3 Numbers: UK GDP On Track To Edge Higher In Q2
James Picerno | Jul 26, 2017 02:03AM ET
- UK economic growth expected to recover slightly in Q2
- Brexit uncertainty is acting as a brake on stronger growth in Britain
- US new-home sales should remain virtually flat in June compared to May
- Fed widely expected to leave rates unchanged in today’s policy statement
The UK economy will be the subject of new analysis today, with the preliminary release of second-quarter GDP data. Later, the focus turns to the US, starting with the monthly update of new-home sales for June, followed by the Federal Reserve’s monetary statement.
UK: Q2 GDP (0830 GMT): The crowd’s expecting that today’s preliminary estimate of GDP growth in the second quarter will tick up to a 0.3% quarterly pace from 0.2% in Q1, according to Econoday.com’s consensus forecast. The prediction matches the National Institute of Economic and Social Research’s projection. But a mildly firmer rate of modest growth will do little to dampen the uncertainty that’s hanging over Britain’s economy.
Although no one’s expecting a recession in the near-term future, stronger growth on par with the 0.5%-to-0.7% trend that prevailed for much of last year is also considered a low-probability outlook. A key reason, of course, is the vague path ahead due to Brexit. The tortured negotiations for leaving the European Union remain front and centre in the IMF’s reasoning for downgrading the UK’s growth estimate to just 1.7% this year from 2.0% previously.
Some analysts are expecting even slower growth. The Centre for Economics and Business Research, for example, is looking for output to rise just 1.3% this year.
“It’s difficult to foresee substantial domestic or foreign investment in the UK given the uncertainty and existing overseas investors may reconsider their positions,” the head of UK equities at Premier Asset Management told The Independent this week. “While this does not mean we are the new ‘sick man of Europe’, we should expect a more fallow period of economic growth over the next couple of years.”
Today’s first look at the official Q2 GDP data isn’t expected to inspire a bullish revision to that analysis.
US: New Home Sales (1400 GMT): Sales of existing homes fell more than expected in June, suggesting that the housing market remains caught in a soft patch. The outlook is still positive, but recent data points to a moderate expansion that continues to struggle with various headwinds.
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“Closings [of new sales] were down in most of the country last month because interested buyers are being tripped up by supply that remains stuck at a meagre level and price growth that's straining their budget,” said the chief economist at the National Association of Realtors, the group that published the existing sales figures. He added, however, that “demand for buying a home is as strong as it has been since before the Great Recession.”
The firm trend in housing prices backs up that view. The S&P CoreLogic Case-Shiller US National Home Price Index increased 5.6% in May vs. the year-earlier level -- close to a three-year high.
David Blitzer, S&P Dow Jones Indices managing director and chairman of the index committee, noted that “the small supply of homes for sale, at only about four months’ worth, is one cause of rising prices.”
The supply headwind may play a role in today’s sales update for newly built homes. Econoday.com’s consensus forecast sees the number of transactions virtually flat for June at 611,000 (seasonally adjusted annual rate), a rise of just 1,000 from the previous month. If correct, sales will hold at a middling rate relative to numbers published year to date.
Meanwhile, building activity doesn’t look set to ramp up in the near term. Although housing construction and newly issued building permits perked up last month, the trend remains in a tight range relative to figures published so far in 2017.
More of the same is expected in today’s update, namely, a market that’s more or less treading water.
US: Federal Open Market Committee Statement (1800 GMT): Economic growth in the US is still expected to pick up in Friday’s “advance” GDP report for the second quarter, but the improvement only resonates because Q1’s rise was so weak.
The macro trend is still strong enough to keep the US out of recession, but the expansion still appears trapped in a subpar recovery. An added burden is the task of managing expectations down in the wake of last year’s election, which inspired hope that Donald Trump would engineer a revival in economic activity.
“I think expectations after the election got way ahead of themselves,” observed the chief economist at Regions Financial this week. “Growth is pretty much where it’s been the past eight years.”
Perhaps that’s why the Federal Reserve isn’t expected to announce another round of raising interest rates today. Economists are predicting that the central bank will leave the target Fed funds rate unchanged at a 1.0%-to-1.25% range, according to Econoday.com’s consensus forecast.
Fed funds futures concur, pricing in a 97% probability that policy will hold steady, based on CME data as of mid-day trading on Tuesday. In fact, the futures market doesn’t see a serious chance of a rate hike until the December FOMC meeting.
There’s a lot ground to cover between now and the end of the year. For the moment, the economic data is strong enough to keep a moderate expansion alive, but too weak to inspire high confidence that more rate hikes are near.
The mixed messages appear to be reflected in key interest rates in recent months. The policy sensitive 2-year Treasury yield has been grinding higher while the benchmark 10-year rate has been sloping down. The divergence won't last forever. Deciding which side will cry "uncle" first ultimately depends on a clearer outlook via the hard data.
Meantime, I don't expect a great deal of clarity in today's statement from the Fed. Given the current state of economic affairs, the monetary mavens will probably hedge their bets and keep the markets guessing about what comes next. The Fed, after all, is looking at the same batch of mixed numbers that's perplexing everyone else.
Disclosure: Originally published at Saxo Bank TradingFloor.com
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