US Housing Starts Fall to 18 Month Low

Daily Analysis - 20/10/2016

Homes Breaking New Ground Plummet at the Fastest Pace Since 2011

Following a disappointing figure during the month of August, September housing starts data printed well below expectations of a 2.90% gain, plunging -9.00% during the period. Even though building permits had a more upbeat outlook on the housing sector, the unevenness of the data could be raising some red flags about the US economic outlook.

Mixed Housing Data Highlights Uncertain Outlook

Although building permits rose significantly during the month of September, climbing 6.30% month over month after contracting -0.40% in August, the losses in housing starts were substantial. According to figures released by the US Department of Commerce, multi-family housing units plunged by 38.00% month over month while single-family homes managed to bounce back from August losses. Building activity has fallen to the lowest levels in 18 months, helped in large part by the falling inventory of existing homes. Data relating to existing home sales is set to be released later in the session, however, the Federal Reserve remains upbeat on the figures as evidenced by comments on construction published yesterday in the release of the Central Bank’s Beige Book. The US dollar is starting to rebound, evidenced by the upward momentum in USDMXN, since erasing most of the post-debate losses.

Crude Oil Drawdown

After last week’s inventory build, the latest Energy Information Administration data showed a surprising drawdown in onshore crude oil inventories. According to the Department of Energy, crude stocks fell by -5.247 million barrels last week. Contrasting with that figure was the biggest build in gasoline inventories in 8 months, with gasoline stockpiles climbing by 2.469 million barrels during the same period. The most concerning aspect of the latest report was rising US production which increased to 8.464 million barrels. Now that prices are at a more advantageous level, producers will continue to hedge their production costs in an effort to ensure they are viable even during a prolonged period of price weakness. Furthermore, the Baker Hughes drill rig count has been steadily rising for months, suggesting more producers are coming back to market, potentially raising the stakes for a renewed supply glut.

Bank of Canada Lowers Growth Forecast

As was widely expected, the Bank of Canada opted to leave interest rates unchanged at its latest meeting, keeping the key rate on hold at 0.50%. Despite hopes that the weaker Canadian dollar would help stimulate the export market, policymakers have been underwhelmed by the results. Officials are also downbeat on the outlook, with Central Bank revising lower its growth forecast for 2016 from 1.30% to 1.10%, reflecting the challenges posed by exports and certain fiscal policy measures. Governor Stephen Poloz admitted that policymakers were very close to cutting rates by an additional 0.25% during the latest decision, but were dissuaded by the level of uncertainty in the economy and the ongoing “balance of risks.” The Canadian dollar continues to cede ground, with USDCAD climbing over 100 pips off of Wednesday lows before continuing momentum higher during Thursday trade.

UK Unemployment Steadies at 11-Year Low

With most of the attention focused on the ongoing “Brexit” negotiations and Europe’s hardening stance towards any flexibility, data from the UK showed that leading indicators remain solid despite the exit risks. Jobless figures reported by the Office for National Statistics showed that the unemployment rate held constant at 4.90%, matching figures from June through August. Adding to the optimistic figure was average weekly earnings climbing 2.30% on an annualized basis, underscoring the strength of the economy. However, optimism aside, concerns about exit negotiations continue to steal the limelight, with Prime Minister Theresa May indicating that GDP may shrink by 4.50% by 2030 if the UK loses access to the single market. While added competitiveness is being derived from losses in the Pound, if the UK is unable to grow trade with other partners, the economic outlook may be bleaker than originally forecast.