3 Numbers: BoE minutes, US mortgage applications, US Fed forecast
UK: Bank of England Monetary Policy Committee Minutes (08:30 GMT): The crowd will carefully dissect today’s minutes in search of clues on whether there’s a consensus for an early rate hike. The subject is front and centre after last week’s hawkish comments from Bank of England governor Mark Carney, who said that tightening monetary policy may start sooner than previously assumed. Depending on the analyst, the first rate increase for Britain may arrive as early as this November or as late as February 2015. One variable that may determine timing: the decision on whether to use so-called “baby steps” that roll out relatively small, incremental increases through time vs. larger, less-frequent, and perhaps slightly delayed hikes. In any case, it seems likely that the cumulative increases will add up to a policy rate somewhere in the 1.0 percent-to-1.5 percent range by the end of next year vs. the current 0.5 percent.
There's growing cries that the central bank can no longer afford to let the bullish momentum in house prices roll on without a stronger policy response. There are other options beyond rate hikes, but some economists still say tighter policy is required. Although some private-sector data sets now show that the housing market is cooling slightly, it’s likely that the ONS numbers will further fuel speculation that that the BoE will be forced to start raising rates before the year is out. The UK economy overall exhibits encouraging signs of strength. In particular, demand for labour is growing while supply is shrinking. “The availability of permanent candidates falls at sharpest rate since November 1997,” according to the REC/KPMG Report on Jobs for May.
It’ll be interesting to learn how the BoE’s monetary policy committee is interpreting the recent economic strength. Was the previous vote on keeping rates unchanged unanimous? That’s the general forecast, but if only one member breaks from the group the market will jump on the news as another sign that the hawks are taking over. In any case, today’s release will be one of the more closely read minutes in recent history.
US: Mortgage Applications (11:00 GMT): Housing starts and newly issued building permits fell more than expected in May, the government reported yesterday. The year-over-year decline in permits looks particularly troubling as it signals the potential for an even lower rate of housing construction in the months ahead. But the mild rebound in sentiment among home builders for June suggests otherwise.
Ditto for last week’s update on mortgage applications, which surged 10 percent in the first week of June vs. the previous week. A repeat performance is unlikely in today's release, although a modest rise would stoke optimism that the housing market will continue to expand. But it’s unclear at this point what to expect. Indeed, the previous jump in applications was at least partly due to seasonal volatility related to the Memorial Day holiday at the end of May. Today’s update will offer a clearer profile of the trend.
The news will be timely in the wake of the disappointing numbers on starts and permits. Commenting on yesterday’s housing report, one economist said that “the data does not provide the kind of assurances that the Federal Reserve would like to see. The housing market, in particular, remains a question mark as it is not able to gain the traction the Fed expected to see by this time in the economic cycle,” advised Mesirow Financial’s chief economist.
With that in mind, today’s applications report sets us up with the last housing-related news ahead of the Fed’s new forecasts that hit the streets later in the day.
US: Federal Reserve FOMC Forecasts (18:00 GMT): One of the key news events to watch in today’s Fed announcement is whether the central bank’s will lower its growth forecast for the economy. In the previous quarterly release of predictions, the Fed tweaked its GDP expectations down a touch. For all of 2014, for instance, the projected rise as of March slipped to a 2.8 percent-to-3.0 percent range, off slightly from the 2.8-to-3.2 percent range published last December.
For context, consider that the International Monetary Fund (IMF) on Monday sharply downgraded its US GDP outlook to two percent for this year from 2.8 percent in the previous estimate. Although the IMF advised that the economy has strengthened since the winter slump in this year’s first quarter, the rebound “provides only a partial offset.”
The Wall Street Journal yesterday reported that Nigel Chalk, the IMF's US mission chief “expects ‘relatively high unemployment and a lot of slack in the labor market’ to persist, and consumer inflation to remain well below target into 2017.”
The labour market assumption still sounds plausible, but yesterday update on consumer prices for May suggests that Chalk's analysis on inflation deserves a bit of revising. The consumer price index increased 2.1 percent in the year through last month—the most in 15 months and slightly above the Fed’s 2.0 percent target.
“The chances that [the Fed] will raise interest rates before the middle of next year are increasing,” wrote an economist at Capital Economics in a research note on Tuesday.
Does the Fed agree? Today’s economic projections, followed by Fed chair Janet Yellen’s press conference at 18:30 GMT, will drop a few clues.