Monday’s a quiet day for economic reports. The light schedule begins with the Ifo Business Survey for Germany, followed by two US numbers: the Chicago Fed National Activity Index and the flash estimate for Markit’s Services Purchasing Managers Index (PMI) for February. Keep in mind that Eurostat publishes a revised estimate of January's consumer price index for the Eurozone at 10:00 GMT. The new CPI number isn't likely to deviate too far from the flash estimate, but a surprise on this front could have unusually big implications for the trading day amid ongoing concerns with disinflation/deflation risk.
Germany Ifo Business Survey (09:00 GMT) Europe’s leading economy has been the foundation that’s kept the Eurozone from slipping off the deep end and so any hint of macro trouble for Germany would be profoundly bearish for the Continent at this stage. The good news is that the country that was once labeled the sick man of Europe has become (and remains) its principal salvation. Crucially, the business sector in Germany is increasingly confident that the economy will expand, according to the Ifo Institute’s influential survey.
Ifo’s expectations index has posted three straight increases in the last three monthly updates. The gain in January to 108.9 puts the expectations benchmark at its highest point in nearly three years. The buoyant sentiment looks even better when you consider that it’s accompanied by relatively encouraging hard data. The current fourth-quarter GDP report for the Eurozone, for instance, shows that Germany’s growth was slightly above average: up 0.4 percent vs. 2013’s third quarter, and a bit faster than the 0.3 percent rise for the 17 countries that comprise the euro area.
Europe is still far too reliant on Germany, of course, but for the moment it’s the only game in town. The good news is that today’s Ifo report will probably tell us that Europe’s primary means of macro support will continue to provide the essential ingredient of economic expansion for the foreseeable future.
US Chicago Fed National Activity Index (13:30 GMT) The economic news for the US has been wobbly lately, with several key indicators for January suffering varying degrees of unexpected setbacks relative to the numbers in previous months. From non-farm payrolls to industrial production to retail sales, the main benchmarks of economic activity have stumbled. And on Friday we learned that existing home sales in January fell more than expected relative to the previous month’s total.
Weather is still widely blamed as the cause for the soft data, which is to say that growth is projected to pick up as the harsh winter fades. To be fair, some of the recent news has been upbeat, notably: last week’s February flash estimate of the US Manufacturing Purchasing Index, which jumped to its highest reading in nearly four years.
It may be counterintuitive at this point, but today’s January update of the Chicago Fed’s National Activity Index (CFNAI) is likely to show that growth is rolling forward at an above-trend rate. The three-month moving average of CFNAI has been north of zero (i.e., growth has been above average) in each of the last four updates through the end of last year and today’s release will likely show the same for January, according to my econometric projection. In that case, we'll have a new set of numbers for thinking that forward momentum remains the dominant theme for looking ahead.
US Services PMI (13:58 GMT) Markit’s recently launched benchmark of the US services sector points to an accelerating rate of growth. Compared with the competing ISM Non-Manufacturing Index, the PMI data paints a moderately stronger picture for this key slice of the economy. Given the recent weakness in other economic reports, another upbeat number today will help take the edge off of worries that the business cycle’s stumbling.
In the previous release, the index’s rise to 56.7—well above the neutral 50 mark—“pointed to a solid expansion of staffing levels within the service economy,” according to Markit Economics. “Anecdotal evidence attributed rising employment numbers to increased levels of new work and improving confidence about the business outlook.” That sounds overly optimistic after several weeks of disappointing updates from other corners of the economy. As such, it’ll be informative to see if today’s initial PMI estimate for February is able to maintain the cheery aura that was evident in the January report.
For what it’s worth, the Federal Reserve continues to expect that the incoming data will firm up in the weeks and months ahead. The fact that the central bank remains committed to winding down its quantitative easing implies that the Fed’s internal forecasts still project growth for the near term. "At least for the time being we are on target to continue the taper going forward, depending on how the (Fed's policy-setting) committee makes that decision as we go through this year," St. Louis Fed President James Bullard said late last week. Today’s PMI report is at the top of Monday’s list for deciding if Bullard’s analysis is still valid.
