The number of economic releases picks up on Tuesday, including a new survey on conditions in the UK's industrial sector via the Confederation of British Industry (CBI). We’ll also see an inflation update for the US based on consumer prices, along with the June numbers for existing home sales in the US.
UK: CBI Industrial Trends Survey (10:00 GMT) Britain’s economic growth continues to impress. According to recent analysis by the EY Item Club (a London think tank), GDP growth for the UK will reach 3.1 percent for 2014, a bit higher than the 2.9 percent projection published in the spring. Even better, the group advised that the expansion is "becoming more balanced”. The upbeat trend of late is supported by a “long-awaited rebalancing of the UK economy – away from its historical over-reliance on the consumer, and towards business investment and ultimately exports”.
Today’s July update on the industrial sector’s trend from the CBI isn’t expected to challenge the encouraging forecast. In the June report, the CBI’s index rose to 11, the highest level since last December’s increase to 12, which marked an 18-year high. Although the consensus forecast sees a modest pullback to eight in today’s release, most analysts see the growth in manufacturing continuing at a healthy pace for the foreseeable future.
Survey data from Markit Economics paints a similarly bullish profile. “UK manufacturing continued to flourish in June, rounding off one of the best quarters for the sector over the past two decades,” a Markit economist noted in the latest release of the UK Manufacturing Purchasing Managers Index (PMI).
Although this cyclically sensitive sector may be due for a slower round of expansion in today’s CBI report, the numbers will likely show that British manufacturing is on a roll. In turn, the news will boost support for EY’s improved GDP forecast for 2014.
US: Consumer Price Index (12:30 GMT) “Inflation seems to be rising once again,” St. Louis Federal Reserve President James Bullard said last week. Many economists disagree, arguing that US economic growth is still too low to generate upside pricing pressure in any notable and sustainable degree. But while inflation has remained low by historical standards, some analysts are wondering if we’re finally on the cusp of a new run of moderately higher inflation. Bullard is obviously in this camp, and so too are those who look at the recent run of faster growth in non-farm payrolls as a signal that inflation will trend higher for the foreseeable future.
Bulls on inflation also point to the latest upturn in the price index for personal consumption expenditures (PCE), which is widely reported as the Fed’s preferred inflation index. PCE inflation in May was running at 1.8 percent on a year-on-year basis, the highest since October 2012. As recently as this past February this measure of inflation was less than half as high at 0.8 percent.
CPI has turned higher as well, increasing 2.1 percent through May as against the previous period last year - the highest in more than two years. The fact that core consumer inflation (less food and energy) is also higher supports the case that pricing pressures are rising, if only on the margins. Research shows that core inflation is a better measure of future inflation against headline numbers and so the sight of this index on the march inspires forecasts for more of the same in the months to come.
But it’s interesting to note that the market’s inflation forecast (the 10-year Treasury yield less its inflation-indexed counterpart) is still around 2.25 percent. That’s a touch higher relative to recent history, but generally in the range for much of the past year. Perhaps, then, it’s no surprise that analysts are expecting a lower pace of monthly inflation in today’s June report for consumer prices: a 0.3 percent rise for the monthly headline number against 0.4 percent in the previous release. A dramatically higher-than-expected report would draw more analysts to the bullish camp for CPI, but for now a big upside surprise looks like a low probability event.
US: Existing Home Sales (14:00 GMT) Housing starts in June delivered a downside surprise, raising fresh questions about the outlook for residential real estate. The darkest fears, however, are overblown, at least for now. Although the monthly comparison for starts fell short of predictions last month, the year-on-year data is still in the black, albeit at a modest pace. But if there are legitimate questions about new residential construction, sales of existing homes in the US paint a brighter profile these days.
In each of the last two monthly updates, sales increased, delivering the first round of improvement this year and the best back-to-back gains over two months since the summer of 2012 (most due to May’s relatively strong increase). It’s too early to say if this is a sign of better times for real estate transactions, but the numbers certainly look encouraging.
More of the same is expected in today’s release for June. The market’s looking for a third straight monthly rise: up 100,000 (seasonally adjusted annual rate), based on the consensus outlook. That alone isn’t a game changer, but another increase in sales for existing homes will help ease worries that the housing market is headed for trouble. A more likely scenario: growth is slowing to a lesser but sustainable pace - today’s numbers will help decide if that’s a reasonable forecast.