3 Numbers: Eurozone’s Current Account Surplus Set To Reaffirm Growth

Tuesday’s another slow day for scheduled economic reports. The Eurozone’s April release of current account data is an exception. Meanwhile, keep your eye on the UK 10-year gilt yield, which recently dipped below the 1% mark for the first time in seven months. WTI crude oil is also newsworthy as the US benchmark remains caught in a bearish slide thanks to an oversupplied market.

Eurozone: Current Account Surplus (0800 GMT): The recent acceleration in economic growth remains on track, based on recent estimates for output in the second quarter. Today’s hard data on the euro area’s current account surplus for April will be read as another clue for deciding if the near-term forecast is still upbeat.

The latest estimate for the macro trend via the Euro-Coin Indicator paints an encouraging profile. Although this GDP proxy has been edging lower in recent months, May’s 0.6% increase for the trailing three-month change matches the pace in Q1, which marks the fastest rise in two years.

The Eurozone Composite PMI data for last month points to a slightly stronger increase for Q2. “The final PMI readings add to mounting evidence that the Eurozone is enjoying a strong second quarter, consistent with GDP rising at a 0.7% rate,” said IHS Markit’s chief business economist earlier this month.

Another solid report in today’s monthly update of the current account surplus will reaffirm the optimistic outlook for the euro area’s second-quarter performance. The March report reflected a slightly lower surplus (seasonally and working-day adjusted) of €34.1 billion, which follows a record high reading in the previous month.

If today’s first look at data for Q2 via the April report sticks close to recent levels, the news will offer another reason for expecting that the Eurozone’s faster growth rate is intact.

UK: 10-Year Gilt Yield: The Bank of England last week announced that it would keep its benchmark interest rate steady at 0.25%, although the vote revealed that several policymakers supported a rate hike.

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The 5-3 split in favour for keeping rates steady was the narrowest vote for the Monetary Policy Committee (MPC) since 2007 – a sign that the BoE may be closer to a hawkish bias than previously assumed. A survey of economists via Reuters projected that only one MPC member would vote to raise rates.

BoE Governor Mark Carney is scheduled to speak today at 0730 GMT and the market will be listening for fresh clues on the outlook for monetary policy.

Meanwhile, traders are wondering if this year’s slide in the 10-year gilt yield has run its course. At several points this month the 10-year yield slipped under 1.0% for the first time since last October. Firmer demand for a safe haven is understandable in the wake of heightened uncertainty due to Brexit and the loss of the government’s majority in Parliament after the June 8 general election.

Yet rising inflation this year suggests that the BoE is under growing pressure to tighten policy. The higher-than-expected MPC vote to raise rates last week is Exhibit A.

If the 10-year yield can hold above the 1.0% rate (it was 1.03% in mid-day trading New York time), the case will strengthen for assuming that the hawks will dominate the policy outlook and perhaps engineer a rate hike at the next MPC announcement, scheduled for August 3.

Another break below 1.0%, by contrast – particularly one that lingers – would be interpreted as evidence that the hawks are weaker than last week’s close vote suggest.

WTI Crude Oil: The oil wars between OPEC and US drillers continue to paint a bearish outlook for the commodity.

The recent decision by the oil cartel to cut production – an agreement that included Russia – offered a bullish aura initially, but confidence soon faded that the prices can break free of the downtrend. A key factor is rising output by US producers.

“The number of oil rigs continued to rise last week and the market needs to see at what oil price will we not have further rig activation in the US,” the chief commodities analyst at the Oslo-based SEB AB told Bloomberg a few days ago. “There seems to be very low conviction in the market that there really will be any inventory drawdown in the second half of the year.”

Traders are pricing in a high probability that an oversupplied will prevail for the near term. The US benchmark, West Texas Intermediate, was trading close to a seven-month low in mid-day (New York time) on Monday. The short-term technicals look convincingly bearish overall, including a price per barrel that’s well below key moving averages.

Barchart.com’s technical opinion yesterday dispensed a strong sell recommendation. The recent slide has arguably left crude in oversold terrain, which Barchart says could lead to a short-term trend reversal. But downside risk remains the dominant force at the moment, and the odds don’t look encouraging for forecasting otherwise until a strong dose of bullish news on supply hits the streets.

Disclosure: Originally published at Saxo Bank TradingFloor.com