The macro profile for Britain continues to show that the UK is leading the way among advance economies for growth. In turn, the upbeat data suggests that an interest rate hike may be near - perhaps nearer than the market expects. In search of new guidance, the market will pay close attention to today’s report on monetary aggregates from the Bank of England. Later, house prices for May via the S&P Case-Shiller data will draw close scrutiny in the wake of mixed numbers for this key sector. Soon after, the Conference Board publishes July figures for its Consumer Confidence Index.
UK: Money Supply (08:30 GMT) Last week’s preliminary GDP report for the second quarter shows that Britain’s economy clawed its way back to the level that prevailed before the 2008 financial crisis. The bullish momentum for the UK macro trend is expected to roll on for the foreseeable future. That, at least, is the message from the International Monetary Fund (IMF) in its July update of the widely read World Economic Outlook, which was published last Thursday. Britain’s full year GDP for 2014 is projected to rise 3.2 percent - the fastest growth rate for the advanced economies, according to the IMF.
The good news on headline economic growth has stoked more speculation about when the Bank of England (BoE) will start raising interest rates. The latest Monetary Policy Committee minutes for early July suggest that a majority of members aren’t yet leaning toward hiking rates this year. But the minutes also show that some members are inclined to consider an earlier-than-expected increase. Forecasts for when the turning point will finally arrive are increasingly divergent. The doves argue that the economy is still too weak to risk a tighter round of monetary policy. But the hawks point to last week’s GDP news as the latest piece of economic that promotes the case for tightening in the near term.
Today’s monthly release of money supply figures for June from the BoE will fuel the debate about the timing of the first rate hike. Among the numbers that deserve attention in today’s release: the broad measure of money as defined by the M4 series that excludes “intermediate other financial corporations” - a data set that “is a more economically relevant measure of broad money than the headline measure of M4,” according to the BoE. Note that the year-on-year increase for this definition of M4 has been inching lower in recent months. In the May data, the annual pace dipped to 3.6 percent, a four month low. If the rate slips again in today’s release - especially if we see a drop below the recent 3.4 percent trough for January - the case will strengthen a bit for assuming that the BoE is laying the groundwork for an earlier-than-expected hike.
US: S&P Case-Shiller Home Price Index (13:00 GMT) Yesterday’s unexpectedly weak data for the pending home sales index (PHSI) - a leading indicator for housing demand - gives the crowd another reason to worry about the wobbly state of residential real estate in recent months. June’s 1.1 percent decline (against. a 0.3 percent rise projected via the consensus forecast) marked the second straight monthly retreat for PHSI. The positive spin is that this index is still above 100, which is to say above average.
The chief economist at the National Association of Realtors (the group that publishes the PHSI data) emphasized that sales activity was "notably higher than earlier this year as prices have moderated and inventory levels have improved”. Lawrence Yun also said that the recent deceleration in prices to the slowest pace in two years is a plus for juicing the volume of purchases. “With rents rising 4 percent annually, potential buyers are less likely to experience sticker shock and can make smart decisions on whether or not it makes sense to buy or continue renting.”
Hold that thought as we await today’s release on prices via the widely watched Case-Shiller Home Price Index (HPI). If moderating price increases are productive at this stage, there was plenty to cheer about in last month’s report. HPI’s 20 city composite rose 10.8 percent for the year through May on an unadjusted basis - substantially slower than the previous month’s 12.4 percent year-on-year rise. The deceleration in the monthly comparison (seasonally adjusted) was even more dramatic, with prices higher by just 0.2 percent in April against 1.3 percent in the previous month.
The question is how much of a good thing is too much? At some point, decelerating prices turns into falling prices, which would suggest that the housing market has turned a corner for all the wrong reasons. We’re nowhere near that point, but a downside surprise would surely unleash a new round of worry after several months of mixed news for real estate. For the moment, economists think the numbers will bring good news for today’s May report. The consensus forecast calls for a 0.4 percent monthly rise and a 9.9 percent increase in the annual rate for the 20 city index - relatively middling compared with recent history. A substantially weaker set of figures at this point, however, could be taken as a new sign of stronger headwinds for a key sector of the economy that seems to be struggling.
US: Consumer Confidence Index (14:00 GMT) The mood among consumers runs from strength to strength these days. In the May report, the Conference Board’s influential index increased to 85.2 in June, the highest in more than six years. “The momentum going forward remains quite positive,” said the director of economic indicators at The Conference Board.
But there's a reason for caution for at least tempering the degree of optimism when we consider the trend in the hard data on real (inflation-adjusted) retail spending. Indeed, the year-on-year change in real consumer spending has been inching lower in recent months while the mood on Main Street has been rising. Perhaps the divergence is only noise. A few months is hardly a trend. We’ll know more after the next round of updates, starting with today’s July data for consumer confidence.
On that note, the crowd’s looking for another slightly higher reading in the Conference Board figures: 85.5 for July against the previous reading of 85.2. The obvious interpretation: consumers are becoming increasingly bullish on the economy. If so, one could reason that we’ll see stronger numbers on retail sales, which will be updated in a few weeks. 