3 Numbers to Watch: EZ inflation, jobless and US Income, Outlays
Euro area May Flash estimate euro area inflation (09:00 GMT) is estimated to show a year-on-year increase of 1.4 percent, slightly higher than April’s 1.2 percent. The inflation rate remains well below the European Central Bank’s target rate of “two or slightly below”, giving all the reasons the central bank needs to keep an eased monetary policy. A lower-than-expected inflation rate would be bearish for the euro, as it would lead to expectations of more easing. This is more important than the higher real rate of return due to low inflation, because the ECB is not responding to macro data due to zero bound interest rates and reluctance to take on more balance sheet risk. Even the OECD suggested that the ECB should consider US-style quantitative easing. Also note that the Harmonized Index of Consumer Prices does not include housing data, and tends to overstate inflationary pressures compared to GDP deflator or core price indices.
Without the ECB accepting more balance sheet risk, there is very little that can be done to boost the economy and virtually no chance of it happening, at least before the German elections and increased breakup speculation. Unfortunately, as the sovereign market is backed by the ECB’s pledge for now, the breakup threat is not viable, and thus nothing should be expected for a long time. Even the OECD suggested that the ECB should consider US-style quantitative easing.
Euro area April Unemployment Rate (09:00 GMT) is expected to increase to 12.2 percent from the previous month’s 12.06 percent. Incredibly, this would mean that the unemployment rate would have risen every month for 24 months. Coupled with the inflation data, and the M3 and bank lending data reported earlier this week, all this suggests that euro area monetary policy will remain eased for a long, long time.
US April Personal Income and Outlays (12:30 GMT): Personal income is expected to have increased by 0.1 percent, and personal spending to have decreased by 0.1 percent from the previous month. The growth rates of both income and spending hit their recent peaks in 2011, when the recovery from the great recession started. During the past twelve months, consumption growth has remained steady, but income growth has been volatile and trending slightly lower.
The blog Credit Writedowns has an interesting view on the matter: after deleveraging in the aftermath of the housing crisis, consumption is growing faster than wages or GDP: this has to mean that deleveraging has ended, and the US is back to increasing household debt. This is helped by rising house prices and bullish stock markets. The personal savings rate has also see-sawed lower for the past couple of years, further supporting this view. The more that economic growth rests on asset price rises and debt growth, without wage rises, the more the whole recovery story becomes dependent on the Federal Reserve’s ultra-easy monetary policies. This obviously presents additional difficulties for the central bank, as tapering off the asset purchase programmes could be even more negative for growth than is commonly assumed.
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