- US home builder sentiment points to better second half for construction
- July’s US industrial production shifts to higher gear, while consumer confidence retreats a bit
- Ukraine crisis has not led to global risk-off move in financial markets
US Home builder index at seven-month high
Recent data out of the US suggest that the economy is continuing to grow at above trend rates. August’s US home builder sentiment (NAHB) rose to 55 from 53 the previous month, which was the highest level since January. Although the housing sector has disappointed this year, lower mortgage rates and an improving labour market look to be now supporting housing demand. Given still relatively low levels of supply and a steady recovery in the labour market, the improving trend in the housing market should continue. Indeed, we think that the second half of the year will be more positive for residential investment and this report is a positive signal in that direction.
US industrial production shows broad based growth
Data reported last week showed that industrial production rose by 0.4% in July, following a similar increase the previous month. Manufacturing output, which excludes utilities and mining output, increased 1%. Automobile and auto parts production reported the fastest pace of growth since July 2009 at 10.1%. The acceleration in July factory production went beyond automobiles. Business equipment production jumped 1.3%, the highest since February. This is a positive sign for growth in the second half of the year. Although the earliest monthly guide to US factory conditions, the Empire State Manufacturing Survey for August released last week, slowed to 14.7 from 25.6 in July, it remains at high levels. Indeed, the decline followed sharp rises in previous months.
Consumer confidence unexpectedly declined
Meanwhile the University of Michigan’s consumer sentiment indicator, declined to 79.2 in the August preliminary estimate from 81.8 in July. Expectations for the future deteriorated although consumers’ assessment of current conditions improved. In this report, data on inflation expectations showed that the one and five year median inflation expectations moved up one-tenth to 3.4% and 2.8%, respectively, but remain well within historical ranges. Overall, sentiment remains at healthy levels, supported by stronger job growth and the improvement in household balance sheets. The trigger of the next leg up in consumer sentiment will be higher wage growth. We think that this will materialise in the coming months given the tightening of the labour market.
Ukraine crisis has not led to risk-off mode in markets
Although the Ukraine crisis has left its footprints on markets, there does not appear to have been a global risk-off move. On 9 July 2014, 5y sovereign CDs spreads of Russia and Ukraine set lows just above those seen in June, signalling hopes for a resolution of the crisis. However, since then they have widened sharply (by 25-45%). However, there has been a notable difference in the market reaction between local markets and global markets. Local markets have suffered while global markets appear to be driven by other market dynamics. For example, the Russian ruble, Ukrainian hryvnia and the Russian stock exchange have lost between 6 and 11%. What is more, palladium prices and European natural gas prices have risen. However, global markets have mainly been driven by monetary policy expectations and demand and supply dynamics. The US dollar has modestly rallied on better than expected US economic data, while dovish Fed communication has pushed 10y US Treasury yields lower. In addition, the euro and German Bund yields have moved lower on unfavourable interest rate spread movements (euro), expectations of more ECB QE and lower inflation expectations. Moreover, the Japanese yen has not rallied on safe haven demand, instead a higher USD and weaker Japanese data have hurt the yen. What is more, gold and oil prices have declined because investors were already positioned for higher prices and a supply overhang in the case of oil. Although equity volatility has risen, the Ted spread does not show signs of stress.