3 Numbers to Watch: EU inflation, German sentiment, US inflation
It’s another busy day for economic news, with consumer price inflation reports for the Eurozone and the US on the short list of key numbers to watch. The crucial question: Is the disinflation/deflation risk contained? The stakes are high for deciding what’s in store for monetary policy decisions in Europe and the US and the outlook for the economic trend in 2014. Meanwhile, keep an eye on today’s update on sentiment in Germany via the ZEW Economic Survey for the latest estimate on the mood in the financial sector for Europe's growth engine. In addition, keep an eye on today's update on consumer price data for the UK, scheduled for release at 09:30 GMT.
Eurozone Consumer Price Index (10:00 GMT) Inflation, or the lack thereof, will again dominate the economic discussion today for Europe, and for all the wrong reasons. The risk of disinflation/deflation continues to lurk, although today’s update will probably look a bit less threatening compared with the previous report. The flash estimate for November pegged consumer prices rising at a slightly higher annual rate: 0.9 percent vs. 0.7 percent for the year-over-year pace through October (pdf).
Disinflation might make Parisians' coffee cheaper, but it will be bad news for the Eurozone. Photo: Shutterstock.com
The big-four economies of Europe have previously reported November inflation data and in three cases the annual numbers are slightly higher (Italy was the exception, with inflation slowing slightly to 0.7 percent). But if today’s report for the Eurozone appears on track to confirm the November flash estimate, that doesn’t change the fact that pricing pressures generally are at risk of fading — a slide that poses serious risks if it rolls on.
The potential for even lesser rates of inflation can’t be ruled out at this point. Even the European Central Bank (ECB) is assuming that inflation will continue to fall in the near term. In its latest monthly report, the ECB projected that consumer prices will rise 1.1 percent next year, down from a projected 1.4 percent for all of 2013 (pdf). In both cases, the forecasts are slightly below the predictions published in September.
BNP Paribas warns that Eurozone inflation has fallen into a “discomfort zone.” A report (pdf) issued by the investment bank last Friday warned that “there is a risk that inflation could swing into negative territory, with prices declining rather than simply slowing, or that it might already be negative given measurement uncertainties.” The strengthening euro isn’t helping. The stronger currency is taking a toll on Europe’s exports — see last week’s news on Peugeot’s hefty loss due in part to a stronger euro, for example.
Today’s inflation update isn’t likely to bring any surprises relative to the flash estimate, but the uncertainty and risks about disinflation/deflation aren’t going away any time soon short of a bold, new initiative from the ECB. As such, a downside surprise today would be a sign of even deeper troubles than previously assumed.
Germany ZEW Economic Survey (10:00 GMT) Germany is expected to retain its place as the leading source of growth in the Eurozone in 2014 among the big-four economies, according to Bank of America Merrill Lynch’s (BofAML) economic outlook for 2014. The unbalanced state of expansion is hardly surprising at this late date, but it’s a reminder that Europe’s recovery will remain vulnerable until a stronger pace of expansion spreads to France, Italy and Spain. Meantime, BofAML projects a “timid recovery of 0.8% GDP growth” for Europe overall (pdf).
Even that mild progress requires that Germany retains its forward momentum. No less is widely expected, although given the uneven state of growth on the Continent, every data point for the country comes with wider implications for Europe. Consider last week’s unexpected weak update on Germany’s industrial production for October. Output dropped 1.2 percent, well below a projected rise of 0.7 percent. “Today’s hard data are definitely not a good starting point for the fourth quarter and represent a limit for a solid expansion,” noted an economist at the Newedge Group in London late last week. “Looking ahead, we expect the picture to improve. German business surveys showed a rapid acceleration in November, all pointing to some gained momentum.”
Today’s ZEW release will test that theory. For the moment, the mood in the finance sector remains upbeat. In the November report, the the ZEW Indicator of Economic Sentiment for Germany (a measure of the economic outlook) increased to a four-year high. Yet the benchmark for the current economic situation in Germany slipped for the second month in a row, albeit marginally. It’s unclear if this mild divergence in sentiment readings is noise or something more troubling. Perhaps today’s ZEW release will paint a clearer profile of the trend. In any case, there's no doubt that the Eurozone can't afford a weaker Germany at this stage.
US Consumer Price Index (13:30 GMT) Today’s inflation report will draw wide attention ahead of tomorrow’s announcement on monetary policy from the Federal Reserve. The key issue with inflation at the moment is deciding if it’s suffering from a stronger wave of disinflationary momentum. The Fed’s preferred measure of inflation — personal consumption expenditures (PCE) less food and energy — has been inching lower this year, running at 1.1 percent on a year-over-year basis through October. That’s well below the central bank’s 2 percent target and a reason for thinking that the Fed may be less inclined to start slowing its bond buying program this month.
Granted, the relatively upbeat data on the labour market and retail spending of late suggests that the tapering may begin sooner rather than later. But the moderately stronger disinflationary trend in recent months implies the opposite and so the monetary mavens may continue to err on the side of caution by letting quantitative easing roll on for a bit longer.
Core inflation based on consumer prices has been a bit firmer compared with the PCE numbers. Even so, CPI less energy and food has been slipping at the margins, inching down to a 1.7 percent year-over-year rate through October. Depending on which way the inflationary winds are blowing in today’s November report, the numbers du jour could potentially change the market’s outlook on the timing of the Fed's tapering. The general assumption is that inflation in November will continue to run more or less at October’s rate, although some analysts see inflation dipping further in the months ahead. If today’s report reveals weaker-than-expected inflation, the odds will rise that the Fed will again refrain from slowing its program of monetary stimulus in tomorrow's policy announcement.