Highlights
Core Bonds trade volatile
EUR/USD: Taking a breather after the post-Draghi rally
Graph of the week
Economic Data
Review: The Good & The Bad
US
Good News
Retail sales
US retail sales rose further in December, by 0.5% M/M, while a more muted increase was expected as sales remained supported by the aftermath of Sandy.
Industrial Production
US industrial production rose by 0.3% M/M in December, in line with expectations. The breakdown was more encouraging as manufacturing production increased by 0.8% M/M.
Housing starts & permits
Both US housing starts and permits rose further in December, reaching new cyclical highs, probably partly due to favourable weather conditions.
Bad News
Empire State Manufacturing Index
In January, the US Empire State manufacturing index lost further ground, dropping from -7.3 to -7.8, while a pick-up to 0 was expected.
NAHB housing market index
After improving for seven straight months, the NAHB housing index stabilized in January. The index stayed flat at 47, while a further increase to 48 was forecast.
Philadelphia Fed index
After a temporary uptick in December, the Philly Fed index showed an unexpected drop in January, falling back into contraction.
University of Michigan consumer confidence
Michigan consumer confidence worsened further in January, falling from 72.9 to 71.3, while an uptick was expected as the payrolls tax hike weighed on sentiment.
EMU
Bad News
Industrial production
Euro zone industrial production fell for a third straight month in November. Production dropped by 0.3% M/M, while a marginal rebound was expected.
German 2012 GDP
According to preliminary data, German 2012 GDP grew by 0.7% Y/Y, slightly less than the expected 0.8% Y/Y and suggesting that GDP contracted significantly in the fourth quarter.
Preview: focus on the euro zone confidence indicators
US
Last week, the US eco calendar was well-filled with economic data showing a mixed picture. All confidence indicators surprised on the downside of expectations while the hard data remained strong. Both retail sales and industrial production surprised on the upside of expectations and also the US housing data extended their rebound. This week, the US economic calendar is rather thin. The focus will be on the housing data, while also the Richmond Fed index and jobless claims are scheduled for release.
On Tuesday, US existing home sales are expected to show a further increase in sales. For a third consecutive month, existing home sales are expected to have increased in December. The consensus is looking for a rise by 1.2% M/M to a total number of 5.10 million. We believe that the risk remains for an upward surprise supported by favourable weather conditions. Existing home sales are at the highest level since late 2009, when tax credits were supporting sales. The inventory of existing homes for sale has dropped significantly and is now at its lowest level since the early ‘00s. For now, we believe that the trend will remain supportive, although there will remain some month-onmonth volatility.
On Friday, also new home sales figures are expected to show an increase in December. US new home sales are expected to have increased by 2.1% M/M, after a 4.4% M/M increase in November. Also for new home sales, unusually warm weather might be a supporting factor, although lean inventories limit the upward potential for sales.
After the poor NY and Philadelphia Fed index, we are looking forward to see whether the Richmond Fed index shows a similar pattern. The Richmond Fed manufacturing index weakened from 9 to 5 in December and a further albeit limited worsening in forecast for January. The consensus is looking for a drop to 4, but after last week’s poor confidence data, we believe that for the Richmond Fed index too, a weaker outcome is not excluded.
Finally in the US, the initial jobless claims are forecast to reverse part of the previous week’s sharp drop. In the week ending the 12th of January, initial claims dropped to 335 000, reaching a new cyclical low. The Labour Department added however that the claims could have been distorted due to difficulties in the adjustment after the holidays. Therefore, the claims are expected to have edged up again in the week ending the 19th of January. The consensus is looking for an increase from 335 000 to 355 000. We have no reasons to distance ourselves from the consensus.
EMU
After a thin economic calendar last week, the euro zone eco calendar heats up this week with the focus on the confidence indicators. The German ZEW (Tuesday), EC’s consumer confidence (Wednesday), the PMI’s (Thursday) and finally the IFO on Friday will give us the latest update on the euro zone economy and should indicate whether sentiment improved further at the start of the new year.
In December, the German ZEW indicator rose sharply, from -15.7 to 6.9. A further, albeit more limited improvement is expected for January (to 12.0). We continue to see upside risks for the German ZEW indicator as sentiment on financial markets remained supportive. Besides the headline index (expectations) it will also be interesting to see whether the current assessment index will be able to gain further ground after a first, albeit marginal pick-up in December.
European Commission’s consumer confidence rose in December marginally from its 2.5-year low. Consumer confidence picked up from -26.9 to -26.5, in line with expectations. For January, a further improvement to -26.0 is expected. Last week, Belgian consumer confidence picked up slightly from low levels. For the euro area reading, we believe that a slightly stronger outcome is not excluded.
Most attention will however go out to the euro area PMI’s on Thursday. After a significant improvement in November, the euro zone manufacturing PMI dropped marginally in December, from 46.2 to 46.1. At the start of the new year, the manufacturing PMI is expected to pick up again, from 46.1 to 46.6. Ahead of the euro zone reading, we will still receive the French and German manufacturing PMI’s, which will provide us more indications. Although we believe that the consensus looks fair, we believe that an upward surprise is not excluded. The services sector PMI index rose already for two consecutive months, from a low of 46.0 in October to 47.8 in December. For January, a further slight increase to 48.0 is expected. We believe that for the services PMI the risks are for a weaker outcome after the rebound of the previous two months.
Finally, in Germany, the IFO will be released on Friday. The index is expected to increase for a third consecutive month in January. The improvement was mainly based in the expectations component, while the current assessment index remained poor. For January, an improvement in the headline index from 102.4 to 103.0 is expected, led by an increase in the expectations sub-index, while the current assessment is projected to pick up only marginally. We hope to see an improvement in the current assessment too, which would suggest that activity is starting to recover.
