UK House Prices, BOE And ECB Rate Decisions

Today’s monthly report on the Halifax House Price Index will probably deliver more good news for Britain’s economic outlook. Later, the European Central Bank and the Bank of England are scheduled to dispense interest rate announcements. Keep in mind that Europe's economic news will receive added attention with US markets closed for the July 4 holiday. Also, with a new round of political crisis roiling Portugal, the crowd will be filtering today’s numbers through the prism of what the headlines tell us with regards to events on the ground in Lisbon. Given that it's (still) all about the hefty debt load weighing on Portugal's economy, the main question on everyone’s mind: Another bailout?

UK Halifax House Price Index (07:00 GMT): Residential building has rebounded in recent months, as this week’s update of the Markit/CIPS UK Construction PMI reminds us. “June data indicated that overall output growth in the UK construction sector was underpinned by a fifth consecutive monthly rise in residential building activity,” Markit Economics advised in a press release. Today’s release of the June number for the Halifax House Price Index will likely offer some hard data to support the improving sentiment reflected in the PMI numbers.

The Halifax House Price Index reflects the broad trend in UK residential real estate prices and by this benchmark it’s clear that the market’s improving. The rebound remains modest but it’s persistent, particularly in the year-over-year comparisons (calculated here using rolling three-month data). In the previous release, Lloyds Banking Group observed that rising demand relative to supply “helps to explain the modest rise in house prices over recent months.” No wonder that construction activity is picking up. Considering the recent wave of encouraging news from other corners of Britain’s economy in recent weeks—including yesterday’s better-than-expected gain CIPS/PMI Services Index—the odds look favorable for more encouraging news in today’s data.

European Central Bank Interest Rate Decision (09:00 GMT): The ECB isn’t likely to cut interest rates or announce a new round of monetary stimulus today, but this is the perfect time to surprise the crowd. Yesterday’s news of an upside surprise of one percent growth in Eurozone retail sales for May is a rare step in the right macro direction, but it’s hardly a game changer. The continent is still mired in recession, which is why the jobless rate continues to inch higher into record territory. The opportunity for managing expectations will be lost today via a rate cut, or so analysts predict. That’s unfortunate, given that the most powerful tool in a central bank’s arsenal is its ability to change how the market perceives the future.

At a moment, when there’s a bit of good news to ponder and on a relatively slow news day for macro, ECB president Mario Draghi and company could influence expectations by rolling out plans for Europe’s version of Abenomics. Instead, we’re likely to see more of the same: a rationale for keeping policy tight relative to what the Eurozone economy needs. Draghi will probably use his press conference today to tell us that the ECB has done enough to promote a recovery in the months ahead. Yesterday’s retail sales report offers a small ray of hope on that front, but confidence will remain minimal for thinking that we’re at the turning point until we see more encouraging data. The tragedy is that the ECB isn’t likely to make a serious effort today at changing expectations. That's a precarious policy given the risk that stronger numbers are still a debatable forecast.

Bank of England Interest Rate Decision (11:00 GMT): The central bank isn’t expected to change its target rate of 0.5 percent today, but pay close attention anyway because this is the first monetary policy announcement with Mark Carney leading the Old Lady of Threadneedle Street. He’ll cast his first vote in the Monetary Policy Committee, although the public release of his decision will have to wait until later in the month with the publication of the minutes on July 17.

The key issue is whether Carney, the bank’s first non-British governor, will push for more quantitative easing at this point. That’s a tougher decision at the moment compared to just a few weeks ago, thanks to the upbeat economic news for Britain lately. It may still be early for normalising monetary policy in the UK, but with inflation running well above the BoE’s stated target the hawks are eager to start squeezing the liquidity. But Carney has a history as a so-called monetary activist as Canada's lead central banker and so he’s likely to favour erring on the side of higher inflation rather than lesser growth. The main event, however, is less about Carney and the BoE and more about how the market perceives the new era that formally begins today.

How, for instance, will the pound react? The past week suggests that GBPUSD support is strong around 1.50. A sharp rise in the days ahead would suggest that the market thinks quantitative easing in Britain may end sooner than later.