Thursday's a busy day for economic and monetary policy news. The main event: the European Central Bank’s interest rate announcement that’s scheduled for 12:45 GMT, along with the press conference that follows at 13:30 GMT. Two numbers that precede the ECB chatter may offer a clue on what the central bank will say. First up is the January report on the retail purchasing managers index (PMI) for Europe. Next, an update on new factory orders for Germany. Later, keep an eye on the latest weekly update on US initial jobless claims for fresh perspective on how the labour market’s evolving.
Eurozone Retail PMI (09:10 GMT) Retail sales in Europe unexpectedly declined in December, falling a hefty 1.6 percent from November, Eurostat reported yesterday. "I can't say that deflation is a likely prospect, but it's a bigger risk than it was just two months ago," Peter Dixon at Commerzbank told BBC. “It will highlight the pressure on the ECB."
The latest hard numbers on retail spending don’t offer any reason to dismiss Dixon's analysis. Even worse, the survey numbers for the retail industry across Europe have been biased toward contraction for several months. Today’s PMI report for January will be useful for deciding if the gloomy news on retail consumption at 2013’s close has spilled over into 2014. It would be surprising to learn otherwise in a convincing degree. As you can see from the chart below, both spending and sentiment in retail has been trending deeper into the red lately. Another weak update in the PMI report will only add more weight to the argument that the ECB should announce a stronger monetary plan today to stabilise if not reverse the negative momentum that may be building in retail and elsewhere.
Another cut in interest rates is one option, but it’s hardly the only choice. Reuters lays out several possibilities for the ECB. In fact, the main challenge is less about the technical details of unleashing a stronger form of monetary stimulus vs. mustering the discipline to act while there’s still time to make a meaningful difference. This much is clear: doing nothing, again, is an increasingly risky proposition at this late date. Some folks say that the central bank alone can’t solve Europe’s deep structural problems. True, but the ECB still has the power to prevent an even deeper strain of macro stress.
Germany Factory Orders (11:00 GMT) Europe’s largest economy has been the critical macro factor that’s kept the Eurozone crisis from turning into a full-scale meltdown. Fortunately, Germany’s resilience is intact, but every wobble is worrisome for the euro region, which can’t afford anything more than marginal trouble for its main growth engine. Accordingly, today’s update on factory orders will receive close attention for any signs of weakness.
That’s a distinct possibility in today’s release. The consensus forecast sees a flat performance for new orders in December, down from the previous month’s healthy 2.1 percent gain. But this is a volatile series in the short run and so it’s best to focus on the year-over-year changes. On that front, the trend of late has been encouraging: annual increases in each of the past six monthly reports. A flat monthly number today still leaves room for assuming that we’ll see the annual change remain above zero. In that case, there’ll be another round of modest encouragement for the near-term outlook for Germany.
Official estimates advise that “the German economy is gathering speed after a weak winter,” according to the economy ministry. Nonetheless, Germany remains vulnerable if only because of all the macro weakness around it. There’s still no compelling evidence that trouble is spilling over the border in a meaningful way. Nonetheless, yesterday’s January update of the Germany Services Purchasing Managers Index reported the slowest growth rate three months. That alone is hardly reason for concern unless a surprisingly weak number in today’s factory orders release suggests otherwise.
US Initial Jobless Claims (13:30 GMT) Is unusually cold weather to blame? That’s how the optimists explain the latest jump in new filings for unemployment benefits. Weather has also slowed growth in payrolls, we’re told. ADP estimates that private employment increased 175,000 last month. That's a decent if unspectacular advance, but it's down sharply from the 227,000 rise in December and so the latest number diminishes the idea that the labour market's growth is accelerating. Perhaps tomorrow's official jobs report from the government will bring better news.
Meantime, if weather’s the culprit (as opposed to a deeper problem that won’t fade when the sun shines brighter), it’s reasonable to assume that we won’t see much, if any, relief in today’s weekly update on jobless claims for January's final week. Spring is still a ways off, although dismal scientists are feeling a bit warmer with regards to today’s number. The consensus forecast calls for a moderate decline in new claims. That's just the thing to revive the animal spirits in the wake of the hefty rise for the week through January 25. Analysts overall see a pullback to 337,000 for last week, down from 348,000 in the previous update (seasonally adjusted data).
A lesser number would help ease concerns that the economy’s headed for rough seas in the months ahead. Nonetheless, a dip in today’s report won’t dispatch concerns that jobless claims may be stuck in neutral in the 300,000-350,000 range. If so, does that mean that the lion's share of recovery for the labour market is behind us? Here too the positive spin migrates back to weather-related turbulence.
That’s a debate that will take time to sort out. Meantime, the economic data so far this year has been a mixed bag and so there’s probably minimial tolerance at this point for an unexpectedly weak claims report. That’s not likely, according to most guesstimates, but today’s number (volatile as it is) may carry an unusually hefty influence for the worse if the crowd is disappointed.