• Mildly positive EU industrial output data expected
• US retail sales to rebound from winter blues
• Uncertain directional outlook for EURUSD
Monday is a slow news day in terms of the quantity of economic releases, although two hard-data updates will receive wide attention: Eurozone industrial production and US retail sales. Along the way, keep an eye on EURUSD, which made a bullish U-turn last week.
Eurozone Industrial Production (09:00 GMT): The economic recovery in Europe is weak, but it’s still alive. Judging by industrial activity, the annual trend has been strengthening in recent months. But the improvement is accompanied by heightened deflation risk and so plenty of uncertainty continues to lurk over the macro outlook. No wonder that the US and the IMF are calling on the European Central Bank (ECB) to take a more aggressive stance with monetary stimulus. Although some corners of Europe ex-Germany are showing improvement, the frail recovery is unbalanced and vulnerable if there's an unexpected shock.
Europe's economy is improving but remains vulnerable. Photo: Paul Grecaud / iStock“The markets anticipate an economic recovery,” said an ECB executive board member earlier this month. “At the ECB we consider that the recovery has already arrived, but we know it to be gradual and fragile.”
Deciding if that’s still assuming too much is a work in progress and subject to revision with each new data point. Today’s main event for updating the analysis is the February data on EU industrial activity. The numbers for the big economies have already been published and the monthly comparisons are positive save for Italy’s bigger-than-expected 0.5 percent slump, according to Eurostat data. But that’s offset to a degree with Spain’s pick-up in industrial output in February vs. the previous month: up 0.7 percent vs. January's 0.2 percent gain.
Breaking free of the negative macro forces will take time, even under the best of circumstances. “The degree of slack in the economy is very high” and “is unlikely to be closed in the euro zone before 2017,” another ECB board member warned last week. Today’s update on industrial activity will probably bring another round of mildly positive news. But if the data looks surprisingly weak, sentiment could take a heavy blow at a point when the well of wishful thinking has run dangerously low.
US Retail Sales (12:30 GMT): Today’s update on consumer spending for March will be a major news event as the crowd continues to look for evidence of a spring rebound. There are some encouraging signals in the March data published so far. The key question today: is macro’s bounce finding any traction on Main Street in terms of the hard data?
There are several reasons for thinking that we’ll see a decent rise in today’s report. The background trend looks upbeat, based on several numbers for estimating last month’s economic activity. As I pointed out last week, there’s a mildly improving case for thinking that the recent slowdown in economic growth really was a temporary affair due to a harsh winter rather than a deeper cyclical problem. Supporting data includes a moderately faster increase in the growth rate for payrolls last month, and the ongoing expansion in the services and manufacturing sector, according to ISM survey data. In addition, consumer sentiment continues to revive.
As for retail spending, the growth trend remains intact, according to March data for chain store sales—consumption gained 3.6 percent on a year-over-year basis, according to the International Council of Shopping Centers (ICSC). “March sales rebounded from the February pace of 2.2 percent which was severely hampered due to adverse weather patterns,” the ICSC reported in a press release.
Considering the big picture for March so far, it would surprising to see an outright decline in today’s retail sales report. A new Bloomberg survey points to higher retail sales for March. There may be even better numbers coming for April. “A number of retailers commented that the shift in Easter (April 20, 2014 vs March 31, 2013) had a negative impact on March sales,” said ICSC’s chief economist. “ICSC research estimates that the March Easter shift subtracted about one percentage for the industry as a whole from monthly sales growth. However, that one percentage point will be ‘added back’ to the April pace.”
EURUSD: A strong euro is the last thing that Europe’s weak recovery needs right now. “We have high wage costs, so our export competitiveness is suffering from the high euro,” the Belgian finance minister said last week. “It also creates a risk of deflation because imports get lower priced in Europe because the euro is so high and that, together with low energy prices, creates an impression — a perception — of deflation.”
Economics aside, the euro was due for a bounce last week. Recall that a week ago (April 7) I reviewed the bearish change in direction for EURUSD, which was partly due to growing expectations that the ECB would roll out a new phase of monetary stimulus. But from a tactical perspective, I wrote that “the downside momentum may be due for a break.” The reasoning: the trailing 20-day return for EURUSD had tumbled into the bottom quartile for performance for the first time since January. A week later, the euro has climbed sharply against the US dollar, boosting the 20-day performance rank back into middling territory.
As a result, there’s more uncertainty about the near-term outlook for EURUSD’s next move. Looking to the intermediate horizon and beyond, however, reminds us that the uptrend remains intact. The euro’s been winding higher since last summer and it’s not obvious that the rise is about to end anytime soon, even if the short-term future is a bit fuzzier than it was a week ago.
This much is obvious: Higher levels of exports have been a key component behind the recent progress in economic recovery in some quarters of the Eurozone—Spain in particular. But there’s a rising threat if the euro continues to strengthen. ECB President Draghi and other bank officials have made a point in telling the markets that there’s no policy target for the exchange rate. That may pass as enlightened thinking in some corners of central banking, but macro prudential choices in this case could ultimately come with a hefty price tag.
