3 Numbers to Watch: UK CPI, German ZEW, US housing starts
The May update on UK consumer price inflation leads the trading day for economic news in Europe. Soon after, the widely watched ZEW survey of economic conditions in Germany is released. Later, the market will focus on US housing starts. US consumer inflation for May is also scheduled for an update today, with numbers hitting the streets at 12:30 GMT.
UK Consumer Price Index (08:30 GMT): Inflationary pressures have eased in recent months, inspiring expectations that the central bank may have more flexibility with monetary policy in the future. That’s still a big “maybe”, but the slip in the annual pace of consumer inflation in the April update—the first decline since last September—is at least a step in the right direction. But the 2.4 percent inflation rate still exceeds the Bank of England’s two percent target, just as it has for the past four years and that’s not expected to change in today’s update.
In fact, the consensus forecast sees consumer inflation inching higher again to 2.6 percent through May. No wonder that the Bank of England remains wary. “The prolonged period of above-target inflation could cause inflation expectations to become less well anchored,” the bank advised in the second-quarter edition of its Quarterly Bulletin that it published last week. If so, “that could cause inflation to persist above the target for longer, which could, in turn, require tighter monetary policy than would otherwise be the case in order to return inflation to the target.” The near-term outlook for inflation remains in the mid-two-percent range, which is to say that no major changes in pricing pressures are expected. That said, the bank seems intent on reminding the market that it’s ready and willing to act if the numbers deliver an extended run of upside surprises.
Germany ZEW Economic Survey (09:00 GMT): The economy has stabilised, according to recent data, but there’s still a fair amount of uncertainty when it comes to deciding if Europe’s leading economy will deliver anything more than weak growth in the second half of 2013. The Bundesbank’s current GDP forecast assumes a rise of just 0.3 percent for GDP this year, according to yesterday’s release of its monthly report for June, which is down slightly from its previous prediction. But even that meager assumption is vulnerable, the bank warns. “The risks to this forecast are largely on the downside. Much will depend on whether the economic situation stabilises in the euro-area crisis countries and whether expansionary forces will gain the upper hand there.”
Is the outlook likely to improve in the summer? Today’s ZEW update may drop some clues. Analysts think we’ll see a slight improvement in the June data. Both the current conditions and expectations components of the survey are expected to post modest gains. But the odds remain low for anything more than subpar progress at this point. That’s a reminder that the economy continues to be unusually vulnerable to any changes for the worse that strike elsewhere in the Eurozone.
US Housing Starts (12:30 GMT): Today’s update on new residential construction is expected to show a rebound after April’s sharp drop. The market is anticipating that the government will report that housing starts totaled 955,000 (seasonally adjusted annual rate) in May, or considerably better than April’s 853,000, which was unexpectedly weak. My econometric modeling also projects improvement, albeit not quite as much as the consensus forecast. More importantly, if the previous release looked like a warning that the recovery in housing hit a wall last month, today’s number is likely to ease the crowd’s anxiety.
Yesterday’s update on sentiment in the homebuilding industry certainly leaves plenty of room for thinking that the housing recovery will roll on for the foreseeable future. The National Association of Home Builders/Wells Fargo housing-market index (HMI) jumped to 52 in the June estimate. That’s the first time in seven years that this index moved over 50, an indication that a majority of builders are optimistic on the future for the sector. “Today’s report is consistent with our forecast for a 29 percent increase in total housing starts this year, which would mark the first time since 2007 that starts have topped the one million mark,” NAHB’s chief economist said in a press release that accompanied yesterday’s HMI report.