Worries about the end game for Greece will continue to weigh on sentiment, including today’s update on current and future expectations for Germany’s economy via ZEW’s monthly release. We’ll also see new data on UK inflation and a fresh batch of numbers for new residential construction in the US.
UK: Consumer Price Index (08:30 GMT): Standard & Poor’s last week jumped on the bandwagon among credit analysts andpared its outlook for Britain’s sovereign debt to negative. At stake is the UK’s triple-A rating. The catalyst for the downgrade? The heated politics linked to a planned referendum in the UK on remaining in the European Union.
The government seems to agree, at least with the potential for a rocky period ahead. The BBC quoted the Treasury as saying, “we are the first to say that this is a time of heightened risk that threatens the recovery, which is why we need to go on working through the plan that is delivering economic security.”
Brexit risk is old news, but the climate may be more precarious if the mild deflationary trend continues. Headline consumer prices ticked lower by 0.1% on an annual basis in April, the first year-over-year decline since 1960! There’s a debate about whether this is genuinely worrisome, or just a temporary flirtation with what some label as negative inflation.
Whatever you call it, a deeper shade of red in today’s update would be troubling in the current climate. Between heightened uncertainty in Europe due to the deteriorating state of negotiations with Greece and the ongoing mystery of what will happen with the UK’s referendum on EU membership, a further weakening of consumer inflation isn’t helpful at this time.
For the moment, however, inflation looks set to stabilise, in part because wages are still trending higher while core inflation remains above the zero mark, albeit at modestly diminished levels of late. Those are a couple of reasons why the crowd’s looking for a mild reprieve in today’s release. Econoday.com’s consensus view sees consumer inflation ticking back into positive territory for the year-over-year comparison, rising 0.2% through May. If so, the news will bring a sigh of relief. A downside surprise, on the other hand, will further shake Mr. Market’s expectations for Britain.
Germany: ZEW Economic Sentiment (09:00 GMT): We’re finally nearing the end game for Greece. True, the actual outcome is still unclear, which means that there’s still a big guessing game when it comes to anticipating the degree of blowback, if any, for the Eurozone overall if Grexit risk moves from a modeling scenario to reality.
In any case, the end is nigh, for good or ill, and so hard economic numbers will have less impact on markets and sentiment going forward, when it comes Europe’s macro outlook. Everything will be filtered through the headlines as it relates to one medium-sized Eurozone economy.
The wound that is Greece needs to be resolved, one way or another, lest it become a festering sore that genuinely becomes a situation of the tail wagging the dog. New economic numbers won’t be meaningless, but it’s likely that any good news will increasingly find limited traction under the weight of Greece’s macro shadow.
In short, uncertainty about Grexit risk is moving into a terminal stage. As The New York Times noted yesterday, a spectrum of voices now recommend that the European Union “plan for Greece to default”. That won’t bring economic Armageddon, but if default and Grexit become reality it’s a safe bet that market volatility will rise and the Eurozone’s nascent recovery will suffer a temporary setback.
The canary in the coal mine at the moment is, of course, Germany. As Europe’s biggest and strongest economy, the country will be the bellwether for assessing the general impact of a worsening Greek crisis. Today’s update of economic sentiment data from the Centre for European Economic Research (ZEW) will provide an early clue of what’s to come until a degree of clarity emerges on the game plan for Europe’s southeastern corner.
As you might expect at this stage, the crowd’s looking for another setback in the mood among financial experts in Germany. ZEW’s current conditions index is projected to slide to 61.7 in the June report, a moderate fall from May’s 65.7, based on Econoday.com’s consensus forecast. A more pronounced drop is on tap for the expectations index, which is forecast to dip to 37.0 from last month’s 41.9.
Softer sentiment will come as no surprise at this late date, especially in the wake of the ongoing slide in the German stock market after reaching a peak in mid-April. The Greek crisis per se isn’t fatal for the currency union, but the mystery of how it’s resolved will be a heavier weight on the Eurozone’s macro trend — an obvious point that’s likely to become a bit sharper with today’s ZEW release.
US: Housing Starts (12:30 GMT): Sentiment in the home-building industry jumped to a nine-month high in yesterday’s update of the Housing Market Index (HMI) for June. The increase surprised analysts, who were expecting a smaller gain. The sub-index that measures traffic of prospective buyers also rose, to 44 — its highest since January.
“Builders are reporting more serious and committed buyers at their job sites and this is reflected in recent government data showing that new-home sales and single-family construction are gaining momentum,” said the chairman of the National Association of Home Builders (NAHB), the group that publishes the data. “The HMI indices measuring current and future sales expectations are at their highest levels since the last quarter of 2005, indicating a growing optimism among builders that housing will continue to strengthen in the months ahead,”
The upbeat news casts a bullish light on the outlook for housing construction, although that’s not obvious in expectations for today’s release. Housing starts posted a strong gain in April — 1.135 million units in seasonally adjusted, annualised terms, which is a post-recession high.
But a degree of payback is expected in today’s release for May. Construction is projected to dip to 1.100m units, according to Briefing.com’s consensus forecast. A mild setback for the bulls, if accurate, although the HMI data implies that a softer pace of growth will be temporary.