UK CPI, German ZEW, US Housing Starts

Questions about the wisdom of the European Union’s plan to impose a levy on Cypriot bank deposits will continue to roil markets and colour economic news elsewhere in the Eurozone. That includes today’s economic sentiment update from Germany via the ZEW survey. Meanwhile, the UK releases its February update on consumer price inflation today, followed by the February release for US housing starts.

UK CPI (09:30 GMT) Today’s number on consumer prices arrives shortly after the market’s inflation forecast touched a four-and-a-half year high. The bond market’s estimate for inflation in the decade ahead reached 3.36 percent last week, based on the “breakeven rate”—the yield spread between the nominal 10-year British government bond rate less its inflation-linked counterpart. One factor behind the rising inflation prediction is the crowd’s expectation that the focus on price stability will ease as a priority in Wednesday’s release of the government’s budget and make room for more efforts at stimulating growth.

As for the numbers published to date, CPI increased 2.7 percent for the year, well above the Bank of England’s two percent inflation target. Although inflation in Britain has long been running above target, the BoE has recently signaled, in somewhat stronger terms, that the country’s struggling economy must also be considered in regard to future monetary policy decisions. If this is a clue that the central bank will allow inflation to run hotter for longer, the market seems to be taking the message at face value by devaluing the pound. The GBP/USD has recently been trading near three-year lows. The bearish outlook will probably persist amid expectations that today’s above-target inflation forecast includes a quasi-commitment to let it ride for the foreseeable future.

Germany ZEW Survey (10:00 GMT) Eurozone optimism has had a rough time recently, thanks to weak economic updates that have yet to provide convincing evidence that the recession is easing, much less ending. Sentiment surveys have been the main exception, with recent readings that hint at better days ahead in the near-term future. But with minimal follow-through in the hard data, the market is having second thoughts. Concerns over the potential blowback from the Cypriot bank levy don't help. Meanwhile, today we are faced with the possibility that one of the most widely watched sentiment surveys—the monthly ZEW survey for Germany—is headed for its first decline since November.

The market is expecting a slight retreat in the ZEW Economic Sentiment Index, which surveys the macro outlook in the German financial community. If this benchmark of expectations falls, it should not come as a complete surprise, in part because this index has been rising sharply in recent months while the ZEW Current Economic Situation measure has remained subdued. In other words, there has been a sharp divergence in expectations versus the mood on current conditions. With a mixed record in the hard-data updates lately, an attitude adjustment is probably inevitable.

US Housing Starts (12:30 GMT) The rebound in residential construction hit a speed bump in January, with new housing starts pulling back from December’s peak, which set a post-recession high of 973,000 units (seasonally adjusted annual rate). Economists think today’s number will post a modest increase, and that is also what my econometric modeling suggests. The possibility for a negative surprise cannot be ruled out, however, or so it seems from yesterday’s weak reading on sentiment in the homebuilding sector via the NAHB Housing Market Index.

The housing report is the only major US economic update scheduled for Tuesday and so an unexpected decline may receive more than the usual attention. The stakes would be high regardless. Housing has been a critical pillar of support for the economy and any signs of weakness will elevate Mr. Market’s anxiety levels. Nonetheless, a setback in starts will still be seen as a temporary dip.

Yesterday’s NAHB HMI release, for instance, suggests that this index’s drop for March is a byproduct of growing pains rather than a sign that the market cycle has turned for the worse. “Although many of our members are reporting increased demand for new homes in their markets, their enthusiasm is being tempered by frustrating bottlenecks in the supply chain for developed lots along with rising costs for building materials and labour,” NAHB’s chairman says. “At the same time, problems with appraisals and credit availability remain considerable obstacles to completing deals.”