3 Numbers to Watch: US housing, output & consumer sentiment
• One million is the new normal for US housing permits
• Modest gain in store for US industrial production
• Slight consumer sentiment uptick in the cards
Today’s scheduled possible Eurozone credit rating changes are Ireland (Moody’s), Netherlands (Fitch) and Portugal (S&P). The Federal Reserve’s Jeffrey Lacker will be speaking at 17:30 GMT. During the European session the UK retail sales for the all-important month of December are out at 09:30 GMT, so GBP could be moving today.
Note that the AUDUSD has broken through the 2013 August and December lows of 0.8818—0.8845, but has not managed to finish with a daily close below those levels. The bad unemployment numbers pushed expectations toward a rate cut when the Reserve Bank of Australia convenes on February 4, (see Ken Veksler for more). Further AUD weakness could cause widespread weakness in other commodity- (CAD) and emerging currencies (especially in Asia), and perhaps thus lead to safe-haven flows to USD.
AUD weakness may trigger a bout of Asian contagion. Photo: Shutterstock
US December Housing Starts & Building Permits (13:15 GMT): The consensus expects housing starts to increase by 975,000, less than November’s surprisingly high 1,091,000, but more than October’s 889,000. The uptrend remains well-behaved, and after bottoming-out in 2009-2011, it looks like the one million is now the new normal. The long-term average is around 1,500,000 units, and the bubble highs were around 2,200,000. so there is still plenty of upside left for the market.
Housing inventories have been increasing somewhat, which should limit the price rises and thus housing starts in the coming months, but after a strong performance in 2013, a more mediocre year should be more than welcome, as many have been scared of another bubble being formed. A lot rests on how the mortgage rates develop, and thus the level of the US Treasury bonds' yields.
US December Industrial Production & Capacity Utilisation (14:15 GMT). Industrial production is expected to have increased by 0.3 percent in December, a modest gain after November’s surprisingly large increase of 1.1 percent. That would still be enough to push the year-to-year change up to 3.5 percent. The steady rise has led to higher capacity utilisation (CU) as well. The consensus forecast sees the CU coming in at 79.1, a level not seen since 2008. Back in February 2013 I mentioned that around 80-level the CU could become an issue to the markets. Luckily, there is still plenty of slack in the labour markets, so higher CU should not be immediately inflationary. However, companies might be forced to increase investments, either domestically or overseas. That choice and globalisation make the connection between inflation and growth more complex than in the past.
US January Flash US Thomson Reuters/University of Michigan Survey of Consumers (14:55 GMT). The sentiment index is expected to post a small increase to 83.5, up from 82.5 in December. While consumer confidence is an important measure, most of its informational value can be derived from labour markets, mean reversion and stock prices. Additionally, the U.Michigan index is closely correlated with other higher-frequency sentiment indicators like Bloomberg’s or Gallup’s weekly indices. Gallup’s index has remained at the highs posted right before Christmas, while Bloomberg’s index fallen after the corresponding high and is currently back to levels last seen in the beginning of December.
Thus, a chance for a negative surprise exists — even a small decrease of the index cannot be ruled out. As next week’s data calendar looks relatively light and the weak December employment report is still haunting investors ahead of the Federal Reserve’s coming tapering at its January 28-29 meeting, a negative surprise could increase expectations that the Fed would not front-load the taper to the early part of the year.
That is the conventional wisdom. In my opinion, questions of when, and by how much the Fed will taper, are meaningless. The Fed has clearly indicated that barring a pure catastrophe, the tapering will continue at a steady pace. Thus, the markets are now moving ‘back to fundamentals’: happy consumers mean more purchases of houses and consumer goods, and the whole economy benefits from that. This tug-of-war between the previous ‘bad news is good for markets’ because of the money printing and the coming ‘good news is good for markets’ is still ongoing, but the latter party is slowly beginning to win.
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