Shifting expectations

Daily update

Markets responded positively to the US midterm election results. Expectations of policy gridlock do not solve the unsustainable US fiscal position but reduce politicians’ ability to inflict further fiscal damage. US Vice President Vance blamed Republican losses on the Gulf war. That, amplified by the optimism bias, shifted expectations of a US retreat and allowed oil prices to fall.
German September factory orders grew in line with expectations. Inevitably past data was revised stronger. This tendency to revise data higher may do real damage. In a world when spin often triumphs over substance, the repeated initial pessimism of German data weakens the narrative about the economy.
Eurozone producer price inflation is expected to continue to rise (as the consumer price data did). Producer prices are obviously more vulnerable to the ongoing energy price issues—consumer prices are dominated by labor costs, which dilute the effects of the Gulf war.
US preliminary productivity and unit labor cost data are due—productivity numbers (being what is left over when everything else is explained) are very vulnerable to data revision. But Federal Reserve Chair Warsh believes in the magic of the productivity pixie, so the figures assume a little more importance.