3 Numbers To Watch: EU output, US mortgages, EURUSD
• Data due on US mortgage applications
• Updates awaited on industrial production in France, Italy and Spain
• Euro strength a cause for concern
Today’s industrial production report for the eurozone will be closely watched for deciding if the on-off economic recovery is now back on again. Later, the wobbly state of the US housing market will come into focus, with another weekly update on the demand for mortgage applications. Meanwhile, keep a close eye on EURUSD, which has climbed sharply in recent weeks — a rally that's drawing more attention as a potential headwind to growth in Europe.
Rising mortgage rates are partly to blame for driving US home building activity lower.
Photo: Hans Hansen
The case for optimism remains a delicate creature when we look beyond Germany, but Monday’s January updates on industrial production in France, Italy and Spain are strong enough overall to inspire hope that today’s release for Europe will provide another dose of upbeat news. The numbers, as usual, tell the story.
With January’s industrial data now available for the primary economies, only France reported a decline, according to Eurostat’s database. In other words, the odds look decent enough for assuming that we’ll see a monthly gain in today’s eurozone release. Economists are inclined to agree: the consensus forecast sees industrial activity rising 0.6 percent in January vs. the previous month.
No-one should confuse an improving profile for industrial production of late as a signal for a dramatic revival in Europe’s growth prospects in the immediate future. The much-discussed risk of deflation in recent months may be receding and the possibility of expansion reviving but some analysts say it’s still premature to dismiss the threat. Marcel Fratzscher, the president of the German Institute for Economic Research (DIW Berlin), is among those pressing for a more aggressive monetary stimulus from the European Central Bank (ECB). “The ECB must counter the deflation threat quickly and decisively, and launch a broad-based programme of bond purchase along the lines of the Federal Reserve,” he said this week.
Regardless of the merits of that proposal, if today’s report skews positive, which is likely, it’s going to be easier for the ECB president Mario Draghi and company to argue that Europe is at least moving in the right direction. In turn, there will be less pressure to cut rates or to launch a new easing policy.
Keep in mind that, no matter what today's numbers show, it’s still hard to draw high-confidence conclusions from monthly comparisons, which can be subject to various forms of short-term volatility. For a more convincing measure of the trend, watch the year-over-year change. If the annual comparison stays positive through January, which is also likely, the gain will mark something unusual in recent history: five straight increases.
Steen Jakobsen, Saxo Bank's Chief Investment Officer, has hinted that there has been more than bad weather behind the recent slowdown in the US economy. Rather, the “slowdown is cyclical,” Jakobsen advised last Friday. “The weather may improve but not the economy.” One of the key troublespots is the housing sector, including housing starts — an important leading indicator that’s fallen on hard times lately. Jakobsen has argued that rising mortgage rates are partly to blame for driving home building activity lower. He says: “Policymakers ignore the nine-month lag between interest rates changes and the real economy.”
If that’s a hazard that’s starting to bite, we may see the evidence in today’s weekly update on demand for mortgages. If so, a bearish number would be a sharp reversal from last week’s report, which delivered unusually good news. Indeed, mortgage loan application volume jumped more than nine percent on a seasonally adjusted basis from the previous week — the best weekly comparison since mid-January. It’s unclear if the surge is a sign of better days ahead, or just a one-off reaction from the previous week’s hefty 8.5 percent decline.
One reason for expecting that demand for new mortgages will post another weekly rise in today’s update is that mortgage rates declined slightly in the week through March 8, according to Freddie Mac. But sales are dipping, too. The number of homes sold has been sliding this year, according to the weekly data compiled by DataQuick. That includes another drop in sales for the week through March 6, based on a rolling measure of the past 30 days of sales.
The question is whether the housing market has peaked — or is it merely suffering from the winter blues? Today’s update on new mortgage applications won’t offer a definitive answer but it may provide some support for adjusting the crowd’s expectations.
Source: Mortgage Bankers Assoc / Freddie Mac
The euro’s strength is the eurozone’s weakness. So says Christian Noyer, a Governing Council member of the ECB. Speaking earlier this week he said: “When the euro tends to strengthen, it creates additional downward pressure on the economy and inflation, which in both cases isn’t warranted. So we’re not happy at the moment.”
Happy or not, EURUSD has shown little capacity for weakness lately. But with the ECB apparently putting the euro’s strength in the monetary crosshairs, or so Noyer’s comments suggest, one might wonder if the bull run is living on borrowed time.
But there’s more to Europe’s macro headwinds than a strong currency, says France’s Finance Minister Pierre Moscovici. “The euro is at a high level...(But) we must not make a scapegoat out of currency,” he recommended over the weekend.
In any case, it’s safe to say that demand for the euro is stronger than usual these days due, perhaps, to the jitters over the turmoil in the Ukraine. As usual with currencies, the value (or lack thereof) is bound up with multiple factors that go beyond pure economics. The potential for imposing sanctions on Russia in the days ahead, for instance, is probably drawing assets from the east into the relative safety of the euro.
It’s anyone’s guess when tensions will ease. Diplomacy with Russia is a delicate art, and engineering outcomes is about as reliable and predictable as forecasting next year’s weather. That said, any substantial signs of a diplomatic thaw will provide an easy excuse for the market to trim EURUSD’s sails. Assuming, of course, that the ECB doesn't act first.