Article / 02 June 2016 at 4:57 GMT

3 Numbers: Weak inflation numbers will not move ECB policy

editor/analyst /
United States
  • Analysts predict no change for the ECB's stimulus program
  • ADP data should show a modestly firmer rise in US private payrolls for May
  • A strike at tech company Verizon strike may skew employment figures for May
  • US jobless claims are expected to fall for the third straight week

By James PIcerno

The European Central Bank’s monthly policy announcement, followed by a press conference, will dominate the economic news in Europe today. Later, two reports will offer fresh insight into US payrolls for May, starting with the monthly estimate of private employment via ADP. Later, the Labor Department publishes its weekly release on jobless claims.

Eurozone: ECB Monetary Policy Announcement (1145 GMT) and Press Conference (1230 GMT) Consumer inflation fell again in May in the preliminary estimate published by Eurostat on Tuesday.

The 0.1% annual decline is the fourth consecutive update of flat-to-negative year-on-year inflation. Questions about the threat of deflation will no doubt be front and centre today as the crowd pores over today’s news from the European Central Bank, including the obvious one: Should the ECB do even more?

Analysts are expecting no change in monetary policy despite the worrisome data in the latest inflation report. On that point, consider that core inflation, which strips out energy and food prices, is in no danger of slipping into negative territory for the near-term future.

Most of the deflationary winds are coming from energy. By contrast, core inflation – arguably a superior benchmark for monitoring the broad pricing trend – ticked higher in May, inching up to 0.8% in year-over-year terms.

That’s a touch lower than the recent highs of 1%. Nonetheless, the relatively steady trend in core inflation suggests that deflation risk is minimal to non-existent. Rather, it’s all about energy.

“The [Eurozone] economy is expanding at a satisfactory clip, the hypothetical deflation threat has receded and none of the risks that had roiled markets early this year has materialised,” a Berenberg Bank economist told the FT. “While the ECB will not rule out further easing, the council will likely emphasise that its previous stimuli seem to be working.”

Economic growth is still sluggish, but for the moment it appears that a modest expansion will endure, albeit at a subdued pace against  the trend from a few months earlier.

The May report for the Euro-coin indicator – a monthly estimate of Eurozone GDP – posted a 0.26% advance. The softer gain implies that Eurozone GDP growth is headed for a slowdown in the second quarter after firming up to a 0.5% quarter-on-quarter gain in Q1.

In other words, the celebrated rebound in Q1 is at risk of faltering. It doesn’t look fatal at this point – a roughly 0.3% GDP rise, if that's what Q2 delivers, will match the trend in last year’s second half. Not great, but firm enough to fend off predictions of a new recession.

In any case, the main event for the euro area today centers on a single question: What does the ECB’s Mario Draghi think? Tune in to the 1230 GMT press conference for the answer.

US: ADP Employment Report (1215 GMT) A modest round of improvement is expected for today’s estimate of US private payrolls from ADP.’s consensus forecast sees companies adding 175,000 workers in May, up from a 156,000 gain in the previous month. That’s still a modest pace compared with recent history, but at least the expected change is positive.

Some analysts are warning that a Verizon strike, which ended this week, may skew the employment figures for May by temporarily depressing the monthly growth comparison. Reuters last week reported that the Labor Department’s payrolls report for last month, which is due on Friday, will be lighter by at least 35,000 because of striking employees at the US telecom company.

If the official jobs data for May will suffer, it’s reasonable to expect that today’s ADP data will be affected too. If so, a weak number in today’s release may not be a reliable estimate of the labour market’s health, or lack thereof. No doubt that’s what the bulls will say if the employment numbers for May are weak.

In other words, we may have to wait until the June reports to figure out what’s really going on with payrolls.

US: Initial Jobless Claims (1230 GMT) The Verizon strike is also said to be the source for the early May spike in jobless claims, which surged in the first week of last month to a 10-month high.

The good news: The two subsequent updates show that new filings for unemployment benefits are easing, providing the basis for a collective sigh of relief.

Today’s update for the final week of May is projected to more or less hold steady.

xxx The Verizon strike may drive a temporary spike in US job claims, but other data
points to the number of unemployed holding steady. Photo: iStock’s consensus forecast calls for a decline of 1,000 to a seasonally-adjusted 267,000. If the estimate holds, the news will boost confidence that the dramatic rise in claims in early May was, for whatever reason, noise.

For additional perspective, keep an eye on today’s update of a related indicator: the monthly report on job cuts, which is published by the outplacement firm Challenger, Gray & Christmas (today's data is due at 1130 GMT).

Recent figures on this front, however, don’t offer much support for the bulls. The April job cuts data revealed layoffs that accelerated to a six-year high of just over 65,000.

But a lot of that is due to downsizing in the energy industry, which has been hit hard by the bear market in oil prices in recent years – downsizing that may not be all that useful for modeling the broad US macro trend.

"We are also seeing heavy downsizing activity in other areas, such as computers and retail, where changing consumer trends are creating a lot of volatility,” Challenger’s chief executive officer said last month.

If job cuts continue to rise in May - particularly outside of the energy industry - the news will limit any celebrations related to encouraging news on jobless claims.


-- Edited by Adam Courtenay

James Picerno is a macro analyst/editor at Follow James or post your comment below to engage with Saxo Bank's social trading platform.


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