Soft inflation in Britain will grab the market’s attention with today’s monthly update on consumer prices from the government. Later, the Mannheim-based Centre for European Economic Research (ZEW) publishes its monthly survey of opinions on Germany’s financial sector. We’ll also see a new US release via the NAHB Housing Market Index.
UK: Consumer Price Index (09:30 GMT) “Red warning lights are flashing on the dashboard of the global economy,” David Cameron warned this week. The prime minister’s analysis follows last week’s outlook from the Bank of England (BoE) for subdued inflation in Britain, including a “significant probability that inflation could temporarily fall below 1% in the near term.”
But not yet. Today’s October update on consumer prices in Britain is expected to show that inflation remained at a five-year low of 1.2%. Given the disinflationary winds blowing, it’s no surprise that analysts don't see an interest-rate hike anytime soon in the UK. In fact, some economists are now pushing back their forecast to 2016 at the earliest.
Inflation may be subdued in Britain, but there are signs that wages growth is accelerating. Photo: Thinkstock
But if inflation is still trending lower, the same is no longer true for wages. The annual pace of growth for total pay (three-month average) has been rising lately, advancing 1% through September (1.3% after excluding bonuses). BoE Governor Mark Carney last week said that “we expect this pick-up to accelerate”.
Will the firmer trend in real wages trigger tighter monetary policy sooner than is currently expected? Perhaps, although that’s a low-probability event in the current climate, as Carney suggested: "A spectre is now haunting Europe, the spectre of economic stagnation, with growth disappointing again and confidence falling back.” As a result, the odds are long that we’ll see an upside surprise in today’s inflation report.
Germany: ZEW Economic Sentiment (10:00 GMT) Recession risk doesn’t look as threatening for Europe’s largest economy these days, but Germany remains on stagnation watch. GDP rose 0.1% in this this year’s third quarter against the April-to-June period, but the outlook remains subdued. One reason for the weak outlook: trade with Russia is being squeezed under the shadow of sanctions - which may be increased if Russia provokes a new phase of crisis in the Ukraine.
Not surprisingly, German economy minister Sigmar Gabriel is eager to avoid any changes that will further pinch trade. "I can't see how [a more confrontational relationship with Russia] would help us move forward economically," he said on Sunday. "That will only make the situation more difficult."
Deciding if Germany’s destined to stagnate or contract in the near term will be the question du jour when reading today’s update expectations via the financial sector. Based on the consensus forecast, a modestly kinder, gentler data set is expected. Economists are looking for mild rebounds in both the expectations and current-situation measures, according to Econoday.com.
If the outlook pans out, slightly higher ZEW numbers will lend support for thinking that Germany’s economy is stabilising after several months of bearish updates. As for expecting more, yesterday’s monthly report from the Bundesbank advised to keep expectations in check, noting that “the further deterioration in economic expectations and the stagnation of new orders point to a rather sluggish course of economic development in Germany until at least the end of 2014.”
US: NAHB Housing Market Index (15:00 GMT) Yesterday’s unexpected decline in industrial production for October serves as a reminder that the US economy, for all its resilience of late, isn’t immune to the macro headwinds that are blowing elsewhere in the world. Output dipped 0.1% last month, surprising analysts and raising concerns that the economic trend is weakening in the final quarter of the year.
The market now turns to the housing sector for assessing the state of the US economy. Tomorrow’s monthly release on housing starts is expected to reflect a modest increase in residential construction. But if another downside surprise is lurking this week we may see a warning in today’s update on the mood in the homebuilding industry.
In the previous release, sentiment turned lower in October, albeit after touching a nine-year high in September. “While there was a dip this month, builders are still positive about the housing market,” said NAHB’s chief economist last month. “However, historically low mortgage interest rates, steady job gains, and significant pent up demand all point to continued growth of the housing market.”
Today’s November report is expected to post a small rise to 55 against 54 in the previous month, according to Briefing.com. Real estate is no longer projected to deliver hefty growth rates, but a flat to slightly higher reading in today’s sentiment index will boost confidence that the housing sector will continue to expand at a moderate pace.
Disclosure: To subscribe to the Daily Shot letter by e-mail please enter your e-mail address here: Subscribe to the Daily Shot