3 Numbers: India's Inflation Pressures Ease, EU Production, US Yield
James Picerno | Sep 14, 2015 01:15AM ET
- India's inflation pressures to ease in today’s consumer and wholesale prices update
- A mild improvement expected for Eurozone's July industrial production
- US 2-year Treasury yield closely watched as the Fed’s rate decision nears
Weaker pricing pressure is expected to persist in today’s inflation updates for India, which has become the world’s poster child for relatively robust growth. Later, we’ll see the hard data on Eurozone industrial production for July.
Meanwhile, with all eyes focused on the Federal Reserve's policy decision due on Thursday , keep an eye on the rate-sensitive 2-year Treasury yield for a real-time update of market expectations on the prospects for a rate hike.
India: Wholesale Inflation (India’s relatively stable growth rate of 7% looks increasingly impressive as worries mount over China’s economic slowdown, Brazil’s ugly recession, and generally downbeat assessments for emerging markets overall. Although the world’s second-most populous country has no shortage of challenges, the broad trend looks resilient at a time when expectations for growth are otherwise tumbling.
“The choices aren’t great really outside of India,” noted a senior investment manager of Pictet Asset Management.
One potential trouble spot is inflation, or the lack thereof. Wholesale inflation has been falling for months and the deflationary bias accelerated in July to the tune of a 4.1% year-over-year decline. Consumer inflation remains positive in annual terms, although July’s 3.8% rise – a record low – marked a sharp drop from the previous 5.4% reading.
The disinflation/deflation winds are expected to strengthen in today’s updates. Consumer prices for August are on track to dip further, to 3.6%, according to a Reuters poll.
Although deflation poses a risk, it may turn out to be a blessing – as long as growth holds up. On that note, the current outlook for India's macro trend is one of cautious optimism, based on sentiment data published by Markit Economics.
The Nikkei India Manufacturing Purchasing Managers' Index ticked lower in August, but at 52.3 the benchmark remains comfortably above the neutral 50.0 mark that separates growth from contraction. As such, the data paint a moderately encouraging outlook for growth in the near term. In that case, weaker pricing pressure could turn out to be a net plus for a country that’s historically struggled with high rates of inflation.
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advised in a research note last week. The current expansion is “almost exclusively the result of two positive shocks”, the bank wrote: the tumble in the price of oil, which slashed inflation, and the depreciation of the euro.
But those positive shocks will weaken in the months to come, especially if (as expected) China’s growth rate decelerates, which will pinch demand for Europe’s exports.
Yet the “endogenous” recovery prospects look modestly encouraging, according to Natixis, based on expectations that household demand will strengthen. But the economic boost will be limited because risk aversion on the corporate side will keep a lid on investment growth, the bank reasoned.
Maybe so, but the moderate pace of growth in Europe’s manufacturing sector is holding steady, according to Markit’s purchasing managers’ index for this slice of the economy. “The Eurozone manufacturing sector showed continued resilience in August, with output growth and inflows of new business both strengthening,” said a senior economist at Markit.
Meanwhile, Now-casting.com’s revisedEurozone’s third-quarter GDP growth inched higher again last week to a projected 0.34% quarter-over-quarter gain. That’s still below Q2’s 0.4% advance, although the recent upside bias in Now-casting.com’s estimates point to the possibility of upside improvements in the weeks to come.
Today’s clue on looking ahead – industrial production for July – is expected to deliver slightly positive news, according to Nordea. The bank’s looking for a slight increase in output for July. That would be an improvement over the previous two monthly declines. In short. there's still a case for cautious optimism for Europe’s modest recovery.
US: 2-Year Treasury Yield In the wake of mixed economic news last week, the rate-sensitive 2-year yield pulled back after testing four-year highs. When the dust cleared on Friday, the 2-year yield was unchanged from the previous week’s close, based on daily numbers from Treasury.gov. The implied message: there’s a possibility that the Fed will start raising interest rates this week at its two-day policy meeting that concludes on Thursday, but there’s still plenty of uncertainty.
The case for seeing this week’s rate decision as something less than fate found support in Friday’s sharply lower-than-expected update on consumer sentiment data via The University of Michigan preliminary numbers for September. “Consumers still anticipate a weaker domestic economy due to the global slowdown and are less optimistic about future growth in jobs and wages than they were a few months ago,” said the chief economist at Michigan’s Survey of Consumers.
It's debatable how much influence sentiment has on Fed decisions. In any case, the week ended with a downbeat macro number.
A few days earlier, however, the numbers painted a sharply brighter outlook, based on the government’s July estimate of job openings, which jumped to a 15-year high. “Prospects for continued solid employment growth (which has slowed only under the most cherry-picked filter) look bright for the near term,” a JP Morgan economist wrote in a note to clients.
If the latest run of numbers leaves room for debate, perhaps this week's releases that arrive just ahead of Thursday’s Fed announcement will help clarify the outlook. Retail sales and industrial production data are scheduled for tomorrow, followed by inflation data on Wednesday and the monthly release on housing starts on Thursday – just several hours ahead of the central bank’s statement.
Meantime, keep an eye on the 2-year yield for a real-time assessment of the market’s expectations. Short of a blockbuster report from one of this week's economic reports, the 2-year yield is likely to remain close to its recent high of 0.75% without a decisive move, one way or the other.
Once Thursday’s Fed announcement hits the streets on Thursday, however, the new new era begins … or maybe not, if the rate hike is delayed once more.
Disclosure: Originally published at Saxo Bank TradingFloor.com
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