Monday’s a slow day for scheduled releases, although the evolving news about Greece will ensure that there's plenty of drama as the crowd contemplates the rising possibility for a Grexit. As for economic reports proper, the main event for Europe is the flash data for consumer confidence in the EU. We’ll also see a pair of US economic releases, starting with a big-picture review of the economy via the Chicago Fed National Activity Index, followed by the monthly update on existing home sales.
US: Chicago Fed National Activity Index (12:30 GMT) The US economy has struggled recently, although the resilience of the labour market suggests that we’ll see stronger growth in the months ahead. Last week’s surprisingly large drop in new filings for jobless benefits pushed claims close to a 15-year low.
The three-month moving average for CFNAI ticked up in April to negative 0.23. The below-zero level indicates below-trend growth, but there’s still a fair amount of distance between the latest reading and negative 0.70, which is the tipping point that signals the start of recessions.
A new contraction looks like a low-probability event at this stage, although that doesn’t preclude weak growth. The Atlanta Fed’s GDPNow model is currently projecting a sluggish 1.9% rise for second-quarter GDP (seasonally adjusted annual rate). That’s better than Q1’s 0.7% slide, but the prospects don’t look promising at the moment for a stronger rebound in this quarter.
Perhaps the ongoing strength in the labour market will be a catalyst for something better. But for now, the main source of optimism is the mounting evidence that the US economy isn’t sliding into a recession, as today’s Chicago Fed data will likely confirm. The foundation for that view draws primarily on the upbeat numbers in the labour market.
But the outlook looks substantially brighter by way of building permits for home construction. Indeed, permits jumped sharply in June, reaching a post-recession high of 1.275 million units in annualised terms. By this gauge, home builders are about to go on a tear.
There’s a certain logic to the bullish forecast embedded in the latest surge in permits. ”The fundamentals for single-family homebuilding are quite positive: job and income gains, pent-up demand, low mortgage rates, and easing access to credit,” noted PNC Bank’s chief economist last week in a note to clients.
By that reasoning, the recent improvement in sales of existing homes will roll on. Although transactions retreated in April to 5.040 million annualised units, the year-over-year trend remains positive, extending a shift to growth that’s been in force since last October.
The latest report on pending home sales – considered a leading indicator for existing sales – also points to a robust market in the summer. This index posted its fourth consecutive gain in April. “Realtors are saying foot traffic remains elevated this spring despite limited – and in some cases severe – inventory shortages in many metro areas,” said the chief economist at the National Association of Realtors, the group that publishes the data.
Given the upbeat tailwind, it’s no surprise that economists are looking for more good news in today’s report. Existing sales are expected to increase to a seasonally adjusted annual rate of 5.25 million, according to Econoday.com’s consensus forecast. If so, the rise will mark the highest level since late 2013.
The housing market is no longer growing at the dramatic pace that characterised the early days of recovery after the recession. But if today’s forecast is accurate, the data du jour will strengthen the view that housing will continue to revive at a steady if relatively modest rate.
The question is whether Greece’s exit from the euro, which is looking increasingly likely, will derail Europe’s rebound? The general consensus is no, although the potential for short-term turbulence will spike. That, at least, is the optimistic scenario. In reality, no one’s really sure what will happen if a Grexit unfolds.
A lot can happen between now and the point of no return – June 30, when a €1.6 billion debt repayment to the IMF is due and the possibility of default looms. But will Russia act as a white knight and provide financing at the eleventh hour? Or will Greece find common ground with its creditors as negotiations go into the final stretch?
Meantime, the European Commission today publishes its flash estimate of consumer confidence for June. The release will provide a peek at how sentiment is holding up, or not, in the Eurozone as the moment of truth approaches. Economic sentiment is especially valuable at this point because the numbers are at the leading edge of the business cycle. The hard numbers that track the economy proper, as usual, arrive with a considerable lag.
Not surprisingly, the EC’s data has been showing a degree of deterioration in the mood lately. Consumer confidence has slipped for two straight months through May and today’s preliminary data for May will likely make that three in a row. If so, is that an early signal that puts the Eurozone recovery at risk? The answer depends on the size of the stumble and what unfolds in the negotiations with Greece in the days ahead.
Sentiment data from Markit Economics, however, suggest that worries about a reversal of fortune are overblown. The Eurozone Retail Purchasing Managers’ Index (PMI) for May reflected the strongest gain in sales in four years. Is that a clue for thinking the currency bloc can survive a Grexit? Markit’s figures offer support for cautious optimism. Will today’s EC numbers reaffirm that view?
