With the mixed sentiment in the market and the continued stream of downbeat data the focus today turns to more clues over the outlook from growth to inflation which might further influence expectations for the next ECB move.
Yesterday the euro came under pressure after markets took Trichet’s comments that the ECB will reassess the outlook for inflation as dovish. The comments were translated to weak bets for monetary tightening and even raise the bets for rate cuts to reverse the 50 bp increase this year.
Fears over the recovery and the deepening debt crisis are still holding their downside pressure on the euro, especially with growing expectations for more ECB support.
Investors tracked the Italian debt auction yesterday to see how they would perform without ECB support, as they are prohibited to buy at auctions. Italy sold 3.75 billion euros of 10-year bonds at an average yield of 5.22% down from the previous auction at 5.77% yet still was not very strong to convince the market to ease the pressure off the euro.
After Trichet’s comments and the expectations for the ECB to alter its stance, the inflation data today will be very important to investors as they assess the next move for the central bank. The flash August estimate is expected to hold at 2.5% though still resuming the downside trend and confirms Trichet’s comments and the need to reassess the outlook for inflation.
The slowing recovery and easing commodities rally have added to the downside pressure on prices and might continue to do so shall the recovery weaken further and spending slows.
Investors fear the pace of slowing growth after the economy expanded 0.2% in the second quarter and Germany, the biggest economy, only expanded 0.1% and the labor data from the nation today will add more signs over the course of growth into the third quarter.
Another important piece of the puzzle will surely be the German labor data where unemployment is expected to hold at 7.0% while hiring to prolong at its sluggish pace adding only 10 thousand jobs following 11 thousand compared to as strong as 49 thousand jobs created at the beginning of the year in February and March.
Jobs will be surely of the essence especially as eyes will also be on the ADP from the United States that will further fuel market jitters. The ADP employment change is a good indicator for investors for what to expect on Friday and whether it will support the upbeat sentiment that Bernanke spread after he assured the ongoing recovery.
It will surely be another volatile session in the hectic week of the nonfarm payrolls and hopes are that the optimism seen in equities can spread to other markets as so far the mixed sentiment is becoming only a bad sign for a surprise to come!