DBdaily: AsiaPac Edition - Housing sentiment shrugs off higher rates
16 July 2013 (8 pages/ 242 kb)

: http://pull.db-gmresearch.com/p/2176-4522/91208193/DB_DbDailyAPAC_2013-07-16_0900b8c08708aef6.pdf

HEADLINES...
Markets: US equities slipped on very poor volume, with 10 year Treasury yields dipping a basis point in response.  The USD was marginally weaker across the board.
US:  CPI rises 0.5%mom/1.8%yoy in June, above mkt. Industrial production up 0.3%mom in June, at mkt. NAHB housing market index up 6pts to 57 in July, well above mkt.
CAN:  Manufacturing sales rise 0.7%mom in May, a tad below mkt.
EMU:  CPI up 0.1%mom/1.6%yoy in June, at mkt. Trade surplus (sa) narrows EUR0.6bn to EUR14.6bn in May, below mkt. ZEW survey (Econ. Sentiment) up 2.2pts to 32.8 in July.
UK:  CPI rises 2.9%yoy in June, below mkt. PPI up 0.1%mom/2.0%yoy in June, a tad above mkt. ONS house price up 2.9%yoy in May, a tad above mkt.
DEU:  ZEW survey (current situation) up 2pts to 10.6 in July, above mkt.
ITA:  Trade surplus widens EUR1.9bn to EUR3.9bn in May.
SWE:  Riksbank minutes state to continue its expansionary monetary policy, on the back of lower inflation and below normal growth outlook in 2013.
AUS:  RBA minutes note policy was seen as appropriate for the time being in light of the exchange rate adjustment and the “substantial degree” of stimulus in place.
NZL:  CPI rises 0.2%qoq/0.7%yoy in Q2, below mkt, trimmed mean unchanged.

THE DAY AHEAD...
US:  Fed's Bernanke testifies, Fed’s Raskin to speak, Beige Book Report, Building Permits (Jun), MBA New Mortgage Applications
CAN:  BoC’s Poloz to speak, BoC Rate announcement, Int'l Securities Transactions (May)
UK:  BoE Minutes, Labour Report (May / Jun)
ITA:  Current Account (May)
JPN:  BoJ Minutes, Machine Tool Orders (Jun F)
NZL:  Dairy auction results

Housing sentiment shrugs off higher rates
Despite the 100bp increase in mortgage rates, the July NAHB sentiment index showed the largest monthly gain since September 2002. The index was up 6 points to 57 – its highest reading since 2005. Within the detail all three components rose, present conditions (60 from 55), expectations (67 from 60) and buyers’ traffic (45 from 40). I.e. housing sentiment shrugs off higher rates.
That said, our US equity analysts strike a slightly more cautious note and argue that later this year lagged home price indices will show a slower pace of gains; and builder margin trends may also begin to lag. That said, they are also of the view that the increase in rates is more likely to impact near-term home price trends rather than volumes. In other words, while homebuyers have lost more than 10% of their purchasing power, against a backdrop of still historically high affordability this isn't likely to outright prevent them from purchasing a home; however, it may constrain how aggressively they bid on those homes.
As far as a direct contribution to GDP growth is concerned, a price impact from higher interest rates will be much less concerning than if there was to be a volume impact in new home construction. After all, as our US economists note, their forecast of 3%-plus second half growth rests largely on our assumption that housing and related sectors produce substantial positive contributions to GDP.
In the other US data June industrial production rose 0.3%, while the capacity utilization rate was up 0.1% to 77.8%. The CPI rose 0.5% in June —the largest month-on-month gain since last February. The rise in the headline was mostly due to gasoline prices which were up 6.3%. The core CPI rose 0.2% (0.2% also in May), but the year-on-year growth rate dipped to 1.6%—the lowest level since June 2011. Shelter costs – which comprise a large share of the core CPI - were up 0.2% versus 0.3% in May - keeping the year-over-year rate of change at 2.3% for the second consecutive month. Within shelter both rent of primary residence and owners’ equivalent rent were up 0.2% in the month. The former is now up 2.9% compared to a year ago and the latter is now up 2.2% — the highest levels since May 2009 and November 2008, respectively. We expect these two metrics to continue to firm due to a declining rental vacancy rate.
In the UK CPI inflation rose from 2.7% to 2.9%, which means no need for an open letter from new Governor Carney to the Chancellor. We think that this will be the peak for CPI inflation with weak upstream price pressures – the PPI output headline rose just 0.1% while core was flat on the month. Our UK economist notes that lower inflation prints should give the BoE room to maneuver in the event that once again growth disappoints. Elsewhere ONS house prices rose 2.9% yoy in May – the highest nominal growth since end-2010.
Closer to home in New Zealand the headline CPI rose just 0.2% qoq in Q2 following a 0.4% qoq increase in Q1, reducing the annual inflation rate by 0.2pps to 0.7% – below the bottom of the RBNZ’s 1-3% target band for a fourth consecutive quarter. This result was 0.1pps below DB and market expectations and the expectation held by the RBNZ as captured in the projections published in the June 2013 Monetary Policy Statement (MPS). The statistical measures of core inflation presented an even more benign picture of inflation in Q2. The 10% trimmed mean was unchanged in Q2 (it had increased 0.5% qoq in Q1) and was up just 0.8% yoy (down from 1.0% yoy in Q1). The weighted median rose just 0.1% qoq (it rose 0.5% in Q1), nudging the median of annual price changes down to 1.3% yoy (down from 1.5% yoy in Q1).
In Australia the minutes of the RBA’s July meeting were a little less dovish than the June minutes. Specifically, the phrases "given the exchange rate adjustment that was occurring, and with the substantial degree of monetary stimulus already in place" and also what appears to have been a modest upward revision to the Bank's inflation forecast suggest that the 'hurdle' for easing come the July meeting was a little higher than that in June. Our cash rate call remains for a 25bp easing in Q3 (we will make a decision on the 'month' in the wake of the Q2 CPI). That said, these minutes suggest some risk that this easing 'slips' into Q4.
The day ahead will be dominated by the testimony of Fed Chairman Bernanke to the House Financial Services Committee.