Tuesday’s busy day of economic releases will resonate with the crowd now that the Grexit risk is no longer a real and present danger. The markets will be keenly focused on the Eurozone’s industrial production data, which is expected to deliver another round of support in favour of recovery. Later, two US data points will offer more context for estimating the odds that the Fed will begin raising interest rates in September.
EU: Industrial Production (09:00 GMT)
Now that the worst-case scenario for the crisis in Greece is behind us (or so we’re told), it’s time to refocus on the real economy in Europe. That starts with today’s monthly update on industrial output.
The crowd’s anticipating some uplifting news for the return to fundamentals in the economic headlines. Econoday.com’s consensus forecast sees industrial activity rising at a solid 2.0% year-over-year rate through May — more than double the 0.8% jump in the previous release.
If the forecast holds, we’ll have more support for arguing that the Eurozone recovery is intact, despite the recent distractions. A bigger test will come when we see the numbers that reflect the economy after the recent turmoil spawned by Greece. The early clues, however, suggest that the improving trend for the Eurozone will endure. Markit’s survey data for the manufacturing sector in the euro area, for instance, has been holding on to its recent gains, ticking up to 52.5 in June — the highest reading in more than a year.
It’s still a modest expansion for manufacturing, but the fact that the purchasing managers’ index (PMI) remained steady to slightly stronger during the stormy months of late suggests that Europe’s economy overall won't stumble because of Greece. Today’s update on industrial production, assuming that the forecast is accurate, will be a down payment for delivering on that analysis in the months ahead.
US: Small Business Optimism Index (10:00 GMT)
Sentiment in the small-business community has held up surprisingly well during the recent soft patch in economic activity. Although the level of optimism dipped as the US economy suffered a mild first-quarter contraction, there’s been a steady rebound in the Small Business Optimism Index in April and May, according to the National Federation of Independent Business (NFIB).
Today’s update for June is expected to remain unchanged vs. the previous month, but that’s still a decent number, if accurate. Indeed, the all-important trend in job creation is still looking stronger these days. ADP’s estimate of payrolls for small firms in the US rose 120,000 during both May and June – the strongest gains so far this year.
“Small businesses continue to lead the way adding over half of the total jobs this month,” said Carlos Rodriguez, president of ADP, earlier this month.
The update on sentiment among small-business owners may not be roaring ahead, but even a flat performance will look encouraging once you factor in the upswing in job creation for these firms. Short of a hefty downside surprise, today’s figures are on track to support the outlook for ongoing recovery – in the small-business sector and for US payrolls generally.
US: Retail Sales (12:30 GMT)
Today’s monthly update on consumer spending will be widely followed for insight on whether the Federal Reserve is still on track to begin raising interest rates in September. Fed head Janet Yellen suggested as much in a speech last week. The operative question today: is the hard data on board with her not-so-subtle hint that the central bank will begin to (gently) squeeze monetary policy?
The odds of a rate hike sooner rather than later are higher now that Greece has struck a deal with its creditors. Grexit risk was never a direct threat to the US economy, but the dollar’s role as the world’s reserve currency all but insured that turmoil in the Eurozone would keep the Fed on a cautious footing. But it would seem that Greece no longer offers an excuse to delay the first rate hike. That leaves us with the elephant in the room: What are the signals from the US economy?
Retail sales are expected to rise a modest 0.3% in June, according to Econoday.com’s consensus forecast. That’s well below the 1.2% advance in the previous month. Nonetheless, if today’s forecast is accurate, spending will rise 2.5% in annual terms through last month — close to the strongest pace since January, when the macro trend looked considerably brighter.
Is that enough to keep the outlook for a September rate hike bubbling? Let’s put it this way: moderate growth in retail spending isn’t a spoiler now that Grexit risk is off the table.
Disclosure: Originally published at Saxo Bank TradingFloor.com