3 Numbers: Solid Industrial Output A Sign Of European Recovery
James Picerno | Jan 13, 2016 03:14AM ET
Eurozone industrial activity for November is in focus today as the market looks for more evidence of stability in the economic recovery for the euro area. Later, we’ll see the weekly update on US mortgage applications. Meantime, keep your eye on the two-year Treasury yield, which has been tumbling after touching a five-year high in late December.
Economists expect encouraging news on Eurozone industrial activity.
Eurozone: Industrial Production (1000 GMT) The contrarian surprise for the new year is the outlook for Europe’s macro trend, which has improved recently. Despite concerns that China ’s slowdown will create stronger headwinds throughout the world, some analysts are anticipating that modest growth in the euro area will hold steady and perhaps tick higher in 2016.
“The world’s third-largest economic bloc is actually doing rather well,” the head of global strategy at Standard Life Investments told Reuters this week. “A number of drivers are supportive”, including “monetary and fiscal policy, a somewhat healthier banking system, better real wages growth helped by lower energy costs, and pent-up demand as consumer confidence improves in those countries that have had a hard few years.”
Recent data releases offer support for thinking positively. The December estimate of quarterly Eurozone GDP growth via the Euro-coin indicator, for instance, edged up to 0.45% — a four-year high and above November’s 0.37%. The improvement was “buoyed by household consumption, labour market performance and the upturn in industrial production”, according to a press release for the current update.
Markit’s chief economist also sees a relatively stronger trend, noting that the latest survey data published by the firm suggests that “the Eurozone economy starts 2016 on a solid footing and well placed to enjoy a year of robust expansion”.
Today’s official numbers on industrial activity for November will offer a check on the upbeat outlook. Economists expect encouraging news, or at least nothing that will derail the view that the recent pace of growth will continue. Econoday.com’s consensus forecast sees output’s year-over-year gain inching up to 2.0%, fractionally above October’s 1.9% rise. That’s still a modest trend. But if analysts are right, today’s report will provide more evidence that Europe’s recovery is set to roll on for the near-term future.
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US: Mortgage Applications (1200 GMT) The benchmark 30-year average national mortgage rate ticked just above 4.0% at the start of the new year — the first rise over that round number since last summer. Perhaps then it’s no surprise that mortgage applications tumbled in last week’s update. The Mortgage Bankers Association reported that mortgage loan application volume fell a steep 27% in seasonally adjusted terms vs. the level of two weeks earlier. Is that a sign of deeper troubles for the housing market? Not necessarily.
First, consider that mortgage rates fell below 4% in yesterday’s weekly update from Freddie Mac. The 3.97% average for the week through January 8 is still relatively elevated vs. recent history, but rates overall remain unusually low when measured across the grand sweep of history for the last several decades.
As for higher rates in the future, it’s still too early to be expecting steady increases. Although the US economy is expected to grow this year, the gains may be uneven from quarter to quarter. The Atlanta Fed’s GDPNow model (as of January 8) projects that fourth-quarter GDP will be a tepid 0.8%, down from the third-quarter’s 2.0% pace. If that’s a reasonable forecast, the case for anticipating higher mortgage rates is still weak.
Nonetheless, higher mortgage rates, if and when they arrive, will take a toll on the housing market. How much of a toll? That depends on how fast and how high rates rise. Given the sluggish numbers for growth overall recently, it’s likely that any hikes announced by the Federal Reserve in the year ahead will be slight and relatively infrequent. In fact, it wouldn’t be surprising to see rates slide from current levels if economic activity turns out to be weaker than expected.
Meantime, let’s see how mortgage applications fare in today’s weekly update. Recent numbers show a clear downward bias, although some of that may be due to payback after front-loading application activity ahead of last month’s Fed hike. Today’s release, however, will be relatively clear of the special factors that may have skewed the numbers previously. As such, the data du jour will provide the first robust signal for mortgage demand in the new year.
US: 2-Year Yield Speaking of interest rates, the two-year yield — said to be the most sensitive for rate expectations — has been caught in a downtrend lately. After touching a five-year-plus high on December 29, this key yield has been sliding, based on daily data published by Treasury.gov. As of midday trading yesterday, this widely watched rate slumped to 0.92%. Is that a sign that the prospect for Fed rate hikes is on hold again?
Fed officials are hinting at that possibility. A series of rate hikes are “not baked in the cake” for the year ahead, said Robert Kaplan, the Dallas Fed’s new president, on Monday. Separately, Atlanta Fed President Dennis Lockhart advised that the inflation numbers may not be supportive of a second rate hike in this year's first quarter.
The crowd seems to agree. The two-year yield has reversed course rather abruptly over the past two weeks, dipping to the lowest level in a month. Unsurprisingly, Fed funds futures are currently projecting close to a zero probability for a rate hike at this month’s monetary policy meeting (January 27-28), based on CME data. That’s not likely to change until or if we see the two-year yield stabilise, if not turn higher again.
Disclosure: Originally published at Saxo Bank TradingFloor.com
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