- Ifo’s Business Climate Index for Germany is on track to inch higher in December
- US Services PMI for December likely to dip slightly but hold near high for 2016
- Politics and economics will determine if 10-year Treasury yield will still rise
- There are high hopes and plenty of uncertainties about US growth in 2017
German business sentiment for December is in the spotlight today via the monthly update of the Ifo Business Climate Index. We’ll also see the flash December data for the US Services PMI. Meantime, keep your eye on the benchmark 10-year Treasury yield, which closed at a two-year high last week.
Germany: Ifo Business Climate Index (0900 GMT): Europe’s biggest economy appears to be in the sweet spot as 2016 comes to a close and today’s update on business sentiment is expected to reaffirm the upbeat outlook.
Equity investors are certainly anticipating an improvement in economic activity. The German stock market closed last week at its highest level in more than a year. Survey data from IHS Markit for December also points to a faster pace of growth, based on last week's flash PMI estimates, which suggest that GDP is on track to accelerate in the fourth quarter after posting a sluggish 0.2% rise in Q3.
The Ifo Institute last week added some end-of-year cheer to Germany’s macro outlook with a revised projection. “All of the signs indicate that the fourth quarter of 2016 will be stronger than previously anticipated, and that this dynamic will continue into the New Year,” the group’s president said in a statement published on Friday.
Today’s December release of the Ifo Business Climate Index isn’t expected to spoil the party. TradingEconomics.com’s consensus forecast sees the benchmark ticking higher for this month to 115.9, a fractional rise from November. If so, the news will reaffirm the view that Germany’s macro trend will close out the year on an upbeat note.
US: Services PMI (1445 GMT): Economic news for the US last week was mixed. Will today’s initial December estimate of activity in the services sector provide new clarity?
A firmer round of macro news would be welcome in the wake of last week’s varied set of numbers. Disappointing reports on retail sales, housing starts, and industrial production in November weighed on expectations a bit. On the other hand, bullish readings for several survey based manufacturing indexes for December, combined with a drop in jobless claims, kept pessimism in check.
As for the services sector, recent figures point to a rebound in economic activity. Earlier this month, the Institute for Supply Management advised that its Non-Manufacturing Index surged in November to its strongest reading in more than a year. “This last quarter is having the year finish up pretty strong,” chairman of the ISM non-manufacturing survey told reporters two weeks ago. “I don’t project that December is going to be much different.”
Today’s PMI data offers a reality check on that forecast. The econometric estimate for the Services PMI in December is expected to tick down, albeit only slightly to 54.3, according to TradingEconomics.com's econometric estimate. That’s modestly below the previous two months, but well up from the tepid-growth readings in the summer. As such, the projection as it stands now isn’t likely to sway expectations one way or another. But just holding steady is a win for the bulls.
“US service providers experienced a robust expansion of business activity in November, helped by the fastest rise in new work for one year,” IHS Markit observed earlier this month. A similar profile is expected in today’s flash estimate for December.
US: 10-Year Treasury Yield: The benchmark 10-year rate closed last week at 2.60%, the highest level in more than two years, based on daily data via Treasury.gov. Even more striking, the current yield has more than doubled since early July, when the 10-year rate touched a record low of 1.37%.
Will yields continue to rise? Recent history suggests as much. Momentum, after all, is a powerful force and so it’s not unreasonable to look at the recent breakout to the upside and conclude that there’s still room to run higher. What could derail that forecast? A surprising run of disappointing economic data.
At the moment, however, there’s a modest case for assuming that growth is due to pickup in 2017. Note, however, that the Federal Reserve’s upwardly revised economic projection for the new year hasn’t changed much from the previous estimate. Last week the Fed advised that it expects GDP to rise 2.1% in 2017, just a whiff above September’s 2.0% forecast.
Looking at 2016 through the prism of the changing of the guard in Washington offers more red meat for the bulls. The crowd is anticipating a Trump stimulus via new infrastructure spending, tax cuts and lighter regulation. It’s unclear how much additional growth the incoming administration can squeeze out of the economy, but the assumption at the moment is that the macro trend will strengthen significantly next year.
But there are risks to consider, starting with political risk. How much of Trump’s agenda will Congress approve? Meanwhile, will tax cuts, deregulation, and fiscal stimulus provide as much lift as expected? Will rising interest rates dull any rebound?
But those are uncertainties for next year, once a Trump White House is up and running. Meantime, market momentum has the upper hand, aided and abetted by last week’s Fed comments. The central bank says it’s planning on three more rate hikes in 2017. Until or if the hard data and/or political developments tell us otherwise, it seems that the 10-year yield is set to drift higher in the weeks ahead.
Disclosure: Originally published at Saxo Bank TradingFloor.com