- U.S. existing home sales expected to recover from paperwork-induced decline
- Markit U.S. manufacturing PMI expected to fall further as manufacturing confidence sags
- U.S. leading indicators expected to edge lower but not by enough to raise any major concerns
- Draghi gives stocks a boost and undercuts the euro by suggesting more stimulus in March
U.S. existing home sales expected to recover from paperwork-induced decline — The market is expecting today’s Dec existing home sales report to show a sharp +9.2% increase to 5.20 million, reversing most of November’s -10.5% dive to 4.76 million. Home sales fell in November mainly because of a delay in real estate closings due to the recent change in mortgage paperwork disclosures.
Aside from the paperwork delay problems, U.S. home sales continue to track at relatively strong levels due to the steady economy, improved labor market, and continued low mortgage rates. However, home sales are being undercut by tighter home availability and some resistance to home higher prices. In addition, starting in January, some potential home buyers might get cold feet about buying a new home with the steep downward correction in the U.S. stock market, which is raising some doubts about the viability of the U.S. economy.
Markit U.S. manufacturing PMI expected to fall further as manufacturing confidence sags — The market is expecting today’s Markit preliminary-Jan U.S. manufacturing PMI to fall by -0.2 points to 51.0, adding to December’s -1.6 point drop to 51.2. The Markit index has fallen sharply by -2.9 points in the last two reporting months of Nov/Dec, indicating a deterioration of manufacturing confidence.
Meanwhile, the ISM’s U.S. manufacturing index is in weaker shape than the Markit index, having fallen for six straight months by a total of -5.3 points to post a new 6-1/2 year low of 48.2 in December. The ISM manufacturing index was below the boom-bust level of 50.00 in Nov-Dec, suggesting that the U.S. manufacturing sector is contracting. U.S. manufacturing confidence in the latter part of 2015 took a hit from the petroleum-sector recession and from weak exports tied to the strong dollar and weak overseas economic growth.
U.S. manufacturing confidence is likely to show fresh weakness in January due to the turmoil in China and the sharp downward correction in the U.S. stock market, which is raising questions about whether the U.S. economy is headed for some weakness. The regional business confidence indexes released thus far for January have been mixed. The Jan Empire index fell sharply by -13.16 points to a 6-3/4 year low of -19.37. Meanwhile, the Jan Philadelphia Fed index rose by +6.7 to -3.5 but it remained in negative territory for the fifth consecutive month.
U.S. leading indicators expected to edge lower but not by enough to raise any major concerns — The market is expecting today’s Dec leading indicators report to edge lower by -0.1%, giving back a little of the solid gains seen in October (+0.6%) and November (+0.4%). The markets will be watching for an unexpected weakness in the LEI given the financial market turmoil that could cause a dent in the real economy in early 2016. Indeed, the LEI on a year-on-year basis has been slowing and in November fell to a 2-1/3 year low of +3.4% y/y. The LEI is not yet flashing any major warning signs, but a decline in the LEI today could be the start of some emerging weakness.
Draghi gives stocks a boost and undercuts the euro by suggesting more stimulus in March — The European and U.S. stock markets received a boost yesterday after ECB President Draghi at his post-meeting press conference said that the downside risks have increased since the start of the year and that the ECB would “review and possibly reconsider” its monetary stance at its next meeting in six weeks in March when new staff macroeconomic projections become available. Mr. Draghi said that the ECB has “the power, the willingness, the determination to act, and the fact is that there are no limits to our action” to bring inflation up to its target of just below 2%.
Mr. Draghi seemed to be hinting at a cut in the deposit rate in March at least when he said that the ECB expects rates “to remain at present or lower levels for an extended period of time.” Mr. Draghi after previous meetings had not explicitly mentioned the possibility of lower rates in the future. The ECB could implement another -10 bp cut in the deposit rate from its current -0.30% level and could conceivably cut its refinancing rate from the current 0.05% level. An expansion in the QE program in March, by contrast, might be tough to get approved by the ECB board unless there is a further deterioration in the financial markets and a further drop in oil prices that boosts deflation fears.
The ECB in any case at its December meeting just extended its 60 billion-euro-per-month QE program by six months to March 2017 “or longer,” raising the total size of the QE program to 1.5 trillion euros from 1.1 trillion euros. Mr. Draghi will be more careful this time not to over-promise stimulus to the markets since the markets were disappointed after the December meeting when the ECB only extended the QE program by six months and did not raise the monthly purchase amount. The ECB is currently a little more than 40% of the way through its QE program, having purchased about 700 billion euros worth of securities so far.
EUR/USD fell sharply yesterday by about -1% after Mr. Draghi’s dovish comments, but then regained most of its losses during the remainder of the session, closing the day just slightly lower by -0.0016 (-0.15%) at $1.0858/euro. One of Mr. Draghi’s goals in mentioning the possibility of more stimulus was undoubtedly to try to talk down the euro and prevent any incipient euro rally tied to dollar weakness caused by expectations that the Fed will have to substantially delay the next rate hike due to the market turmoil seen thus far this year.
