Article / 13 January 2014 at 6:05 GMT

3 Numbers to Watch: Italian output, US Federal budget, EURUSD

editor/analyst /
United States

• Eurozone pins hopes on strong Italian industrial output
• US Fed budget to fuel Republican/Democrat debate
• EURUSD in focus after week of bad news in Europe

Monday’s a slow day for economic reports and so the update on industrial production for Italy will serve as the main event for Eurozone data today. Later, the US Treasury releases budget numbers for the government. Meantime, the recent strength of EURUSD will remain topical as the market considers when or if the European Central Bank will roll out of a stronger program of monetary stimulus to combat a weak economy and the ongoing threat of disinflation/deflation.

Italy Industrial Production (09:00 GMT) The recent upturn in industrial output in Italy suggests that Europe’s third-largest economy may have finally turned the corner. By the deflated standards of expectations for this beleaguered nation, the sight of a key indicator showing mild signs of strength inspires hope that 2014 will mark a change for the better in broad macro terms. The stakes are certainly high, in no small part because the Eurozone is still battling its disinflationary demons, as last week’s report on consumer prices shows. 

it coffee

Italians could be enjoying their morning cappuccino that bit more if industrial production figures suggest a corner has been turned. Photo:

Even if today’s report looks encouraging, the news will be overshadowed by last week’s dark release on unemployment. The jobless rate in Italy hit a fresh high of 12.7 percent in November, up from 12.5 percent in the previous month, according to Istat. Far more troubling is the news that unemployment among the nation’s youth also hit a new high of 41.6 percent. The message, of course, is that provisional signs of a mild recovery in Italy have yet to show any traction in the labour market. That’s a key reason why the Eurozone jobless rate is also stuck at a record high.

To the extent that Europe’s macro troubles will ease in the year ahead, progress on reducing unemployment will be a critical factor. But that’s not going to be easy for the Eurozone ex-Germany if Italy’s economy remains stuck in neutral or worse. Deciding if there’s at least marginal improvement will take time, and it begins with today’s update on industrial production. This much is clear: if industrial activity starts sliding again, Italy’s long odds for a meaningful recovery in the near term will only get longer. That’s a frightening prospect for a country with an elevated and still-rising jobless rate. As if that’s not enough to worry about, Italy’s debt-to-GDP ratio is high and rising and at more than 130 percent is second in the Eurozone only to Greece's nosebleed levels. Without growth, that’s another ticking time bomb if inflation continues to fall and the real cost of servicing the debt rises.


US Federal Budget Balance (19:00 GMT) The federal budget deficit remains a contentious topic in Washington these days. A hawkish faction in the Republic party is pushing the case for more fiscal austerity at every turn. A recent poll from the Pew Research Center shows that eight in ten Republicans think that deficit reduction is a priority. By comparison, only 67 percent of Democrats share that view.

Today’s monthly budget update for December from the Treasury will provide more fodder for political debate. But the numbers of late don’t look all that helpful if you’re a fiscal hawk and trying to make a case that the trend is heading in the wrong direction. The improving state of budgetary affairs may get lost in the noise of partisan warfare, but for the moment, the data looks encouraging for the cause of fiscal rectitude. The Congressional Budget Office (CBO) last week reported that the red ink has retreated by nearly 40 percent in the government’s first fiscal quarter of 2014, which started October 1, vs. the year-ago number. Looking at last month’s profile via CBO, the LA Times noted that “the deficit has gone down so much that the federal government actually ran a surplus for December — a one-time occurrence that resulted from some special circumstances but still an indicator of the rapidly improving state of the government’s finances.”

CBO’s December estimate suggests that today’s Treasury release will formally bring good news as well. That’s no trivial point if interest rates are headed higher. Servicing the debt load is still going to be a fiscal weight of some magnitude for years to come, regardless of what happens in the short run. But to the extent that the red ink is retreating means that interest payments will take less of a bite out of the budget.     


EURUSD The euro’s strength will remain a key topic in the wake of last week's discouraging news on inflation and unemployment for the Eurozone. The 0.8 percent annual increase in consumer prices through December is below the 1.2 percent rise for the US and the 2.1 percent advance in the UK. Even deflation-prone Japan reported a higher headline inflation rate for the year through November at 1.2 percent, a five-year high. As a result, real (inflation-adjusted) interest rates in the Eurozone are higher than in the US or Japan. “The euro is an attractive currency because it’s yielding a zero or minus 1 percent real yield, while everybody else is at minus 2 percent,” Mike Amey, portfolio manager and managing director at PIMCO, observed late last month.

A strong currency is good news for the euro bulls, but it’s a problem for an economy that’s still struggling to generate growth while fending off disinflation/deflation risk. Indeed, lending in the Eurozone continues to fall, slumping at the steepest rate in more than 20 years in November. The weak macro profile implies that the European Central Bank (ECB) should do more to insure that inflation doesn’t continue sliding. Yet the ECB left its main policy rate unchanged at 0.5 percent (above the comparable zero-percent rates in the US and Japan) at last week’s monetary policy announcement. ECB President Mario Draghi put a brave face on events and said that “we remain determined to maintain a high degree of monetary accommodation and to take further decisive action if required." For the moment, however, the status quo prevails.

The market this week will focus on whether the ECB is likely to act anytime soon. Much depends on incoming data, starting with tomorrow’s Eurozone industrial production report. Meantime, the ECB’s relatively tight monetary policy has driven EURUSD higher lately — a trend that only adds to Europe's woes by making exports less competitive. But the ECB’s tolerance for a weak economy and a strong currency has limits. The euro, in fact, has stumbled a bit so far this year. The main question is whether Draghi’s tough talk on fighting disinflation/deflation will result in any real policy changes in the near future. If the crowd thinks there's a chance for monetary changes soon, the euro could weaken further this week.




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