of course, that militants don’t hijack the crowd’s attention in the meantime.

us.10yr.11sep2014

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