Tuesday, 14 March 2017

Trump/Merkel Meeting, ZEW Survey, US PPI

The main event of the day is not an indicator but rather the meeting between Trump and German Chancellor Merkel in Washington. The two are expected to discuss a wide range of issues, including the global economy, trade, NATO, the fight against the Islamic State, and ties with Russia and China. So far, Trump’s meetings with other heads of government have ended with everyone happy, but there are more areas of conflict between the US and Germany than between, say, the US and Canada. Moreover, Merkel has been critical of several of Trump’s positions. This meeting could result in US criticism of Germany’s trade surplus or its fiscal policy, which could be positive for the euro.

As for the data, the European day starts with EU industrial production and the German ZEW survey.

EU IP is expected to be up on a month-on-month basis, but to show some slowdown on a year-on-year basis. That could be perceived as negative for the euro.

However, the ZEW survey, which is released at the same time, is forecast to show not only an improvement in current conditions but also a healthy rise in expectations. That is likely to counter any bad impression from the IP figures and is likely to underpin the euro, especially if investors are tending to buy the single currency ahead of Merkel/Trump meeting.

Of course the ZEW is “soft” data, derived from a survey of analysts’ opinions, while the IP figure is “hard” data, derived from figures of how much was actually produced. The divergence between these two kinds of data is pronounced in Europe, with soft data tending to come out better than hard data.

In the US, the producer price index (PPI) is expected to show a relatively small month-on-month rise but for the year-on-year rate of change to accelerate sharply, both on a headline and core basis. While a rate hike is fully discounted for this week, increasing pipeline inflation pressures could add to speculation about an upward shift in the dots and more rate hikes than the expected three this year, which would probably mean further dollar strength. The question then becomes the tug-of-war between the monetary policy divergence trade that is pushing USD higher, and the trade policy conflicts (such as with Merkel and Germany) that are putting downward pressure on the dollar. Given that PPI is not usually that big a market-mover for USD, I would expect the trade angle to win out today.


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