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The Marketplace - September 24th 2014
24/09/2014
Following a fall in UK consumer inflation recorded last week, Yesterday’s UK mortgage data provided further evidence that Bank of England Governor Mark Carney may choose to hold off raising interest rates in the near term as mortgage approvals fall to a 12-month low in August.
Sterling closed the day relatively unchanged against its major counterparts with all eyes on the ECB during a light week for data, as figures released yesterday showed business activity in the Eurozone expanded at a weaker pace than expected in September. This morning’s German IFO business climate index will be watched closely as concerns over the Eurozone recovery show signs spreading to the region’s largest economy.
End of UK House Price Bubble?
Housing market activity seems to be moderating just as demand for unsecured loans has begun to rise quite strongly, the latest data from the British Bankers Association revealed yesterday. The number of mortgages for home purchase which were approved increased by 5% to 41,588, a 12-month low, versus 42,715 in July, while those for re-mortgaging were down 16% and those classed as ‘other’ were off by 30% despite economists expecting a reading of 42,900.
The fact that mortgage approvals are currently continuing to soften after lenders have now likely got to grips with the new mortgage regulations suggest that there has been some underlying moderation in housing market activity. Still, the number of loans approved was still about 5% higher compared with August 2013. Surveys from the Royal Institution of Chartered Surveyors and mortgage lender Halifax released earlier this month suggest house price growth slowed sharply in August.
Eurozone Business Growth Slows in September
Eurozone business activity has expanded at a slightly weaker pace than expected in September as firms cut prices for the 30th month in a row. The data will add further pressure on the ECB which is struggling to spur growth and revive prices that remain way below target.
Markit's Index which is based on surveys of thousands of companies across the region and seen as a good indicator of growth, dipped to a nine-month low of 52.3, shy of expectations by analysts who had forecasted no change from August's 52.5. The index has been above the 50 mark that separates growth from contraction since July 2013 although Markit said the latest survey pointed to third-quarter economic growth of just 0.3%
The ECB surprised markets earlier this month by cutting benchmark lending and deposit rates further and said it would buy asset-backed securities and covered bonds. Growth ground to a halt in the bloc last quarter as Germany's economy shrank and France's stagnated, adding to the pressure on the ECB, although no change to policy is expected when the Governing Council meets next week. The manufacturing PMI for Germany, Europe's largest economy, slumped to 50.3, its lowest reading since June 2013 and below all forecasts in a Reuters poll of 32 economists. A service industry PMI for France, the bloc's second-biggest economy, sank to 49.4 after just two months in growth territory.
The Eurozone currency has also been under significant pressure on economic sentiment for the region, testing lows against the US Dollar and the Pound during the past week.
US Federal Reserve Member Says Low Inflation Gives Room for Stimulus
Federal Reserve Bank of Minneapolis President Narayan Kocherlakota raised eyebrows yesterday evening as he intimated that the Fed could keep stimulating the US economy because inflation is posing ‘little threat’ the US economy. The Fed member expects inflation to run below 2% for the next four years through to 2018. That means there could be further room for monetary policy to be helpful, in terms of boosting demand without driving inflation.
The comments come after Fed Chair Janet Yellen’s latest monetary policy statement left the markets confused, providing little in terms of direction that could hint towards a future rate rise. Market speculation surrounding a future rate rise has increased following a positive second quarter for the US economy that has suggested the US recovery is on track. Yellen has continued to outline that any future move to tighten policy will be data dependent. Kocherlakota’s comments pose the view that rates could remain low (ultra-easy) for a considerable time period to spur growth within the US economy.
Today’s Key Data:
EUR – German IFO Business Climate: In a similar trend to Monday’s consumer confidence data, Germany’s No. 1 think-tank is showing an erosion in business confidence. The 7000 strong survey is predicted to show a slide from 106.3 to 105.9 points.
USD – New Home Sales: Sales of new single-family homes declined for a second straight month in July to a seasonally adjusted annual rate of 412,000, from 422,000 posted in the previous month. Nevertheless, the housing market is on a growth trend. Larger stock of properties and tame prices will help boost demand in the coming months. New homes sales data is considered volatile, despite the decline new home sales were up 12.3 from July last year. Sales of new single-family homes is expected to rise to 432,000.
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