Consumer sentiment in Germany is the main event for today’s lineup of European economic releases. Later, all eyes will be on the Federal Reserve Bank, when it releases its monetary policy statement at the conclusion of today's Federal Open Market Committee meeting. Meantime, keep an eye on EUR/USD, which has fallen sharply since last week’s European Central Bank meeting.
Germany: Gfk Consumer Climate Index (0700 GMT): The macro trend for Europe’s main economy remains “very robust” the Bundesbank advised on Monday. “The upward momentum of overall economic activity in Germany continued in the third quarter,” the central bank said in its monthly report.
This is a bit surprising for the bears, who expected that the fallout of the Volkswagen (OTC:VLKAY) scandal and China’s slowdown would take a sizeable bite out of Germany’s economic activity. But if there’s rising worry within Germany about the near-term outlook, the concern didn't show up in this week’s October update of the Ifo Business Climate Index, which measures sentiment in the country’s business sector.
The current conditions benchmark for the Ifo data slipped modestly while the near-term business expectations index advanced to its highest reading since February. “The German economy is proving remarkably resilient in view of this autumn’s multiple challenges,” the economic think-tank said in a statement.
Ifo economist Klaus Wohlrabe told The Wall Street Journal that it was "surprised by the outcome". "It shows that general fears that Germany’s economy will be badly damaged by the Volkswagen scandal seem to be unwarranted," he said.
That’s also the message in this week’s upbeat projections for exports via BGA, a trade group in Germany. BGA said that it sees exports rising 6% this year. "There will be no long-term damage to the good reputation of German products through the VW scandal,” the group predicted.
Today’s question: Will German consumers also shrug off China worries and the potential for VW-related blowback? An early clue arrives in today’s monthly report on sentiment from Gfk. The consultancy’s Consumer Climate Index has weakened lately, but slowly and modestly. The soft but steady descent is expected to continue in today’s estimate for November.
Econoday.com’s consensus forecast sees this benchmark dipping to 9.4, which would mark a nine-month low.
That’s hardly a disaster, but if the prediction holds it will serve as a reminder that the slow erosion of consumer confidence in Germany endures. For the moment, that’s not a problem. But it a may be a hint of things to come if the Eurozone economic projections continue to weaken in the weeks ahead.
Federal Reserve FOMC Statement (1800 GMT): The cloudy outlook for the US economy will likely convince the Federal Reserve to leave interest rates unchanged in today’s monetary announcement, according to a survey by The Financial Times. “We believe [Fed Chair] Yellen’s objective will be to neither strongly signal a December hike nor to take that possibility off the table,” Michael Feroli, US economist at JPMorgan Chase, told the FT.
Softer interest rates in recent weeks support Feroli’s outlook. The effective Fed funds (EFF) rate has been drifting lower this month. EFF’s 30-day average slipped to 0.1277% at last week’s close – the lowest since early August.
Meanwhile, the 2-Year Treasury yield, considered the most sensitive spot on the yield curve for rate expectations, remains well below last month’s high of 0.82%, when the crowd was expecting that the Fed was about to start squeezing monetary policy. As of midday trading yesterday, the 2-year yield was 20 basis points lower at 0.62%.
Another factor that may convince the Fed to punt on raising rates is tomorrow’s preliminary report on third quarter GDP, which is expected to reflect a sharp slowdown in growth from Q2’s strong 3.9% rise (seasonally adjusted annual rate). Econoday.com’s consensus forecast anticipates output rising a weak 1.7% for the three months through September.
Even if the crowd is right and rates remain unchanged, the Fed’s policy statement will be closely analysed for clues about what comes next. There are several cross currents in recent economic data, which has muddied the waters for measuring the strength of the macro trend. Not surprisingly, comments from Fed officials have presented a mixed outlook overall with respect to rate hikes.
Will today’s policy statement provide a clearer view? Probably not, for a simple reason: the economic reports since the last FOMC meeting are still painting a murky profile of the trend.
EUR/USD: If the goal of the European Central Bank’s monetary meeting and press conference last week was to keep pressure on the euro, the outcome has been a clear success so far. The single currency has fallen sharply since the October 22 policy announcement.
EURUSD was trading around 1.132 just ahead of last Thursday’s ECB event. As of midday trading yesterday, the euro’s value against the US dollar had slumped roughly 2.4% to just below 1.105.
A softer current is part of the plan, of course, to combat what appears to be a return of deflationary risks, if only on the margins. The ECB last week hinted that it might roll out a new phase of monetary stimulus in December.
Meanwhile, ECB chief economist Peter Praet yesterday told AFP that there are “no taboos” for raising the Eurozone’s chronically low inflation rate. He noted that the central bank is undergoing an “in-depth 360-degrees reflection” on how to respond to weak inflation.
Recognising that the reaching the bank’s circa 2% inflation target is still looking unlikely any time soon, Praet said that "we will assess this in December, notably in light of the new macroeconomic staff projections”.
The question is whether the ECB will provide convincing evidence to the market for pushing inflation higher? Even a modest degree of success on this front could spark a rally in EURUSD, if only because the recent selling may have gone too far.
The euro has slipped to its lowest in two months against the greenback and the rolling 20-day percentage change translates to the lowest percentile rank since July. The raw material for a short-term pop in EURUSD? Perhaps, although the key variable: expectations for the ECB’s inflation-boosting plans.
The hurdles for success, however, are rising. "Cutting the deposit facility is too simple and won't help," a trader told Reuters this week. “Even what they have done up to now has not had enough of a result for them to be happy. I wouldn't know, but it's not for me to invent the magical instrument – it's for them to invent that."
Disclosure: Originally published at Saxo Bank TradingFloor.com