Euro Area Rebound Accelerates

Daily Analysis - 01/02/2017

Monetary Union Experiences Pickup in Growth

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Advance figures reported on Tuesday by Eurostat showed that the Euro Area grew by a faster than anticipated pace during the fourth quarter while other key economic metrics continued to show progress on reaching the Central Bank’s targets for unemployment and inflation.

Eurozone Fundamentals Display Broad Gains


In another sign that the exceptionally accommodative stance of the European Central Bank is aiding efforts to restore economic activity, preliminary figures released by the EuroStat showed that the economy grew by 0.50% during the fourth quarter.  For the calendar year, the economy expanded by 1.70%, however, there are two more revisions to the figure due over the coming months.

Nevertheless, the positive economic momentum was also felt in several other areas including inflation and employment.  Headline consumer prices rose by 1.80%, marking the fastest pace of price growth since February of 2013.  The gains were driven primarily by higher energy prices while core inflation remained on hold at 0.90%.  Unemployment, which has remained elevated for years, showed further progress, falling to 9.60% which is near an 8-year low.  After climbing 100 pips against the US dollar, EURUSD is pulling back from recent momentum higher in early European trade.

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Chinese Manufacturing Expansion Endures


Although the pace of gains has decelerated to a degree, January manufacturing figures released by the National Bureau of Statistics China overnight showed the purchasing manager index rising for a sixth straight month.  While optimistic in that it represents sustained momentum, the latest numbers suggest that output growth is easing despite new orders for exports climbing.  Part of the reason behind the gains could be the Lunar New Year holiday which is currently underway across China as manufacturers increased purchasing activity ahead of the celebrations.

However, the major looming concern is a showdown between the United States and China on the trade relations front as the Trump Administration weighs its options with respect to tariffs and imports barriers.  After strengthening on Tuesday, the Yuan is trending slightly lower versus the US dollar with the pair still consolidating after the steep losses experienced in USDCNH at the outset of 2017.

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US Home Prices Hit New Record


Data reported by Standard & Poor’s showed that US residential real estate prices hit a new record exceeding the last housing bubble according to figures compiled within the Case-Shiller Home Price Index composite.  Through the end of November, prices in a non-seasonally adjusted average of 20 major US cities showed that prices grew by 5.30% on an annualized basis, beating forecasts of 5.10% growth and the prior reading.

However, despite the optimism on the pricing side, there are some concerning trends and the possibility of emerging weakness on the housing front.  For one, higher interest rates are likely to raise mortgage financing costs across America, leading to fewer sales and pressure on prices.  Furthermore, rising pending home sales could indicate buyers postponing decision-making amid rising mortgage rates and costs.

 

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New Zealand Unemployment Spikes


The loose policy initiatives undertaken by the Reserve Bank of New Zealand received a disappointing dose of data on Tuesday after the unemployment rate rose to 5.20% during the fourth quarter.  While a minor setback in the sense that labor force participation rose to the highest point on record, helped in part by new entrants to the labor force, the amount of individuals looking for employment also rose.

However, in a sign that conditions are improving overall, part-time employment fell as full-time employment rose for the period.  Adding to the optimism was the 1.60% wage growth recorded during the quarter, coming right in-line with readings from the last seven quarters.  Despite the positive indications, the headline figure was enough to sink the NZDUSD pair, with the value currently 40 pips off intraday highs.

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