3 Numbers: French Industrial Output Likely Good News For Macron

Today’s monthly update on French industrial production for March is the country's first major economic release since Sunday’s presidential election. Meanwhile, survey data from the Atlanta Fed on US inflation expectations offers a clue for anticipating Friday’s update on consumer prices. Along the way, keep an eye on the EUR/USD , which has reversed course this week after rallying ahead of Sunday's presidential election in France.

France: Industrial Production (0645 GMT): The first major economic release for France since Emmanuel Macron won the presidential election on Sunday is expected to give the independent centrist some good news.

Industrial activity for March is on track to increase 1.0% vs the previous month, according to TradingEconomics.com’s consensus forecast. If the projection is right, output will expand in monthly terms for the first time this year.

Macron faces numerous political and economic challenges, but expectations are high that the newly minted 39-year-old president can reform France’s sluggish economy in a bid to unleash stronger growth.

From the perspective of the manufacturing sector, there’s already a tailwind in progress, or so recent survey data suggests. The Markit France Manufacturing PMI climbed to a six-year high in April, reaching 55.1 – well above the neutral 50 mark that separates growth from contraction.

“The latest expansion was driven by a sharp rise in output and new orders as the relatively weak euro continued to bolster client demand,” an economist at IHS Markit said last week. “The rate of job creation accelerated, while businesses remained optimistic towards their future growth prospects, indicating that growth momentum is likely to continue in the months ahead.”

Today’s release appears set to deliver some hard-data support. There’s a long road ahead for Macron and his reform plans. Meanwhile, analysts think that March numbers for industrial output will mark an auspicious debut for economic updates. Although a gain will have nothing to do with Macron, good news will still inspire many to hope that an upbeat report will be the start of a new era for growth in Europe’s second-largest economy.

Get The News You Want

Read market moving news with a personalized feed of stocks you care about.

Get The App

US: Atlanta Fed Business Inflation Expectations (1400 GMT) : Pricing pressure has ticked up lately, but inflation still appears tame. That alone may not convince the Federal Reserve to forgo another interest rate hike at next month’s FOMC meeting, but in theory it gives the central bank additional flexibility for delaying another round of monetary tightening.

Nonetheless, the crowd is betting that the Fed will raise rates when it issues a new policy statement on June 14. Fed funds futures are pricing in a near-90% probability that the central bank will lift its target rate to a 1.0% to 1.25% range from the current 0.75% to 1.0% band, based on CME data as of Tuesday (May 9).

Meantime, the Treasury market’s implied inflation forecast in midday trading yesterday was slightly below 1.9% via the yield spread on the nominal 10-year note less its inflation-indexed counterpart. That's roughly in line with the annual change in the core measure of the consumer price index (CPI), which excludes food and energy -- a benchmark that's seen as a relatively reliable measure of the trend.

By those yardsticks, it's reasonable to assume that inflation remains under the Fed’s 2% target. In turn, that’s a clue for thinking that a rate hike next month may not be fate after all.

Today’s May update of the Atlanta Fed’s survey of inflation expectations among businesses will probably deliver more of the same. Last month, companies were anticipating 1.9% inflation for the year ahead. That’s in line with the current 10-year Treasury forecast at the moment. Meantime, economists are expecting that core CPI will tick up to a 2.0% year-over-year rate in the April report due on Friday. But that’s still on track with the Fed’s inflation target.

In short, it would be surprising if today’s survey release signals a sharply firmer inflation rate above 2% for the months ahead.

EUR/USD: Expectations that Emmanuel Macron would be elected as French president revived animal spirits in the days ahead of Sunday's election in France. But in a classic case of buy on the rumour and sell on the news, the single currency has retreated since the voting.

EUR/USD briefly topped 1.10 in intraday trading on Sunday – a six-month high – but has subsequently pulled back in recent days. In midday trading New York time on Tuesday, the euro was trading fractionally below 1.089 US dollars.

Macro’s win is considered a pro-growth outcome for France and the euro area generally, but the euphoria is fading as the crowd refocuses on the economic outlook. To be sure, the Eurozone’s macro profile has improved recently, but so has the US forecast. In the wake of last week’s rebound for US employment growth in April, economists are raising growth projections for GDP in the second quarter. Although it’s still early, most forecasters are looking for a substantial acceleration in output in Q2 compared with the tepid rise in Q1.

Firmer expectations for the US macro trend are boosting expectations that the Federal Reserve will continue to raise interest rates. By contrast, the rebound in growth in the Eurozone has yet to convince the European Central Bank to start tightening monetary policy. On the margins, at least, the case for a stronger dollar vis-à-vis the euro has merit.

The ultimate arbiter, of course, is the hard economic data. But the next major US release looks encouraging. Friday’s retail sales report for April is expected to rebound substantially, according to the consensus forecast. That alone doesn’t ensure that the greenback will rally against the euro, although it’s one more reason to assume that EUR/USD may face headwinds for extending its recent rise until or if Eurozone data overtakes US numbers.

Disclosure: Originally published at Saxo Bank TradingFloor.com