Today’s foreign trade report for Germany will receive wide attention in anticipation of Eurozone GDP growth in this year’s final quarter. Later, we’ll see the weekly update on US mortgage applications. Meanwhile, keep a close eye on the US two-year Treasury yield ahead of next week’s FOMC meeting.
Germany: Foreign Trade (0700 GMT): Yesterday’s revised third-quarter GDP data for the Eurozone confirmed that economic growth slowed to 0.3% from 0.4% in the second quarter. One of the key reasons for the slightly softer trend: a hefty round of deceleration in the growth rate of exports for the euro area. The 0.2% quarter-over-quarter increase in exports for the third quarter reflects a sharp slowdown from Q2’s 1.6% gain.
Will weaker export growth continue to weigh on Europe’s macro trend in the fourth quarter? Today’s update on Germany’s foreign trade picture for October will offer an early clue. As the currency bloc’s main exporter, Germany is a bellwether for foreign trade in the Eurozone. By that standard, it’s clear that the trend is decelerating.
The annual pace of Germany’s exports eased for the third month in a row in September, rising 4.4% in unadjusted terms from the year-earlier level. That’s the slowest gain since January.
Economists at Berenberg think that the growth rate for exports will continue to slow in this year’s final quarter, for Germany and the Eurozone. “After the weaker euro boosted exports in early 2015, the crisis in many emerging markets will interrupt German export growth in late 2015,” the bank advised last week. That’s a clue for managing expectations down for today’s monthly update on foreign trade for Europe’s export leader.
US: Mortgage Applications (1200 GMT): Trulia’s recent outlook sees a bit of cooling for US residential real estate in 2016. “Pessimism is creeping back into the housing market,” the firm wrote.
A cooler trend is already visible in the appetite for mortgages recently. Although the week-to-week data for new applications is volatile, there’s been a modest decline since this past August. Note the gently sloping linear trend line in the chart below.
The elephant in the room for real estate in the year ahead is the possibility that interest rates are headed higher, perhaps as early as next week, when the Federal Reserve may begin to tighten monetary policy. In fact, mortgage rates have already ticked up in recent weeks. The national average for the 30-year mortgage was 3.93% last week, according to Federal Reserve data. That’s still well below the peak for the last several years of roughly 4.50%. Nonetheless, rates are now showing signs of creeping higher.
Much depends on what the Fed does or doesn’t do next week with respect to monetary policy. Meantime, today’s weekly update on mortgage applications will offer fresh data for deciding if the recent downshift in demand is gaining momentum.
U.S. 2-Year Treasury Yield: Next week’s policy announcement from the Federal Reserve is on everyone’s radar, largely because of expectations that the central bank may raise interest rates for the first time in nearly a decade on December 16. But sceptics say that there’s still a weak case for squeezing monetary policy.
The reasoning for delaying a rate hike includes projections that US economic growth will continue to slow in the fourth-quarter GDP report that’s due at the end of January. As a preview, the Atlanta Fed’s GDPNow model is currently projecting a slowdown in fourth-quarter growth to 1.5% (as of December 4), down from Q3’s 2.1% and Q2’s 3.9%.
Meanwhile, the two-year Treasury yield, which is widely followed as a benchmark for rate expectations, has jumped above the 0.9% mark in recent weeks, which is more or less a five-year high. That’s a sign that the crowd’s been pricing in a rate hike for next week’s FOMC meeting.
But in a curious bit of divergence, the benchmark 10-Year yield has offered little if any confirmation for the two-year’s implied forecast. As of midday trading yesterday (New York time), the 10-year note was trading at roughly 2.23% – a middling level for recent history and nowhere near the five-year high of roughly 4.0% that was set back in 2010.
In summary, there’s still room for doubt about the Fed’s decision at next week’s meeting. How much doubt? An informed answer starts with monitoring the two-year yield in the days ahead. A dip below the 0.90% level in particular would raise uncertainty about the outcome for next Wednesday’s monetary news.
Disclosure: Originally published at Saxo Bank TradingFloor.com