3 Numbers: UK Inflation, German ZEW, U.S. Small-Business Mood

The pace of economic releases picks up on Tuesday, including the monthly inflation update for the UK. We’ll also see fresh numbers on the mood in Germany’s financial industry via the ZEW survey and the September release of the Small Business Optimism Index for the US.

UK: Consumer Price Index (0830 GMT): Britain’s economy seems to be in a sweet spot at the moment. A moderate rate of economic growth endures while inflation remains more or less flat at the headline level. Soft pricing pressure might be a warning of trouble ahead, but forward momentum continues to hold up quite nicely.

Consider the current monthly estimate of the GDP trend from the National Institute of Economic and Social Research, which advised last week that economic output remained steady with a 0.5% increase for the three months through September—unchanged from the previous update. The new data equates with a 2.5% GDP rise for all of 2015, dipping to a 2.4% gain in 2016, NIESR noted.

The outlook is in line with projections in a new report from economists at the EY Club, which reported this week that it expects the UK economy to expand by 2.5% this year and 2.4% in 2016. Meanwhile, consumer price inflation will likely remain below target for the next several years, the EY Club anticipates.

Today’s release on consumer prices for September is expected to show that headline inflation will tick up from zero to a 0.2% year-over-year gain, according to CommerzBank, but that’s still weak enough to keep any worries about rate hikes on ice for the near term. Soft inflation would be worrisome if growth was collapsing, but the NIESR and EY Club data suggest otherwise. Meanwhile, wage growth continues to outpace inflation by a wide margin.

One potential warning sign for the months ahead: yesterday’s release of September data via the Lloyds Bank Regional Purchasing Managers’ Index for England and Wales. The new update reflected the slowest rate of business activity growth in two years. “Growth remains positive but has continued to slow in September and rounds off the weakest quarter of expansion in over two years,” advised a managing director at Lloyds (L:LLOY) Bank. “Although employment continues to rise, we may see businesses take a more cautious approach to hiring in the final months of the year.”

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Germany: ZEW Economic Survey (0900 GMT): It’s only been two months since China’s currency devaluation, which triggered a major shift in expectations for global growth. But last week’s news that German exports tumbled in August at the steepest rate in several years suggests that blowback for Europe's biggest economy is near.

“Given the recent spate of poor August data, the latest trade numbers are not such a big surprise and remain consistent with our view that Germany is facing significant headwinds from weakening global demand," Philippe Gudin of Barclays told Reuters.

Will today’s sentiment data offer another hint of what’s in store for Germany’s export-dependent economy? Yes, according to Econoday.com’s consensus forecast for the expectations component in today’s ZEW report. The macro outlook for Germany has been sliding this year, according to ZEW’s numbers, and another hefty decline is predicted for today’s October update. Economists see the expectations index (Economic Sentiment) falling to 7.1 for this month, which would mark the lowest level in a year.

The China factor is starting to resonate, advised Jonathan Loynes at Capital Economics. “Germany is more exposed. It sends a bigger proportion of its exports to China than most European countries, so I would expect it to be affected first, and hardest.”

That forecast will likely resonate in today’s ZEW survey numbers.

US: Small Business Optimism Index (1000 GMT): The Small Business Optimism Index that’s published by the National Federation of Independent Business remains near its highest levels since the US recession ended in mid-2009. But the weak outlook for third-quarter GDP growth suggests that maintaining an upbeat perspective is going to face stronger headwinds.

The Atlanta Fed’s GDPNow model projects that the US economy will expand by a tepid 1.0% in Q3, based on the October 9 estimate. That’s well below Q2’s hefty 3.9% rise.

Yet there was no sign of worry in the August update on the sentiment from NFIB. The group’s optimism index for small firms was essentially unchanged vs. the previous month. “Small business owners did not seem to be very concerned about the antics of the stock market or China’s currency devaluation, NFIB’s chief economist said last month. “Maybe it was too late in the month to be fully captured by the survey so more might be revealed in September, but most small business owners have their capital primarily invested in their own firm, not other people’s firms.”

Economists expect that today’s September reading on NFIB’s index will continue to tread water. Econoday.com’s consensus forecast see this benchmark ticking lower to 95.8 from 95.9 previously, although that’s effectively no change.

Even if sentiment holds steady, there are warning signs in the hard data for small firms. In line with September's disappointing employment report for the US overall, small-company payrolls posted an unusually weak gain last month—the weakest in nearly two years, based on ADP’s data. That’s a sign that today’s NFIB index data may be softer than expected, in which case we’ll have another warning sign to consider for the US macro outlook.

Disclosure: Originally published at Saxo Bank TradingFloor.com

Written By: James Picerno