Busy Week Ahead, But ECB Meeting Stands Out

The week ahead is packed with events and data.  The monthly cycle of purchasing managers surveys  and the US jobs report are featured. There are also central bank meetings in six high-income countries and three emerging markets.   Given the recent geopolitical development, in Ukraine, as well ISIS, will give the NATO meeting extra significance.  

At the end of the day, there will be little to learn from the PMI data and most of the central bank meetings. Yes, there may be some headline risks, but our information set will not change very much.  The euro area flash report steal most of the thunder from the final report.   Arguably, more important for the outlook will be German industrial orders and production reports.  Modest improvement is expected.  The German economy is not really contracting, though it did in Q2.  

German exports to Russia are no more than 1% of GDP.  Assume that the sanctions cut German exports to Russia by three-quarters.  Now put that in the context of last year’s growth (0.4%) and this year’s projected growth of the German economy (~1.7%).  This is not to argue, like many have done that Germany has not interest in a rigorous sanction regime.  Such arguments seem to repeat the error of those who thought the euro zone was going to break up over Greece or Cyprus.  So many investors seem to exaggerate economic influences and dismiss political motivations. 

We have argued the advent of EMU and the euro is first and foremost an economic solution to a political problem, the reunification of Germany.  Europe itself is more a political construct than a geological one.  Political interests overrode economic interests, and that is why EMU survived. Similarly, the political elite is not Philistines.  They can and are putting larger political interests ahead of narrow economic interests.  Yes, there are compromises, but an economic determinist explanation and forecast does not do the situation justice.  

The PMI data is likely to confirm that the UK economy has lost some economic momentum that was recorded earlier this year.  It continues to operate a high level, but the moderation seen in July likely extended into August.  

The US employment data will also most likely confirm what we already know, and if it does not it will likely shrugged off as a fluke.  There is no reason not to look for the 200+ monthly increases in non-farm payrolls to extend the streak to seven consecutive months.  Nearly all the inputs that have been reported that economists use to shape their forecasts improved.  

Fed officials are looking at the general trend and here is what they see.  The acceleration of improvement can be seen in the averages.  The more recent averages are above the long-term term averages.  The three-month average is 245k.  The six-month average is at 244k.  The 12-month average is at 214k, and the 24-month average stands at 203k.