Daily Market Update: US homebuilders more confident; euro under pressure ahead of Thursday’s ECB meeting
A quiet start to the week for economic news flow saw US home builder sentiment as the only release of any note.
The NAHB housing market index beat Wall Street estimates in making a new high for the current cycle, with the headline index now back to levels last seen in late 2005. The detail of the report showed a broad‐based improvement in confidence levels, with measures of current and future sales both rising. Accompanying commentary from the NAHB highlighted that “this upward momentum shows that our industry is strengthening at a gradual but consistent pace”, adding that it expects housing to “keep moving forward as we start to close out 2015”. Indeed, this theme will remain in focus today as the only data releases of note again relate to the US housing sector, with positive growth in housing starts set to resume in September following two modest declines from the cycle high of 1,211 m units reached in June.
Fed‐speak remains an important focus for markets, with the latest contribution to the US rate debate coming yesterday from New York and San Francisco Fed Presidents Bill Dudley and John Williams respectively. Dudley said that “it’s still too early to consider an interest rate increase” while Williams indicated that the US economy “is still on a good trajectory” meaning that in his view policy makers will likely begin to normalise interest rate settings “in the near future”. But perhaps the most telling quote from either official was Dudley’s comment that there was lots of data between now and the end of the year, summing up the Fed’s wait and see approach by saying “first we’ll see what comes out, and then we’ll decide”. In other words, the incoming news between now and the time of the December 16th decision will ultimately determine whether or not the Fed proceeds with the rate hike it has guided as being likely. Markets continue to push out the expected timing of the first hike which is now not fully priced until the third quarter of next year. That looks wide of the mark to us as we think the economy is in better shape than that outlook implies but we, the market and the Fed all await the incoming data (especially on the jobs market) for evidence on how the economy and its outlook are evolving in the months ahead.
In the meantime, early‐week trading in fx markets is producing a modest amount of euro weakness, with the single currency down 0.6% against sterling and 0.3% against the dollar, opening at 73.2p and $1.1340 respectively. There isn’t any obvious piece of newsflow in which to couch this modest move; rather it seems that the euro is coming under some selling pressure ahead of what is expected to be a dovish update from ECB President Draghi on Thursday in which he is expected to emphasise the ECB’s readiness and willingness to provide more stimulus if needed. While there is little expectation of any actual announcement as soon as this week, expectations are building that the ECB will in December announce an extension and or expansion of its QE programme – sentiment that is likely to keep the euro under pressure in the period ahead.