Economic data released this week has proven to be a close fit with the recent trend of a burgeoning housing market alongside a struggling manufacturing sector.
By Peter Martin
Tuesday, June 23, 2015
Yesterday’s existing home sales report showed a healthy increase in May, sales jumping 5.1% to an annual pace of 5.35 million, exceeding the consensus estimate, and setting a year-on-year change of 9.2%, the best result in close to two years after the 11.9% recorded in March.
It’s not just existing home sales that are strong. Sales of new units were up to an encouraging 534,000 (SAAR) in April and continued to improve in May, climbing 2.2% to a seasonally-adjusted, annualized pace of 546,000, the highest level since February 2008.
The rising sales are alongside higher home prices, meaning the housing market is truly boasting a lot of strength right now. The FHFA house price index, like other measures of house prices, has been showing steady progress; the index increased by 0.3% in April, following a 0.3% in March, and the year-on-year change us up to +5.3%.
In contrast to the bright spot of the housing market, the manufacturing sector has been struggling with a number of adverse factors, not least the strength of the US dollar which has weighed on exports. Weak exports lay behind the weakness in today’s disappointing report for durable goods orders, which showed not just a 1.8% decline in May’s orders, but a big downward revision for April (originally reported as a 0.5% drop, but now amended to -1.5%). There can perhaps be some consolation in that the headline level for May is heavily distorted by weakness in aircraft orders, a component that is notoriously swingy (aircraft are naturally not purchased on a regular basis because of their great cost and durability). Aircraft reside in the transportation component of this report, and excluding transportation, orders were up 0.5% (though April’s ex-transportation orders were revised down from +0.3% to -0.5%).
Anecdotal data for June does not look any better. Markit’s manufacturing PMI fell to a very disappointing 53.4 in the flash reading for June, the weakest level seen since October 2013 and the report showed output growth declining for a third month in row. Chris Williamson, Chief Ecomomist at Markit, warned that ‘the weak PMI number for June raises the possibility that we are seeing a loss of momentum heading into the third quarter.’ He added that ‘the slowdown is being led by deteriorating export performance, which many producers in turn linked to a loss of competitiveness caused by the stronger dollar. Although stabilizing in June after declining in April and May, export orders have not shown any growth since February.’ The strength of the dollar is likely to continue to pose a problem, with the currency making big gains against its major peers today. EUR/USD fell 1.6% to 1.1157, while USD/CHF surged 1.74% to 0.9375.
Manufacturing data for Europe looks more promising, with the eurozone manufacturing PMI up to 52.5 in the flash reading for June, just ahead of expectations and showing a slight improvement from May’s level of 52.3. The services sector is even more encouraging, up to 54.4 in June from 53.3. in May, and this should give a lift to third-quarter GDP.
News surrounding Greece continues to hold sway over the financial markets at this moment though, and hopes that budget concessions made by the Greek government might be enough to obtain a cash lifeline from its creditors and thus stave off default have helped lift stocks globally. The German DAX and French CAC 40 were both up well over 1%, following soaring gains yesterday, while US stock indices opened up moderately. Shortly after the open in New York, the Dow Jones was up 49 points or 0.27% at 18,168, while the S&P 500 Index advanced 0.16% to 2126.3.
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