- Industrial production for Italy is the main event for today's EU releases
- The data will show if growth is firming in the third largest Eurozone economy
- The EURUSD rally faces stronger headwinds as the currency approaches $1.15
- Media reports say ECB officials try to talk the euro down when it rises too high
- Will the falling 2-Year Treasury yield persist despite Fed rate hike plans?
Monday’s a sleepy day for economic reports generally, which means that the monthly update on Italy’s industrial output will have a near-monopoly for scheduled macro releases. Meanwhile, keep your eye on the euro, which will have a tough time maintaining its rally against the US dollar.
The market will also be watching the 2-year Treasury yield for fresh guidance on the outlook rate hikes— hikes that Federal Reserve Chair Janet Yellen said are still “appropriate” at some point in the near-term future.
Italy: Industrial Production (0800 GMT): Europe’s third-largest economy posted strong numbers for its industrial sector in January. Is the upbeat news another false dawn for this beleaguered economy? Or is the progress a sign that Italy’s on track to deliver firmer growth generally? Perhaps the answer awaits in today’s update on industrial activity for February.
Meanwhile, the rearview mirror offers a degree of support for thinking positively. The harmonised figures from Eurostat show that Italy’s industrial production rebounded handsomely in this year’s opening month, rising 1.9% vs. declines in the previous two months. Among the Eurozone’s big-four economies, only Germany’s output advanced at a faster pace.
For the year-on-year comparison, however, Italy’s 3.9% increase for the year through January is well above the gains for Germany, France and Spain. It could be noise, of course. Italy, after all, still struggles with macro headwinds on several fronts.
Yet there’s a mild tailwind blowing generally and so another round of growth in February for the industrial sector isn’t beyond the pale. Last week the government’s data office, Istat, reported that the country’s leading indicator remained positive – “suggesting the continuation of the slight growth also for the first quarter in 2016".
Sentiment data for March also looks promising. “[Italy’s] manufacturing sector ended the first quarter on a solid footing, according to the latest PMI data, with March seeing accelerated growth in output and inflows of new orders,” a Markit economist advised earlier this month.
The analysis will continue to ring true if today’s hard data on industrial output in February doesn’t offer a reason to rip up the recovery script.
EUR/USD: The euro rally against the US dollar was on hiatus in February, but the bullish trend revived in March. But after weeks of winding higher, EURUSD is bumping up against high-water marks for the past year – the 1.14 to 1.15 range. Breaking above this ceiling will prove challenging, in part because the European Central Bank surely recognises that letting the currency strengthen further from the current level threatens the euro area’s shaky recovery.
Indeed, The Wall Street Journal last week noted that ECB officials “have a habit of stepping up to talk the euro down whenever it rises too far.” What defines “too far”? Minds will differ, although the 1.15 mark in recent history has inspired fresh central banker commentary, the Journal noted.
A repeat performance unfolded last Thursday, when EURUSD spiked up to just over the 1.145 level on an intraday basis. True to form, ECB officials reminded the crowd that monetary stimulus was waiting in the wings and could be rolled out at a moment’s notice. Perhaps, then, it’s no surprise that the euro found resistance at the 1.14 level at the end of last week.
There’s no guarantee that EURUSD won’t rise to 1.15 or higher. But given what’s at stake – including the still-weak Eurozone recovery – it’s a safe bet that the ECB will play hard ball if the euro makes another run higher.
Two-Year Treasury Yield: Federal Reserve chair Janet Yellen last week said that the decision to start raising interest rates last December wasn’t a mistake and so more tightening this year is “appropriate”.
“This is an economy on a solid course, not a bubble economy,” she advised. There’s scope in the data for making that case, but the Treasury market is inclined to emphasise the negative. Indeed, it’s a bit strange to hear the top US central banker outline the case for more rate hikes in the wake of a downtrend for the Two-year Treasury yield – widely considered to be the most sensitive spot on the yield curve for rate expectations.
Meanwhile, the Fed funds futures market is currently pricing in a near-zero chance of a rate-hike announcement at the monetary policy meeting that's scheduled for April 26-27.
There's also no hint of a rate hike on the horizon via the 2-year yield, which eased last week to 0.70% (via Treasury.gov’s daily data). That’s well below the recent high of roughly 1.10% at last year’s close – shortly after the Fed raised the policy rate for the first time in nearly a decade. But plans for squeezing policy again is running up against market gravity and so the key question for the week ahead: Will the previous low for the Two-year yield – 0.64% in February – hold?
Perhaps a better way to frame the question is: What might derail the current round of downside momentum? Two key economic reports for March in the days ahead are on the short list: Wednesday’s monthly data on retail sales and Friday’s update on industrial production. But it’s going to take solidly bullish profiles to reverse the accelerating appetite for safe-haven liquidity.
Based on the Atlanta Fed’s revised estimate for first-quarter GDP growth, however, the odds for bullish surprises don’t look encouraging at the moment. The bank’s Q1 nowcast dipped to just 0.1%, which is effectively a recession call.
Gravity, it seems, is set to remain a potent force on yields short of a stellar run of macro reports in the days ahead.
Disclosure: Originally published at Saxo Bank TradingFloor.com