Today's consumer inflation report for Germany will likely confirm that disinflation risk eased again last month, as shown in the provisional estimate for June. Later, France releases its monthly industrial production report for May, which will be closely watched in the wake of the better-than-expected number in the previous release. In the US, the release of the Federal Open Market Committee minutes, followed by a speech from US Federal Reserve chairman Ben Bernanke will attract the lion’s share of traders’ attention in all things bond-related.
Germany Consumer Price Index (06:00 GMT): Inflation probably inched higher to an annual pace of 1.8 percent through June, according to last week’s report from Destatis. Today’s follow-up estimate for last month isn’t likely to change, but that leaves the question of whether the recent rise in the year-over-year inflation rate is a positive? Yes, at least for now. Higher pricing pressure in Europe’s leading economy eases the disinflation/deflation threat that had been brewing earlier in 2013.
Analysts say that wage increases and a relatively low unemployment rate in Germany are the main factors pushing inflation up these days. With the rest of the Eurozone largely treading water if not contracting, higher inflation in Germany is still a net positive. All the more so when you consider that inflation’s annual pace had been slipping earlier this year through April. But the price trend turned up in May and the provisional estimate points to a repeat performance in June. Lower inflation anywhere in Europe at this stage, least of all in Germany, is a sign of deepening macro troubles. The good news is that today’s report will provide one more reason to think that the continent’s economic headwinds may be stabilising.
France Industrial Production (06:45 GMT): The surprisingly strong gain in industrial production in April — the biggest monthly increase in nearly two years — looks impressive, but it’s probably noise. Quite a lot of the bounce was due to the auto industry, which has been hammered recently. France’s economy generally is still weak if not contracting and so today’s update on industrial output for May will probably pale in comparison to the previous release. Indeed, some analysts think we'll see another round of red ink for industrial output in May.
Nonetheless, the possibility that France’s recession is easing is growing more plausible. Last week’s flash estimate of the Eurozone Composite PMI reflected a slower rate of contraction and the France component rose to a 10-month high, albeit a high that’s still under the neutral 50 mark. Today's number will provide a stress test for thinking that the worst has passed for France. In turn, the data du jour will be closely watched for assessing the odds that the Eurozone’s second half will compare favourably, if only on the margins, to this year’s first half.
US FOMC Minutes and Bernanke Speech (18:00 GMT and 20:10 GMT): Fed chatter will receive lots of attention today, but the big news will be the reaction in Treasury yields, starting with the benchmark 10-year bond. Interest rates have been climbing steadily for the past two months, largely due to the central bank’s discussions of late about the beginning of the end for the extraordinarily easy money policies of recent years. Today’s release of minutes, followed soon after by Bernanke’s speech at the National Bureau of Economic Research, will no doubt drive sentiment for bond trading today and perhaps for the rest of the week.
It’s likely that Bernanke will dial down the tapering talk in his remarks. The Fed’s initial discussion of its exit strategy last month was widely criticised for focusing too heavily on a time table versus a state-dependent policy for tapering. In other words, the market heard that monetary policy would be tightened automatically in the near-term future. To be fair, Bernanke and company have explained that the economy’s overall growth rate would be the main determinant of when and how to begin any tapering. But that got lost in all the speculative noise in the initial reaction to formal talk of higher interest rates down the road.
“Clearly it was an announcement that took the markets by surprise and that was probably not as sufficiently grounded with information for them to feel that there was certainty,” International Monetary Fund managing director Christine Lagarde said in late-June. Fed officials have been trying to adjust market expectations ever since and today’s talk by Bernanke will probably focus on tamping down anxiety. In that case, the 10-year yield will probably stay below its recent peak of around 2.73 percent.
