The markets have become a little more relaxed during the ending week – stock indices and bond yields have risen, and EURUSD has fallen back to the previous week’s lows. The slightly better-than-expected economic data and dovish promises of possible corporate bond purchases from the European Central Bank have improved the mood. It remains to be seen whether the more positive sentiment is transitory – the ECB has a tendency to float “test balloons”, or rumours of different kinds of policy steps, without any serious intention to push ahead with implementing them.
The idea is partly to wield the cheapeast tools in economic and political terms, and at the same time exercise the most effective power of a central bank. Threatened moves are more effective than half-measures, as markets have a tendency to “buy the rumour and sell the fact”. It is well known that Germany is not in love with the ECB’s monetary largesse, and that the ECB is wary of acting counter to German will. Reuters has published a good article on this strained relationship.
The next big events are the results of the ECB’s comprehensive assessment of the European banks on the next weekend, and the Federal Reserve’s meeting on October 28 to 29, which is expected to announce the final tapering of the Fed’s monthly asset purchases. This will put an end to QE3, and open up room for the ECB to begin closing the “balance sheet gap” between itself and the Fed. With these kinds of risk events ahead, today’s economic news will probably get little attention.
Germany November GfK Consumer Confidence (06:00 GMT)
German consumer confidence is expected to have continued falling to a reading of 8 from the previous month’s 8.3. That would be the third consecutive month of diminishing confidence, but in the larger picture only a dent in the post-crisis uptrend. With unemployment low and purchasing manager index for manufacturing beating expectations and remaining healthy yesterday, a prolonged deterioration of consumer confidence sounds unlikely. That is, unless the Ukrainian crisis leads Russia to wield European natural gas dependency as a weapon, or the euro crisis erupts again.
Consumers are terrible at predicting economic turning points, but deteriorating sentiment does have an effect on household spending and investment decisions. So hard data in the form of retail sales could prove interesting at a later point. Another dimension is political risk. The rise of the eurosceptical AfD party in the polls makes it unlikely that Germany’s position on fiscal austerity and monetary tightness will change. The Ifo indexes will be published next Monday.
UK Q3 Gross Domestic Production (08:30 GMT)
The flash estimate of gross domestic production (GDP) will probably be today’s main event. The consensus expects a 0.7% rise, which is slightly lower than the second quarter’s 0.9% growth, trimming the yearly change to 3% from the second quarter’s 3.2%.
The Bank of England seems to be in no hurry to raise rates, as long as Europe’s outlook remains weak and inflationary pressures stay subdued. After observing the premature rate hikes in the euro area and Sweden during the current crisis, the central bank is very wise indeed to keep its hands off the interest rate lever for as long as possible. With the medium-term interest rate outlook being dicey, the pound could react violently to both positive and negative surprises in GDP data.
With the rest of Europe hardly growing at all, the British numbers are stunning. The GDP surpassed pre-crisis highs in the second quarter, which was a hallmark moment, and another strong quarter could underline how important an independent central bank and fiscal spending freedom can be during deep recessions. Ignoring UK demands and criticism of the European Union is becoming difficult. Perhaps the UK example could help the new European Commission to become “less German”?
US September New Home Sales (14:00 GMT)
Sales of new homes are expected to drop back a bit to 470,000 in September after August’s stunning 18% jump. The drop would still retain over half of August’s gains. Historically home sales are still at very low levels – before the housing boom, it had for decades oscillated between roughly 350,000 and 850,000 units, but at the height of the boom soared to almost 1,400,000 units.
From low levels, high annual increases can easily be sustained, and the recovery in the housing markets is poised to continue. With mortgage applications on the rise, and as new regulations on the mortgage markets passed, lending should continue increasing. I would poise myself for possible positive surprises in the coming months. See the long-term chart on FRED.