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Low CPI May Rattle UK, German ZEW Survey And US Store Sales

Published 09/16/2014, 05:06 AM
Updated 03/19/2019, 04:00 AM

Inflation is the main event for UK economic news, with today’s release of consumer prices for August. Later, the German economy will be in focus as the market braces for another weak set of numbers in the ZEW survey on economic sentiment. Meantime, it’s a light day for macro reports in the US, although the weekly update on chain store sales will drop a fresh clue about the outlook for consumer spending.

UK: Consumer Price Index (08:30 GMT) The latest run of numbers still show that growth has a sturdy bias in Britain, but there are widespread worries that trouble awaits if Scotland chooses independence on Thursday. A new poll of executives who run the companies in the FTSE 100 Index (the largest firms listed on the London Stock Exchange) reflects an overwhelming view that the UK economy will suffer if Scotland decides to go its own way, according to The Telegraph. As a result, analyzing Britain’s future is on hold until we learn the outcome of Thursday’s vote.

Meanwhile today’s update on consumer prices may tell us if the recent deceleration in inflation will persist. There’s been a modest decline in the annual rate of growth in the consumer price index over the past year, although numbers in recent months suggest that inflation has bottomed out at about 1.5%.

In the July report, the CPI rose by 1.6%, which was notably below June’s 1.9% gain. Today’s update for August is expected to stick to the 1.6% rate, according to the consensus forecast from Econoday.com. Inflation at that level is bullish in the sense that it’s below the Bank of England’s 2% target and so the central bank is under minimal pressure to raise interest rates.

Recovery fears

But too much of a good thing may be troublesome at this stage. The weak growth in wages, for instance, suggests that the recovery of late may not be as robust as it appears from a top-down view. Real wages in Britain have fallen over the past five years, according to The Economist.

By comparison, Germany and the US have had modest wage increases. A downside surprise for UK inflation at a time of heightened uncertainty about Thursday’s vote could be unsettling. By some accounts, inflation will in fact continue to creep lower, although that’s the minority view for now. But given the already soft pricing pressures around the world, and Europe’s travails with disinflation/deflation in particular, the sight of decelerating inflation in Britain may be interpreted as a sign that economic momentum is faltering.

Then again, if the Scottish people reject independence on Thursday, there’ll be a huge sigh of relief with regards to macro matters. In that event, the bulls will still look kindly on stable to slightly lower inflation.


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Germany: ZEW Economic Sentiment Index (09:00 GMT) Germany’s economic growth is slowing, according to the revised outlook published yesterday by the Organisation for Economic Cooperation and Development. Europe’s biggest economy is projected to expand by 1.5% in 2014, down from the group’s 1.9% forecast issued in May. Although expectations for Germany have fallen, the 1.5% rise for this year is nearly double the prediction for the entire Eurozone, which is showing very weak growth on OECD estimates.

Sanctions impact

Europe’s biggest economy, in short, is still crucial for keeping the Continent from slipping into even deeper macro troubles. The question is whether the downward revisions for Germany of late have run their course. Coming up with an answer is difficult at the moment, in no small part because of the uncertainty over the Ukraine crisis. With the European Union’s latest ramping up of sanctions against Russia, the risk of negative consequences for Germany seem to have risen.

“The new sanctions will not help to relieve tensions,” predicted the chairman of Germany's Committee on Eastern European Economic relations. “We're probably at the start of a perilous spiral of sanctions.”

It’s unclear how all this will play out for Germany, which has substantial economic links with Russia. But it’s clear that the mood among financial analysts and institutional investors in Germany is deteriorating and the negative bias is expected to roll on in today’s update for September.

The consensus forecast is for another decline for the ZEW measures of current conditions and expectations, according to Econoday.com. Softer numbers won’t be a surprise at this point. What’s at stake is whether the main risk for the German economy goes beyond mediocre growth. With that in mind, all eyes will focus on today’s ZEW data for guidance on what to expect for the autumn.

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US: Chain Store Sales (11:45 GMT) Retail sales posted a healthy rebound in August, according to last week’s update from the US Census Bureau. Consumer spending increased by 0.6% last month, twice as fast as economists were predicting. On a year-over-year basis, sales increased 5.0%, the best gain in more than a year. Not surprisingly, the mood on Main Street is inching higher: the preliminary September reading of the Reuters/University of Michigan Consumer Sentiment Index advanced to its highest level since July 2014.

That is good news, although the driving force behind the stronger sentiment was mostly due to the expectations slice of the data. By contrast, the current conditions measure fell slightly in September. But that’s probably just noise, or so one can argue, given the generally positive trend in the year-over-year change for the weekly chain store sales data. This measure of retail sales has shown an upward bias in the year-over-year comparison for months. The weekly changes have been robust lately as well, posting the best run of growth in two months.

Confidence boost

“Consumers are spending again and not just on vehicles,” economist Joel Naroff noted after last week’s report on retail sales. Decent numbers in today’s chain store sales report will strengthen the case for expecting consumption growth to persist. If so, the news will boost confidence that the US economic expansion will continue for the foreseeable future.

"September tends to have the third-highest volume in sales during the year, capturing the last of the back-to-school shopping and fall merchandise demand," said a spokesman for the International Council of Shopping Centers, the group that publishes the chain store sales numbers. "I expect sales for the month to continue to show a healthy trend – increasing by4 to 5%.”

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