3 Numbers: Eurozone investor confidence to hold near 10-year high
- The Eurozone Sentix Investor Confidence should be close to 10-year high in July
- US Labor Market Conditions Index is expected to slip in June, but stay positive
- Will the 10-year Treasury yield break above 2.40% this week?
By James Picerno
Sentix’s investor sentiment index for the Eurozone in July will probably reaffirm an upbeat outlook in the wake of strong economic growth for the currency bloc. Later, the Federal Reserve publishes its monthly update of the Labor Market Conditions Index. Meantime, investors will be watching to see if the benchmark 10-year US Treasury yield rises above 2.40% this week.
Eurozone: Sentix Investor Confidence Index (0830 GMT) Next month’s release of first-quarter GDP data is expected to show that economic activity accelerated and today’s release of investor sentiment data will probably support the upbeat outlook.
The Euro-Coin Indicator, a GDP proxy, is currently projecting a 0.6% increase for Q2, matching Q1’s rise.
If the forecast holds, the relatively firm back-to-back advances will signal that Eurozone growth has not only picked up from last year; it’s also sustaining a faster pace.
Recent survey data supports the positive forecast. Last week’s Eurozone Retail PMI, for instance, increased to its highest level in nearly two years.
The news marked “a promising end to the second quarter for retailers across the big three Eurozone economies,” said an economist at IHS Markit. Note, however, that Eurozone stocks have been trending lower in recent weeks.
The Euro Stoxx 50 Index closed on Friday at its lowest level since late April. But after bidding up prices for months through May, anticipating firmer growth, investors seem inclined to lock in some profits after a strong run.
Nonetheless, today’s Sentix Investor Confidence for the Eurozone is expected to hold close to its highest level in a decade. Investing.com is forecasting that the index will edge down to 27.5 in this month’s reading, slightly below June’s 28.4.
But that still leaves this gauge of investor confidence near a 10-year high - a vote of confidence that the Europe’s recovery remains on track for Q2 and the second half of this year.
From the perspective of the year-on-year trend, however, payrolls increased 1.6% through last month, unchanged from May. That’s a relatively subdued gain – close to the slowest annual increase in three years and well below the post-recession peak of 2.3%.
Some analysts say that the slow-but-steady deceleration in annual employment growth is a sign that hiking interest rates could derail a recovery that’s maturing.
Enter today’s update of the Labor Market Conditions Index (LMCI), a multi-factor measure. This measure is expected to provide a bit of dovish cover for thinking twice about another round of rate hikes.
TradingEcononomics.com’s econometric forecast sees the index slipping to 1.6 for June. That’s still a modestly positive reading, but it would also mark the second dip.
Nonetheless, the hawks will emphasize that LMCI has been positive for a year and so the case remains weak for delaying rate hikes. In fact, the Federal Reserve on Friday (in a report submitted to Congress) advised that several measures show a “relatively tight labor market.”
That’s a clue for thinking that today’s LMCI data, which is published by the Fed, probably won’t contradict the central bank’s analysis issued just three days earlier.
The benchmark 10-year Treasury rate shot up to 2.39% on Friday, close to a two-month high, based on daily data via Treasury.gov. The policy sensitive 2-year yield has been trading higher, too, holding at or above the 1.40% mark in recent days - the longest run at that level since 2008.
The stronger gain in jobs growth in June was the latest catalyst for selling bonds and thereby driving yields higher. The next hurdle for the 10-year rate is 2.40%.
If the benchmark yield can break above this level on a sustained basis, the technical outlook will strengthen for expecting even dearer yields. Several economic reports this week may provide new excuses to sell Treasuries, including tomorrow’s data on job openings and Friday’s updates on retail sales and industrial production.
Meantime, the crowd is inclined to back away from the safe haven of Treasuries. Another round of strong economic releases may convince the remaining bond bulls to run for cover.
James Picerno is a macro analyst/editor at CapitalSpectator.com. Follow James or post your comment below to engage with Saxo Bank's social trading platform.