DE PMI, ECB Announcement, U.S. Jobless Claims

Updates on manufacturing PMIs for France, Germany and the Eurozone are scheduled for release, just ahead of the European Central Bank’s monetary policy announcement. Later, the weekly jobless claims report for the U.S. will be closely scrutinised for new clues about the business cycle after the news that manufacturing and payrolls growth weakened again in April.

Germany PMI Manufacturing Index
Output slipped again in last week's flash estimate of manufacturing activity for April. The question is whether the follow-up number for last month reveals that this crucial slice of Germany’s economy suffered even more than initially estimated? The market will be keenly interested in the answer as this is one of the last major bits of Eurozone economic news before today’s monetary policy announcement from the European Central Bank.

The first PMI guesstimate for Germany is likely to hold, more or less, although a big downside surprise would further raise expectations that the ECB will cut interest rates. Even if Germany’s manufacturing PMI stays at 47.9 for April, the recent trend still raises plenty of doubts about the eurozone’s last line of macro defence. Some analysts are inclined to write off the country’s soft economic numbers of late as a temporary slowdown due to weather - the winter just passed was reportedly Germany’s coldest in 25 years. Perhaps it is plausible, but that is a debate for another day, and one that will be resolved soon with incoming data. Meanwhile, if today’s final PMI number for German manufacturing stumbles further relative to the flash estimate, the market will be especially anxious as the ECB announcement draws near.


European Central Bank Announcement
Will they or won’t they? The general view has been that a rate cut is unlikely at the ECB announcement. But economic data from across the eurozone has remained weak in recent updates, and more analysts are expecting that the central bank’s 0.75 percent target rate will give way after all. Whether it is lower inflation or rising unemployment, the latest batch of numbers suggests that Europe’s recession certainly is not easing. But is it deepening? More analysts are inclined to argue in the affirmative.

I think the odds are slightly better than average that the bank will cut rates, but the bigger mystery is forecasting how the market reacts with, or without, a cut. Further easing would be a sign that even the reluctant dove, a.k.a. the ECB, is now formally managing expectations down... again. That is quite a change from earlier this year, when the bank’s working assumption was that the worst of the recession was history and a slow but steady rebound was underway.

The deeper reality is that a rate cut at this late date is probably a non-event, other than the short-term volatility it may bring to the forex markets. It is widely recognised that the monetary stimulus already in place is not having much of an effect in the business and consumer sectors and so it will be interesting to see if the ECB has anything new up its sleeve on this front. If I had to choose, I would pick a new plan to ensure easier access to credit over a rate cut. Whatever comes, it is likely that the market will be hanging on every word as the ECB explains (and defends) its monetary policy in the face of a persistent recession.

U.S. Initial Jobless Claims
Yesterday’s economic news suggests that March’s mixed macro profile is extending into April. ADP reports that private payrolls in April grew at the slowest pace in seven months while the ISM Manufacturing Index slipped closer to the neutral 50 mark last month. Will the weekly update on initial jobless claims bring more evidence of economic deceleration?

The previous claims report suggested the exact opposite. New filings for unemployment benefits dropped sharply last week, just above a five-year low. If the economy is stumbling, hints of trouble are likely to show up in jobless claims sooner rather than later, and so a disappointing number in today’s release would be especially troubling in the wake of yesterday’s weak ADP and ISM data. By contrast, a claims number that remains close to last week’s seasonally adjusted 339,000 level will strengthen the case for thinking that the economy’s troubles are another speed bump rather than the start of a new recession. Either way, jobless claims are likely to be the main event for Thursday's U.S. economic news.