3 Numbers To Watch: Eurozone Production, US PPI & Mich. Sentiment

After a wild ride courtesy of the Federal Open Market Committee (FOMC) minutes and Fed chairman Ben Bernanke’s dovish speech, we're ending the week with some proper numbers.Today’s data from Europe is mostly old news, but the US data, especially the first July sentiment reading, will provide further clues on the near-term growth potential. The Bank of Japan releases its monthly report at 05:00 GMT. Federal Reserve board members Plosser and Bullard speak before the US session close in Jackson Hole – Bernanke will skip the event.

Eurozone May Industrial Production (09:00 GMT): Production is expected to have fallen by 0.2 percent from April, and 1.4 percent from a year ago. The German and French numbers were released earlier this week, so today’s releases should not contain a lot of surprises. The production index has been in a clear downtrend for the past two years, although for the last three months it has risen nicely. The purchasing managers' index (PMI) already bottomed out last summer, and has been climbing steadily back toward the fifty-level. As the chart shows, there is a positive correlation with a small lag between the PMI and production: PMI tends to react first, and production follows.

Unfortunately, sometimes the PMI expectations prove wrong, and production does not move in tandem. Most research desks seem to think that we are about to see a turnaround in Europe – the June and May PMI indices have continued improving slowly, and consumer confidence has also increased a bit. Personally, I would like to wait for the PMI to make a decisive break above the fifty level.

Anticipating recovery too early can be a costly mistake, as experience from early 2012 shows. The PMI had increased for three months in a row, but failed to take out the 50 level, and the plunge in production just kept going, taking expectations back down. At that time, expectation were largely because of the European Central Bank’s LTRO-loans to banks. This time around, the expectation build-up is mostly because of the ECB’s OMT-programme. It sounds too familiar to me. The next ECB meeting will be held on August 1.

US June Producer Price Index (12:30 GMT): With the Federal Reserve trying to confuse all the commentators, the best bet for us is to watch the numbers that the Fed is looking at. The headline PPI is expected to have risen by 0.5 percent in June, the same as in May. Annually, this would mean a rise of 2.1 percent versus 1.4 percent in May. The core PPI, which excludes more volatile items, is expected to have risen by 0.1 percent month-over-month and 1.6 percent year-over-year. In June, the core PPI showed a 1.7 percent rise, so today’s release should confirm that inflation is clearly lower than the Federal Reserve’s target of two percent. Low inflation numbers could “confirm” that tapering of asset purchases is further out than was commonly expected only a week ago, but as this is not news any more, it should provide no additional bullish reaction. More importantly, low inflation would not give an excuse to sell.

US July Thomson Reuters/Michigan Consumer Sentiment (13:55 GMT): This sentiment index is expected to have increased somewhat to 83.6, from 82.7 in June. This is a preliminary reading, and thus prone to later adjustments, but it is still the first data point for July. It is especially important now, as the mortgage rates have risen and stocks are at an all-time-high. As consumer demand remains the key driver of the US economy, and confidence is one of the best indicators of propensity to consume, this will probably be the most important number of the day. See my earlier post on the long-term sentiment chart.