The news on the Ukraine crisis will dominate today's trading sentiment as the world reacts to Crimea's provocative referendum on rejoining Russia. Preliminary results, with 50 percent of the votes counted, showed that 95.5 percent of ballots cast favoured joining Russia, though ethnic Ukrainians and Tatars largely boycotted it. Consequently, tensions are expected to mount today as international sanctions on Russia begin. Otherwise, it's a light day for scheduled economic reports, although the numbers we'll see are worth close attention. Indeed, the debate on what to do, if anything, about Europe’s low inflation will move to the fore again today with the revised data on the consumer price index for the EU. Later, two reports for the US (industrial production and the NAHB Housing Market Index) will sharpen the focus on deciding if weather's been a factor in the recent slowdown in economic momentum.
EU Consumer Price Index (10:00 GMT): The IMF worries that “lowflation” is stalking the Eurozone. While not as threatening as outright deflation, the organisation explained, “ultra low inflation—let us call it ‘lowflation’—can be problematic for the euro area as a whole and for financially stressed countries, where it implies higher real debt stocks and real interest rates, less relative price adjustment, and greater unemployment.”
Although the European Central Bank (ECB) still officially insists that deflation risk isn’t a real and present danger, some bank officials are hinting that the ECB is open to the possibility of launching a programme of asset purchases and/or other strategies for a new round of monetary stimulus. Sabine Lautenschläger, who joined the ECB’s executive board earlier this year, told The Wall Street Journal last week that “we have room left to act. The deposit rate could be negative, for example.”
There may still be room to act, but is there time? Today’s revision to February’s flash estimate of the consumer price index (CPI) may provide an answer. Although second estimates to CPI don’t usually change much, if at all, even a slightly lower number in today’s release could have a big impact on the crowd’s expectations for ECB policy.
In the flash estimate that was published late last month, the annual rate of consumer inflation was unchanged in February vs. the previous month, albeit at a low rate of just 0.8 percent—far below the ECB’s two percent target. Germany’s inflation, however, inched lower last month, although this is blamed on softer energy costs. Nonetheless, the ECB doesn’t see deflation as a problem at the moment. That raises the question: Would a drop in today’s CPI update vs. the flash number alter the central bank’s thinking?
US Industrial Production (13:15 GMT): The debate about winter weather and its role in the recent run of sluggish economic reports will be front and centre again today with the February release of industrial production data. In the last report, output slumped in January, posting the first monthly contraction in six months. The year-over-year rate is still positive, although here too a mild downside bias is conspicuous relative to recent history.
But other data for last month suggests that the macro trend for February is firming up. Retail sales revived last month, increasing for the first time in three months. The ISM Manufacturing Index also turned higher in February, reversing some of the weakness that showed up in the January data. Markit’s US Manufacturing Purchasing Managers Index delivered an even stronger rise last month. The sharp gain in this benchmark of manufacturing activity “to a large extent reflects a temporary rebound after supply chains and production had been disrupted by severe weather,” according to Markit’s chief economist. “This solid trend offers some reassurance to the Fed that the recent weakness in the official production and payroll data is primarily weather related, meaning the FOMC will be keen to continue to taper its asset purchases.”
An analysis of auto purchases in January via a pair of professors at Princeton and Chicago also points to the harsh winter as the culprit. “The evidence suggests caution in reading too much into weak retail spending in January,” Atif Mian and Amir Sufi wrote on their recently launched House of Debt blog a day before the release of the encouraging retail sales data for February. “It was probably due more to bad weather than to a weakening economy. When it comes to durable goods such as cars, it is likely that purchases will increase sharply when the weather improves in the states that had extremely cold winters.”
If so, today’s news on industrial production, which is heavily influenced by manufacturing output, should provide some support for their upbeat outlook.
US NAHB Housing Market Index (14:00 GMT): Home building has taken a hit recently, and the slide in the mood among home builders last month doesn’t inspire forecasts of a quick rebound. Unless, of course, you buy into the weather argument. “Cold weather clearly put a chill on new home construction last month and this is also reflected in our latest builder confidence survey,” noted the chairman of the National Association of Home Builders (NAHB) in the previous Housing Market Index (HMI) report. “The less weather-sensitive permits data suggests that our forecast for solid growth in single-family housing production in 2014 remains on track, as pent-up housing demand is unleashed.”
Today’s HMI release will test if the pent-up-demand factor has any traction in this month’s sentiment estimate for the home building industry. A rebound for housing may be in the works, but caution is still recommended for assuming a quick turnaround. Credit Suisse last week reported that home-buying demand weakened last month, which inspired the bank’s downgrading of several home building stocks to neutral. Although Credit Suisse projects rising orders for the three companies (PulteGroup, Toll Brothers, and William Lyon Homes) to the tune of 10 percent this year and 15 percent in 2015, the bank's near-term outlook is considerably softer: “Our February traffic index fell to 36 from 38 in January, and 65 in February 2013. We expect to see declines in absorption in first-half 2014, along with lower gross margins. This is in contrast to the recent generally positive commentary from builders and the optimism reflected in the stocks.”
But if today’s HMI number for March inches higher, as the consensus forecast indicates, a spring thaw for housing may be closer than Credit Suisse anticipates.
