Tuesday’s calendar is loaded with event risk with the ZEW Surveys the ones to watch in the European morning session while US Industrial Production is key in the afternoon. However, price indices from UK, EZ, and US are also potential market movers.
The ZEW Surveys have turned quite ugly of late with the German Expectations Index falling from a peak of 57.7 in September 2009 to -7.2 in October 2010. The Eurozone equivalent has also weakened considerably, down to 1.8 from 59.6. But most worrying is the sheer deterioration seen in the last six months. Back then the German and Eurozone Expectations indices were at 45.8 and 37.6, respectively.
However, unlike the ZEW, which surveys participants in the financial markets about the direction of interest rates, equities and inflation, the IFO queries actual businesses about their expectations for the coming six months and this survey has been much more positive in recent months. The Expectations Index of the IFO Survey for Germany rose back up to 105.1 in October, more or less tying with August and July as the highest reading in the current expansion. Are the financial experts overly pessimistic or are German (and Eurozone) businessmen set for a surprise downturn? Certainly, the divergence between the two series looks untenable.
Industrial Production and Capacity Utilization are drivers in the US morning session as production looks likely to make a small comeback in October following September’s -0.2% month-on-month. We look for production to increase 0.2% in October erasing September’s decline while consensus is a tad more optimistic with a 0.3% projection. Utilization of machinery has practically stalled in the last three months around 74.7% and we look for practically unchanged utilization in October as well, rising slightly to 74.8%. Unless our expectation of a slowdown in inventory accumulation is to materialise in the fourth quarter, production needs to pick up in response consumer demand. So in that regard, yesterday’s strong Retail Sales report was quite positive.
Empire Manufacturing was largely ignored yesterday as Retail Sales put in a strong display, rising 1.2% against expectations of 0.8% and 0.9% for consensus and Saxo, respectively. However, that should not distract from was an absolute miserable report. Not only did the headline General Business Conditions Index decline all the way to -11.14 from 15.73 against market expectations for a roughly unchanged print of 14, but the internals of the report were not pleasant reading either. The discrepancy between Prices Paid (22.08 from 30) and Prices Received (-2.6 from 8.33) rose providing another indication that company margins may be hard to increase in the next earnings season. However, that was not the worst part of report. That award is split between New Orders and Shipments as both managed impressive declines. The former declined to -24.38 from 12.9 while the latter declined to -6.13 from 19.39. While it is true the Empire Manufacturing is a quite volatile series this was a particularly horrendous report, which is hopefully quickly reversed.
Disclosure: No positions