- Britain's CPI is expected to keep accelerating in today’s update for April
- The post-Brexit vote fall in the pound is the key driver for rising prices
- Economists see a faster annual rate of US industrial output in today’s April report
- US housing starts should pick up in April, but the rise will be a modest one
Accelerating inflation in the UK is in focus today via the April report on consumer prices. Later, two US numbers for April will be closely analyzed: housing starts and industrial production.
UK: Consumer Price Index (0830 GMT): The annual pace of core consumer price inflation in April is expected to rise above the Bank of England’s 2% target in today’s report. The last time core inflation was that high was in 2014.
Headline inflation is on track to accelerate even more, picking up to a 2.6% year-over-year pace, according to Econoday.com’s consensus forecast. The projection translates into the strongest annual gain for the consumer price index in three years.
The Bank of England last week advised that the sharp drop in the value of the pound post-Brexit is the key factor that’s lifting prices. “CPI inflation has risen above the [Monetary Policy Committee's] 2% target as the depreciation of sterling has begun to feed through to consumer prices,” the central bank noted in its quarterly inflation review. The BoE “expects inflation to rise further above the target in the coming months, peaking a little below 3% in the fourth quarter.”
Higher inflation comes at a tricky point in the business cycle for Britain. Economic growth continued to slow in the three months through April, according to last week’s estimate from the National Institute of Economic and Social Research. The 0.2% rise marks the softest gain in a year.
“Growth in the service sector has remained subdued, consistent with softer consumer spending growth,” a researcher at NIESR said. “We expect the squeeze on household real incomes to continue as inflation accelerates throughout the year, reaching almost 3.5% by year end.”
The optimistic spin is that the inflation acceleration is expected to be temporary, which implies that the BoE can limit interest rate hikes if not avoiding hikes completely. Nonetheless, the outlook for higher inflation and slower growth presents a challenge for monetary policy in the second half of 2017. Just how much of a challenge may become clearer in today’s inflation results.
US: Housing Starts (1230 GMT): Builder sentiment in May increased to its second-highest reading since the recession ended. Housing construction in today's April update, however, is expected to remain in the narrow range that's prevailed so far this year.
Econoday.com’s consensus forecast calls for a modest rise in housing starts to an annualized rate of 1.256 million units. Although that’s an improvement over March’s 1.215 million, the projected gain still leaves starts at a middling rate relative to recent history.
Executives in the home building industry, however, are anticipating that construction activity will pick up later this year. The Housing Market Index increased to 70 in this month’s report, second only to 71 in March, the highest level since the US recession ended in mid-2009.
The HMI report for May "shows that builders’ optimism in the housing market is solidifying, even as they deal with higher building material costs and shortages of lots and labour,” said the chairman of the National Association of Home Builders, which publishes HMI.
The bullish mood among home builders is encouraging, but the hard data on new residential construction has been stuck in neutral since late last year and analysts aren’t expecting an upside breakout in today’s release.
US: Industrial Production (1315 GMT): The year-over-year trend for industrial output is expected to pick up to the best pace in nearly a year in today’s update for April.
Economists see output rising 1.6% vs. the year-earlier level, based on the implied estimate via Econoday.com’s one-month consensus forecast. If the prediction is right, the hard data on industrial activity will reaffirm recent evidence that shows the rebound for this corner of the economy remains intact.
One caveat is the recent dip in survey data for manufacturing, which represents the dominant influence on the headline industrial numbers published by the Federal Reserve each month. The ISM Manufacturing Index for April eased for a second month. Although the benchmark is still signalling growth, the April reading dipped to its lowest reading this year.
A similar story applies to the Manufacturing PMI. “Manufacturers reported that growth of production and order books have slowed markedly since peaking in January, with April seeing the weakest improvements for seven months,” said the chief business economist at IHS Markit earlier this month. Softer growth in the domestic consumer sector is conspicuous, he added.
Traders will be watching to see if the downshift via survey data is corroborated with a weaker-than-expected round of numbers in today’s update on industrial activity.
Disclosure: Originally published at Saxo Bank TradingFloor.com