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Article / 13 July 2016 at 5:01 GMT

3 Numbers: Eurozone industrial output set to tumble

editor/analyst /
United States
  • Eurozone industrial production expected to slide in May after rising sharply in April
  • US inflation survey to be widely read after predictions of a pricing-pressure revival 
  • Is the yen’s sudden tumble a sign that the currency bull run has finally hit a wall?

By James Picerno

Europe’s industrial sector is in focus with the monthly update on output scheduled for release today. Later, the Atlanta Fed publishes new survey data for inflation expectations. Meanwhile, the crowd will keep a close eye on USDJPY for deciding if this week’s slide in the Japanese yen marks the end of the currency’s bull run in 2016. 

 Eurozone industrial output for May is expected to slide with sluggish growth likely
for the rest of 2016. Photo: iStock

Eurozone: Industrial Production (0900 GMT) There’s a recovery unfolding in Europe’s industrial sector and it “gathered momentum” in June, according to Markit Economics, which reported that the Eurozone Manufacturing PMI rose to a six-month high of 52.8.

“An upturn in the rate of production growth signals factory output is expanding at a near-2% annual pace, which should help to drive further modest economic growth in the second quarter,” Markit’s chief economist said earlier this month.’s latest estimate for Q2 GDP falls in line with that outlook. Last week’s projection sees Eurozone output overall rising at 0.37% in quarterly terms. But that’s down from Q1’s 0.6% GDP advance. In other words, the macro trend has decelerated, but only slightly.

Today’s hard-data update on industrial activity in May won’t provide much support for upgrading subdued projections.’s consensus forecast sees output slumping 0.8% in monthly terms – a hefty reversal after April’s 1.1% jump.

Looking further out, the joker in the deck is the potential for Brexit-related blowback. Last month’s UK vote to leave the European Union is widely expected to push Britain into recession, which may reverberate by trimming Europe’s growth. But for the moment, there's no sign of trouble. The Ifo Institute this week projected that Eurozone GDP quarterly growth will remain relatively stable for the rest of the year at 0.3% to 0.4%.

Consumption is expected to be the “prime driver” for Europe’s modest expansion in the second half of this year, Ifo advises. Industrial output, by contrast, is on track for sluggish growth for the rest of 2016. The forecast translates into a relatively upbeat profile compared with the outlook for today’s numbers for May.

US: Atlanta Fed Business Inflation Expectations (1400 GMT) The benchmark 10-year Treasury yield has rebounded a bit after touching a record low last week, but the implied deflationary warning remains intact.

Today’s monthly survey results for inflation expectations among businesses in the Atlanta Fed’s region offers a fresh look at the outlook for pricing pressures. Data from other sources imply that the 1.8% advance for inflation over the coming year in last month’s report will be comparable, perhaps slightly lower, in today’s release.

Consider the Treasury market’s implied inflation forecast based on the yield spread for the 10-year nominal and inflation-indexed Treasuries. This market-based estimate ticked lower in June, slipping to 1.47% vs.1.60% in the previous month. That’s effectively no change in the grand scheme of inflation projections, although it’s also a clue for thinking that today’s Atlanta Fed data will be more or less hold steady.

But some analysts see a different narrative unfolding. Economists at Capital Economics, for example, advise that US headline inflation will be closer to 3% next year – substantially higher than the roughly 1% annual pace for the consumer price index as of May. The key catalyst: rising labour costs. As a result, the Fed will soon be forced to resume interest-rate hikes, the consultancy predicts.

This isn’t the first time that analysts have warned that inflation is about to ramp up sharply. What would be a first is if the forecast turns out to be true for the near term. If that’s likely, maybe we’ll see the evidence with a firmer pricing trend in today’s report.

USDJPY Elections have consequences, especially for the yen. The currency plunged after Japanese Prime Minister Shinzo Abe, basking in a strong re-election victory in the upper house over the weekend, asked for fiscal stimulus to bolster the country’s sluggish growth trend. The forex market is also fixated on reports that former Fed chairman Ben Bernanke, on a visit to the Bank of Japan on Monday, told officials that the country still had options for ramping up monetary stimulus.

It’s too soon to declare that the long-running slide in USDJPY has come to an end, but in a dramatic change of sentiment the market’s no longer willing to dismiss the possibility that a major U-turn is in progress.

“It now looks like there’s coordinated fiscal and monetary policy," the global head of foreign exchange strategy at BMO Capital Markets told Reuters. “If you get a fiscal policy that is expansive ... the natural thing is to finance that with money-printing.”

The news took a hefty toll on the yen. USDJPY (as of mid-day trading on Tuesday in New York) was up more than 4% in the last 48 hours, close to a one-month high (based on daily data). Action Forex advised yesterday that a break above 106.78 carries “larger bullish implications” for USDJPY.

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– Edited by Gayle Bryant

Juhani Huopainen is a blogger and a macro analyst at MoreLiver’s Daily. Follow Juhani or post your comment below to engage with Saxo Bank's social trading platform.


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