Market Economics | Interest Rate Strategy - BNP PARIBAS ...

Key Data Preview
Chart 3: US Housing Starts & Building Permits
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1000
750
500
Building Permits (lagged 1 month, k)
Housing Starts (k)
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May Aug Nov Feb May Aug Nov Feb May Aug Nov Feb May Aug Nov Feb May
06 07 08 09 10
Source: Reuters EcoWin Pro
Jun (f) May Apr Mar
Housing Starts
(000s, saar) 580 593 659 634
Key Point:
A 5.9% decline in building permits in May suggests
housing starts will ease in June.
BNP Paribas Forecast: Small Decline
US: Housing Starts (June)
Release Date: Tuesday 20 July
Housing starts are expected to decline by 13k to 580k in
June after plunging by 66k in the previous month. Indeed,
building permits dropped sharply in April by 10.9% m/m,
and in May they dropped by another 5.9%. Given that
permits lead housing starts by one to two months, the May
decline in permits points to more weakness in new
construction over the near term. Also supporting our
forecast, construction hours worked declined by 0.1% m/m
in June following a 3.0% decline in May. In line with that,
the NAHB index of homebuilders’ optimism dropped in
June by 5 points after two month of somewhat stronger
readings. It appears that much of the stabilisation in
housing demand over the past year was a pulling forward
of demand through the tax credit, leaving the outlook for
housing highly uncertain. New lows in mortgage rates
should provide some support to housing demand, although
we look for only a modest improvement from these levels
through the remainder of the year.
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1.1
0.9
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0.6
Chart 4: Eurozone Manufacturing PMI
1.4 Manufacturing PMI:
Ratio of New Orders to Stocks of Finished Goods
1.3
Manufacturing PMI: Headline (RHS)
0.5
30
97 98 99 00 01 02 03 04 05 06 07 08 09 10
Source: Reuters EcoWin Pro
Jul (f) Jun May Apr
Manufacturing 55.4 55.6 55.8 57.6
Services 54.5 55.5 56.2 55.6
Composite 55.2 56.0 56.4 57.3
Key Point:
The more forward-looking elements of the PMIs point
to a further moderation in activity.
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55
50
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BNP Paribas Forecast: Past the Peak
Eurozone: ‘Flash’ PMIs (July)
Release Date: Thursday 22 June
Following fourteen consecutive rises, taking the ‘headline’
index of the manufacturing PMI for the eurozone to its
highest level since mid-2006, May and June figures saw a
moderation in activity in the sector.
The output and new orders indices of the manufacturing
PMI have both declined by around four percentage points
from their peaks though both remain consistent with robust
levels of activity (at 57.2 and 55.9, respectively).
The ratio of the sub-indices for new orders and stocks of
finished goods, historically a good leading indicator of the
future direction of the manufacturing PMI, is consistent with
a further moderation in activity going forward (see chart).
External economic conditions remain supportive of activity
in the sector but developments within the eurozone are not
so favourable. Domestic demand is already weak and will
be undermined further by fiscal policy tightening.
In line with the relative weakness of domestic demand, the
PMI for the service sector has been less elevated than its
manufacturing sibling. The services PMI weakened in June
and, with the new business and future expectations indices
both falling sharply, we look for a further fall in July.
The employment indices of the manufacturing and services
PMIs are barely above the 50 expansion level, indicative of
high unemployment continuing. This in turn bears down on
labour costs, keeping output price indices low.
Market Economics 166 July 2010
Market Mover
59
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