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John J Hardy
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Article / 28 May 2014 at 4:21 GMT

3 Numbers: German jobless, EU money supply, US mortgage applications

editor/analyst / CapitalSpectator.com
United States
  • Unemployment seen falling in Germany
  • Private lending is key figure in money supply numbers
  • Construction sector optimism may translate into more US mortgages


Europe’s growth engine is in focus again today with the release of unemployment data for Germany. A few minutes later, the European Central Bank publishes monthly money supply numbers for April. There are no major US economic reports today, although we'll see new weekly data on mortgage applications, which will provide guidance for deciding if the housing market’s mildly encouraging revival of late will roll on through the summer.

Germany: Unemployment Change (07:55 GMT): Europe’s leading economy expanded at a healthy pace in this year’s first quarter, rising 0.8 percent, according to Eurostat’s flash estimate from last week—twice as fast as the previous quarter’s gain. But the momentum will slow a bit in the months ahead, the Bundesbank projected in its latest monthly bulletin. Economic activity in Q1 was supported by a mild winter and so “GDP growth is likely to be comparatively low in the second quarter after seasonal and calendar adjustment,” the central bank advised. This “should not be interpreted as a slowdown in the underlying economic momentum.”

Audi

Germany is still in the driving seat of the Eurozone economy.  Photo: Alexander Hassenstein

That’s good news for the Eurozone, of course, which continues to rely on Germany to an unhealthy but still-essential degree. Indeed, Eurozone GDP increased a slim 0.2 percent in Q1, or just one quarter as much as Germany’s advance in the first three months of this year. The heavy reliance on one country for keeping the Continent's macro trend afloat is a risky affair, the Bundesbank seemed to say: “The potential for external disruptions has recently increased significantly owing to the greater perception of economic risks in a number of emerging markets and the considerable geopolitical uncertainties in eastern Europe.” 

It’s anyone’s guess how these risk factors play out over the rest of the year, but the stakes are certainly high for Europe, where economic activity is still dramatically unbalanced.Even if serious macro blowback from the east never materialises, there’s enough home-grown risk to keep Germany at the forefront of Europe’s near-term solution for steering clear of the business cycle ditch. European Central Bank president Mario Draghi emphasised as much on Monday: “What we need to be particularly watchful for at the moment is, in my view, the potential for a negative spiral to take hold between low inflation, falling inflation expectations and credit, in particular in stressed countries.”
The good news is that Germany’s economy looks able to withstand any deflationary pressures from outside its borders, in part because its labour market is showing signs of renewed strength this year. Private-sector employment growth touched a 29-month high in May, according to business survey data compiled by Markit Economics. A similarly upbeat message can be found in the monthly total of unemployed workers, which has been steadily falling this year. Many economists think the bullish trend will continue in today’s update for May. Europe’s outlook is still precarious, but its biggest economy will remain a critical source of growth for the foreseeable future.

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Eurozone: Money Supply (08:00 GMT): Deflation remains a significant threat in Europe, Mario Draghi warned this week. The European Central Bank president explained that a “too prolonged” run of inflation below current expectations “would call for a more expansionary stance, which would be the context for a broad-based asset purchase program.”

It sounds like the ECB is laying the groundwork for announcing a more aggressive programme of monetary stimulus. Maybe, but the trend in the monetary aggregates to date suggests that austerity still has the upper hand over stimulus. The narrow measure of money supply (M1) in March slipped to its slowest year-over-year growth rate (5.6 percent) since September 2012. The trend for broad money (M3) is slightly stronger relative to its recent history, but overall it’s fair to say that pace of growth with monetary liquidity in the Eurozone is in retreat.

That’s an odd sight at a time of heightened concern about disinflation/deflation. Even more troubling is the ongoing slide in new private lending in Europe, which will be updated in today’s report as well. Loans to the private sector continued to contract in the last report, falling 2.0 percent on an annual basis through March, according to ECB numbers. There’s a lively debate about whether the central bank will roll out a new phase of monetary policy at its meeting next week (June 5). This much, however, is clear: the sliding rate of money growth and outright decline in private lending suggest that a more aggressive stance on disinflation/deflation is long overdue.

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US: Mortgage Applications (11:00 GMT) Newly filed mortgage applications posted their best three-week period through May 17 in more than a year. That’s an encouraging sign for the housing sector, which has suffered a series of setbacks in recent months.

There are hints elsewhere that this crucial sector is at least stabilising. Sales of new and existing homes increased modestly in April, suggesting that the winter freeze in real estate is thawing. If today’s weekly update on mortgage applications manages to remain in the black, the news will boost optimism for thinking that the residential property market will continue to recover in the months ahead.

Still, there are risks to consider, or so it seems based on sentiment readings for the home building industry, which remained wary. Confidence remained below the neutral 50 mark for the fourth month in a row in April, according to the National Association of Home Builders/Wells Fargo Housing Market Index. Yet this benchmark has also held steady in the mid-40 range. “After four months in which the HMI has shown little signs of fluctuation, it is clear that builder sentiment is becoming more in line with the market reality of a continuing but modest recovery,” said NAHB chairman (and a home builder) earlier this month. “However, builders expressed some optimism that sales will pick up in the coming months.”

The weekly data on mortgage applications is a volatile number and so it’s difficult to gauge the trend by focusing on any one release. But given the past three weeks of growth, even a modest rise in today’s report would be a persuasive clue for thinking that the housing sector is set for a decent if unspectacular summer. It doesn't hurt that the national average for mortgage rates dipped to the lowest level since last November. Is that enough to keep demand rising for new real estate purchases? Stay tuned for the answer.

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— Edited by Clare MacCarthy

29 July
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