German Business Confidence Improved In November

Today's updates include a fresh read on the mood in Germany among manufacturers, followed by the release of the Bank of England's monetary policy committee minutes, and the November profile of housing starts in the US.

Germany Ifo Survey (09:00 GMT) Business confidence improved in November, according to last month's update of the Ifo Business Climate Index. The modest gain ended six months of consecutive losses for this widely watched sentiment metric for Germany's manufacturing and trade sectors. The consensus forecast sees another slight improvement for today's update, which implies that the worst may be over for the recent downgrades in the economic outlook.

That was the message in last week's release of Markit's preliminary "flash" Germany PMI Index for December, which rose over the neutral 50 mark for the first time in eight months. One more small sign that the economy might just be edging back towards growth overall. Ditto for the upbeat reading in the latest ZEW survey of financial experts and their outlook for economic activity.

But don't start the party just yet. Getting from here to there will take time. There's a murky realm between reaching the bottom and starting a new, sustainable phase of progressively stronger economic numbers. The Ifo Institute, in fact, warned last week that said "the German economy looks set to contract in the fourth quarter of 2012, before staging a recovery that is expected to be modest initially in 2013."

Surveys that measure the crowd's expectations may be looking past the current rough patch, but confirmation via hard data will take time. Industrial production for Germany, for instance, suffered a substantial setback in October and the next update arrives in the new year.

Nonetheless, today's Ifo data will probably hold steady at the previous level if not post a modest increase, which may provide more fuel for EUR/USD's rally. The upbeat expectations for the Ifo report is the guesstimate among economists generally. Similarly encouraging signals are dispatched in a trio of econometric models (ARIMA, VAR, and exponential smoothing) I used to analyze Ifo's historical data (including numbers for its siblings: Business Situation and Expectations indices) to generate point forecasts.

Bank of England Monetary Policy Committee Minutes (09:30 GMT) The UK has a "sticky" inflation problem, the Bank of England's chief economist, Spencer Dale, said last week (pdf), reminding everyone of what was already clear. Inflation has exceeded the BOE's inflation target for several years. "The stickiness in inflation may persist for a while yet," predicted Dale, who is also a member of BOE's monetary policy committee.

It's easy to assume that the central bank won't cut interest rates anytime soon without a far darker reading on the economy than we've seen recently. The BOE's target rate of 0.5% is considerably higher relative to the Fed's funds rate, yet England's economy is also weaker vs. the US. The wobbly growth numbers of late for Britain implies a lesser a target rate, or so one can argue. But Dale's comments don't leave much room for thinking that the BOE is about to embrace the doves.

A former MPC member, Andrew Sentence, also favors a relatively hawkish policy at the moment. "There will always be temptations to tolerate more inflation in the short-term in the hope of achieving better economic growth in the future," he wrote a few days ago. "But these temptations should be resisted."

Yesterday's inflation report for November makes resistance a bit easier as a policy prescription. The consumer price index in Britain slowed last month to 0.2% from October's 0.5%, leaving the annual rate at 2.7%--unchanged from October.

US Housing Starts (13:30 GMT) The housing recovery in 2012 will continue in the new year, although I expect a pullback in today's update on housing starts for November. That's likely to be a pause that refreshes, but for the moment the pace of new residential construction looks a bit overextended.

Consider how housing starts and newly issued building permits compare, as shown in the chart below. In the last two years, for instance, a month of starts exceeding permits has led to a retreat in starts in the following month. The relationship between the two indicators is naturally close, and so starts are never going to deviate far from permits for long.

The consensus forecast is also projecting a lower reading for starts in today's report: roughly 865,000 vs. 894,000 in October. But a lower number won't be a sign that housing's revival is history. The homebuilding industry, to name one source, remains optimistic.

The NAHB Housing Market Index inched higher to another six-year high in yesterday's update for December. “Builders across the country are reporting some of the best sales conditions they’ve seen in more than five years, with more serious buyers coming forward and a shrinking number of vacant and foreclosed properties on the market,” advises NAHB's chairman. So while housing starts for November may be down, the bull market in construction will probably see new highs in 2013.