- EU stimulus may improve optimism
- US employment outlook strong
- EUR weak and getting weaker
Monday is usually a slow day for economic data, but the focus of attention will be on Sentix’s investor confidence report for the eurozone, the only data release for the currency bloc today. As a result, this index will receive more attention than usual as the crowd looks for new signals to assess the macro outlook in the wake of last week’s news that the European Central Bank has launched a new phase of monetary stimulus. In turn, EUR/USD deserves close attention since the ECB action is in part an effort to weaken the euro. Meanwhile, the Conference Board publishes its monthly update of Employment Trend Index for the US.
Eurozone: Sentix Investor Confidence Index (08:30 GMT) The European Central Bank (ECB) last week cut interest rates and began charging banks for holding excess reserves in a bid to strengthen economic growth. Will the latest changes to monetary policy suffice to stabilise the currency bloc and stop the recent momentum in disinflation with consumer prices from slipping into outright deflation? Only time will tell, although we’ll have a new clue about the odds in today’s June update on investor confidence.
Recent numbers show that optimism on the near-term outlook for the Eurozone has hit a ceiling this year. After peaking in April, the headline index slipped to 12.8 in May, the lowest since January. Meantime, the six-month expectations component fell for the third month in a row in May, which “usually hints at a trend reversal”, Sentix advised. “Consequently, the strongest economic dynamics since the eurozone recovery started in the middle of 2012 should lie behind us already.”
That may have been true a month ago, but does the ECB’s new stimulus actions change the calculus? Yes, or so it seems based on the initial reaction of equity markets in Europe. The major indices posted gains last week, much of it directly following the central bank's announcement. For example, Germany’s DAX and France’s CAC 40 posted robust gains on Friday, the day after the ECB’s news.
The longer term outlook is still problematic, although macro risk is a bit lower in the wake of the central bank's new strategy. Will it work? According to one ECB board member, Luc Coene, a robust test of whether the latest stimulus decision has any traction will have to wait until the end of the year. “Depending on the outcome, we'll see if there is a need or not for more measures,” he said on Friday. 
US: Employment Trend Index (14:00 GMT) Payrolls in May posted their fourth consecutive gain of 200,000-plus increases, the government reported on Friday. Although the 217,000 gain was well below April’s advance, it was high enough to encourage optimism on the economic outlook. “We’re seeing the continuation of solid payrolls gains, which is an accomplishment for the economy,” a BNP Paribas (OTC:BNPQF) economist in New York told Bloomberg. Perhaps the most important news in last week's release is the persistence of stable year-on-year growth of 2 percent, as I noted on Friday. Indeed, that's a strong signal for expecting moderate growth overall.
Confirmation of the positive trend is likely in today’s update of the Employment Trend Index (ETI), which measures several facets of the labour market and related economic sectors. Although this benchmark from the Conference Board aggregates previously released data, it’s useful as a single measure for tracking the general momentum (or lack thereof) for job creation prospects in the US.
In the previous release, the numbers looked bullish. “April’s increase in the Employment Trends Index, and continued improvement in recent months, is signaling solid job growth through the summer,” said the Board’s director of macroeconomic research. Friday’s jobs report only strengthens the case for thinking that today’s update for May will offer more of the same. Some analysts read the latest payrolls number as a sign that economic growth is set to accelerate. That’s still debatable, although the outlook for ongoing moderate growth is certainly warranted. Nonetheless, today’s ETI data will probably give the bulls another excuse to cheer.
EUR/USD: Worries about deflation risk convinced the ECB last week to cut interest rates and impose charges on bank reserves. The changes are also designed to weaken the EUR and boost exports. In fact, the EUR has been falling against the USD for weeks. After EUR/USD peaked at 1.39 in early May (based on daily midpoint quotes), the EUR has dropped more than two percent through last Friday. Now that the rumour of central action has become fact, is the currency’s slide over?
The ECB’s latest monetary program has inspired a new round of forecasts that Europe’s economic prospects have improved, if only on the margins. To the extent that assets are reallocated to European shares on this view, the shift will put upward pressure on the EUR. Of course, this influx could be offset as banks move reserves out of Europe to avoid paying a fee for keeping reserves at the ECB.
For the immediate future, however, there’s more than the usual uncertainty lurking as the market digests the full implications of the ECB’s policy shift. The first question this week: Will the 1.36 support level for EUR/USD hold?
Overall, it wouldn’t be surprising to see EUR/USD trend marginally higher in the short term, perhaps running up to the 1.37-1.38 range. But with the Federal Reserve Bank still on track to wind down its quantitative easing program, which implies higher rates, combined with the ECB’s new-found assertiveness to juice the economy, gravity will probably prevail in the weeks to come as it relates to EUR/USD. As ECB executive board member Benoit Coeure said over the weekend, Eurozone rates will stay low for several years relative to the US and Britain. As a result, euro rallies will face a strong headwind over time.