FXTRADING Economic Data Summary (Asia-Pacific | 05/19)

US Housing Market Shows Signs of Stabilization

The latest US NAHB Housing Market Index rose from 34 in April to 37 in May, beating market expectations of 35 and recovering from the previous cyclical low. Builders assessment of current sales conditions also improved, with the related sub-index rising to 40, while sales expectations for the next six months climbed to 45, suggesting developers are gradually regaining confidence in market conditions for the second half of the year.

Although 32% of developers cut prices to support sales, down from 36% in April, the average discount widened to 6%, indicating many firms are still relying on price reductions to stimulate demand. At the same time, the prospective buyer traffic index improved to 25 but remained at a relatively weak level, as elevated mortgage rates continue to weigh on home affordability. FXTRADING believes the most difficult phase for the US housing market may have already passed, but high interest rates will still limit the pace of demand recovery. The improvement in builder confidence mainly reflects expectations that the economy will avoid a sharp downturn.

New Zealand Services Sector Still Struggling to Exit Contraction

New Zealands BusinessNZ Performance of Services Index rose from 46.2 to 48.9 in April, but remained below the 50 threshold, indicating the sector continues to contract. Among the sub-components, the activity and sales index improved to 48.9, the employment index rose to 48.5, while new orders returned to expansion territory at 51.2, becoming one of the few indicators showing recovery.

The supplier deliveries index fell further to 46.6, while the inventories indicator only edged up to 47.6, reflecting ongoing pressure on logistics and supply chains. A growing number of businesses have directly pointed to rising fuel costs as a key operational burden. With tensions in the Middle East continuing and transportation risks around the Strait of Hormuz increasing, economies like New Zealand that heavily rely on imports and shipping are especially vulnerable to fluctuations in global energy prices. FXTRADING believes the biggest challenge for New Zealand‘s services sector is that imported cost pressures are continuing to erode corporate profit margins. Although orders have improved, energy, transportation, and logistics costs are still dragging on the sector’s recovery pace.

Divisions Within the Fed Over Balance Sheet Reduction Are Widening

Federal Reserve Governor Michael Barr recently warned against aggressive balance sheet reduction policies, highlighting growing divisions within the Fed over the future structure of the financial system. Barr argued that treating balance sheet reduction as a policy objective in itself is fundamentally misguided. He emphasized that easing bank liquidity requirements simply to shrink the balance sheet could ultimately weaken the financial systems resilience against risks.

Barr specifically noted that the 2023 US regional banking crisis already demonstrated that the financial system is far less stable than it may appear on the surface. When market stress emerges, the banking system‘s dependence on liquidity is far greater than in the past. FXTRADING believes the Fed’s real concern now is financial stability under a prolonged high-interest-rate environment. As long-term yields remain elevated, pressure on bank balance sheets is gradually building.

The European Central Bank Is Beginning to Reconsider the Possibility of Rate Hikes

ECB Chief Economist Philip Lane recently stated that the Middle East energy shock could force the European Central Bank to reconsider raising interest rates in order to prevent higher oil prices from spilling over into wages, inflation expectations, and broader consumer prices. Compared with earlier concerns about weak European growth, the ECB is now increasingly worried about secondary inflation effects from rising energy prices.

Lane believes this energy shock differs significantly from the situation in 2022. Back then, Europe was mainly facing a regional energy crisis, whereas today global energy and transportation costs are rising simultaneously, meaning imported goods can no longer effectively cushion inflationary pressures. As international supply chain costs continue to rise, companies will eventually pass those pressures on to consumers. FXTRADING believes the ECB has now entered a difficult dilemma. On one hand, eurozone growth continues to slow and underlying demand remains weak. On the other hand, rising energy prices are once again increasing inflation risks. If oil prices continue climbing, the ECB may be forced to maintain a restrictive policy stance for an even longer period.

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