Wednesday's FOMC outing showed the Powell Fed to be less model-driven than its predecessors, but the lack of any language confirming four 2018 rate hikes sent the dollar plunging lower.
Article / 20 May 2016 at 5:00 GMT

3 Numbers: Growing fears of diminishing Eurozone surplus

Blogger / MoreLiver's Daily
  • Germany’s producer price index has tumbled to levels last seen in 2010
  • The euro area’s current account surplus has shrunk on a stronger euro
  • Falling oil prices mean the “core” surplus is even worse than the headline figure
  • US home sales are close to post-recovery highs, but rates are bottoming out

By Juhani Huopainen

It’s a quiet Friday in terms of economic data releases. The Federal Reserve’s Daniel Tarullo speaks at 1300 GMT – following the hawkish minutes of the April’s meeting and the recent batch of good economic data, better to listen to what he has to say. All times GMT.

Germany April Producer Price Index (0600 GMT). The consensus forecast expects unchanged prices in April, which would leave the year-over-year price decline to 3.1%. 

The producer price index is now down to levels last seen in 2010, thanks to the cheaper oil and low overall inflation. It is not the inflation that the German skeptics of the European Central Bank are complaining about.

The weak profitability of banks and insurance companies and above all, the risk-sharing that the ECB’s monetary policy causes are the real worry.

Euro area March Current Account (0800 GMT). The seasonally adjusted current account surplus is expected to have increased to €19.6 billion in March, up from €19bn in February.

For the past 18 months, the surplus has oscillated between €19bn and €30bn. We are at the lower end of that range, which in isolation suggests we could begin to see higher surpluses in the near future.
Chart source: Saxo Bank

When we look at the changes in the euro area’s effective exchange rate (the EER, a weighted average of the exchange rates of the euro area’s trading partners), a continuation of the range seems unlikely.

A weaker currency tends to boost exports and decrease exports, thus driving the surplus higher. The effect is not instantaneous, but it is there.

Beginning in April 2014 and continuing until April 2015 the euro area’s EER plunged heavily from 101 to just 87. The current account surplus hardly budged – suggesting that a weaker currency was not enough to boost exports anymore.

Demand hits home: US existing residential sales are likely to have to risen in April. Photo: iStock

The EER has since risen to 92, giving room for the current account surplus to decrease from recent levels. This could either be a good thing (the euro area’s increasing demand for imported goods) or a bad one (a sign that foreign demand for euro area goods is weakening).

Also note that oil’s plunge from over $100/barrel in 2014 to just $26/b in 2016 did not increase the surplus at all – suggesting that the “core” surplus has performed even worse than the headline figure.

US April Existing Home Sales (1400 GMT). Existing home sales are expected to have increased a bit in April. The annualised rate is seen to be 5.4 million units, up from 5.33 million in March.

Over the past five years, unit sales have been relatively stable, but the negative correlation with interest rates is notable. In 2013 the 10-year US Treasury bond yield and the 30-year average fixed-rate mortgage rate rose, but it took some time before home sales started decreasing.

US ExHomeSales
Chart source: Saxo Bank

Of course, other factors, like house prices, incomes, jobs and so on are also driving home sales. But if long-term interest rates begin climbing on higher inflation and tighter-than-expected Federal Reserve policies, the housing market will also start to feel its fair share of the pain.

The report will be published here.

-- Edited by Adam Courtenay

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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