3 Numbers to Watch: French payrolls, German CPI, US 10-yr yield
Wednesday is a light day for major economic updates, although today’s releases on non-farm payrolls in France and consumer price inflation in Germany deserve careful attention for deciding if the Eurozone's outlook is changing. Meanwhile, keep an eye on the benchmark yield on the 10-year Treasury Note in the US as next week’s Fed meeting approaches and the market ponders when the central bank will start tapering its bond-buying program.
Allez la France! The finance minister is optimistic, others not so much. Pic: Nicolay Dimitrov
France Payrolls (06:30 GMT): The notion that the Eurozone economic recovery is still alive ran into some turbulence yesterday with the news that industrial production in France suffered an unexpected setback in October. Economists were looking for a mild 0.2 percent rise and instead were told that industrial output fell for the second straight month with another 0.3 decline. Compared with the year-earlier period, industrial production is down 0.9 percent.
Europe’s escape from recession may still be moving forward, but it’s hard to tell by the latest numbers for the Continent’s second-biggest economy—assuming you’re anyone other than France’s finance minister. “France has truly emerged from recession,” Pierre Moscovici tells the FT. “Of course, I would like to see the growth rate increase, but I wish we could stop this attitude of systematic doubt about the French economy.”
Perhaps today’s quarterly update on payrolls will offer some relief. If so, upbeat numbers will present a sharp contrast with recent history. In the second-quarter release, the trend turned considerably darker versus the year’s first quarter. The goods-producing sector was especially hard hit with a loss of nearly 0.6 percent in payrolls. Considering that the previously released unemployment numbers for France in the three months remained stuck at an elevated 11.0-to-11.1 percent range (pdf), it’s best to manage expectations down for today’s report. It seems that Mr. Moscovici’s brand of optimism (and France's recovery) still faces an uphill battle.
Germany Consumer Price Index (07:00 GMT): Is the disinflation/deflation threat creeping up on Germany? Sure, inflation is still comfortably north of zero in Europe’s leading economy and there’s no imminent risk that it will slip into negative territory. But there are several suspicious signs that this potential for trouble, however remote at the moment, deserves monitoring. The sharp deceleration in Eurozone inflation to dangerously low levels in recent months is one reason. It’s not yet clear if the disinflationary winds blowing across the economies of Europe will strengthen in the months to come, but if that happens the trend may spill into Germany.
A low-probability outcome? Yes, for the moment, although it doesn’t help that the Bundesbank last week cut its inflation forecast for 2014 to 1.3 percent from the previous estimate of 1.6 percent. To be fair, the lower inflation outlook is offset a bit with the bank's modestly higher growth forecast for next year. In the here and now, however, there’s still a few numbers to worry about, including the fall in labour costs in Germany to the lowest level in three years. Labour costs per hour worked slipped to a year-over-year rise of 1.6 percent in this year’s third quarter, down from 2.0 percent in the previous quarter, the federal statistics office reported on Monday.
Is the deceleration in inflation a problem? Not yet, although the annual rate of consumer price inflation (CPI) has been drifting lower in this year’s second half. CPI dipped to a 1.2 percent rise over the year-earlier level, the slowest since this past April. The preliminary estimate for November, however, suggests that prices stabilised last month, with the CPI rate inching higher to a 1.3 percent rate. Today’s follow-up estimate for November is widely expected to stick to the initial estimate. But if the crowd is wrong, and inflation is weaker than expected in today’s number, it’s going to be a bit tougher to dismiss the concern about the disinflation/deflation factor.
US 10-Year Treasury Yield: US economic news has been encouraging lately, including yesterday’s update of a moderate revival in the NFIB Small Business Optimism Index in November. Even better, non-farm payrolls delivered an upside surprise with another 200,000-plus increase last month and a drop in the jobless rate to a five-year low. But there’s no free lunch, as implied by the recent increase in the benchmark 10-year Treasury yield. Last Friday, the yield reached its highest level since September, according to Treasury data. But if that was a sign that the market’s becoming worried that the Federal Reserve is moving closer to begin tapering its bond-buying program, anxiety has been receding this week. In late trading yesterday, the 10-year yield was at roughly 2.80 percent versus 2.88 percent at the end of last week.
The market is again assuming that the best of both worlds is possible: stronger growth and low interest rates. The Fed’s tapering is still lurking in the future, of course, but there’s still a degree of confidence at the moment that the central bank won’t announce at next week’s FOMC policy meeting that it will begin winding down its bond purchases this month. One reason is that inflation has remains low, stable and at times inching lower. The market-implied inflation forecast (based on the yield spread for the 10-year nominal Treasury less its inflation-indexed counterpart) of late suggests as much. This estimate of future inflation was roughly 2.15 percent yesterday, or near the lowest level since September.
The combination of what appears to be an improving labour market while inflation remains subdued creates a tricky challenge for the central bank. Tapering could send inflation lower still while creating new headwinds for the economy’s still-modest capacity for creating jobs. Is there a way to balance these risks and still move ahead with tapering? Yes, or so suggests St. Louis Fed President James Bullard, who’s currently a voting member of the FOMC. “A small taper might recognise labour market improvement while still providing the [Fed] the opportunity to carefully monitor inflation during the first half of 2014,” he said earlier this week. “Should inflation not return toward target, the Fed could pause tapering at subsequent meetings.”
It’s unclear if this idea will have any traction at next week’s FOMC meeting. Then again, if the 10-year yield starts moving up in the days ahead, that may be a sign that the Bullard strategy is more than talk.