It’s a light day for scheduled economic reports in Europe, but the US retail and housing sectors are in focus with the release of weekly store sales data and the monthly update on existing home sales. Meanwhile, keep an eye on the sinking 10-year yield on German bonds as Berlin persists in pushing austerity while the Eurozone economy continues to stumble.
US: ICSC-Goldman Sachs Chain Store Sales (11:45 GMT) The US continues to post encouraging economic results, although retail spending was unexpectedly weak last month. The government’s September report showed a 0.3% pullback for consumption. The decrease was below the 0.1% dip that economists projected, based on the Bloomberg’s median survey estimate. Is that a sign that the US economy isn’t as robust as other data suggest? Today’s weekly update on store sales will provide a clue.
The annual pace of growth for chain stores has been moderately positive for some time, advancing at nearly 4% recently. But the trend since late June is now showing a slight downward bias. It may be noise, of course, but there’s a bit more uncertainty hanging over the retail sector these days in the wake of last week’s disappointing update on sales for September. As such, today’s release will provide a timely update for tracking the appetite for spending on main street.
One reason for expecting that today’s data will continue to show moderate growth is the generally upbeat macro profile. As I discussed yesterday, the US economic trend looks encouraging, based on a broad set of indicators through September. As such, it’s no surprise that consumer sentiment “posted a healthy September gain due to more favourable prospects for the domestic economy as well as more favourable personal income expectations” according the recent update of the Thomson Reuters/University of Michigan Survey.
If today’s ICSC data continues to show store sales growing at around 4% a year through last week, the news will boost the odds that consumer sentiment will remain buoyant in October. In turn, it’ll be easier to argue that September’s weak retail sales report was only a temporary setback for consumer spending.
US: Existing Home Sales (14:00 GMT) Housing starts rebounded in September, primarily due to construction of multi-family units. Nonetheless, last week’s update on new construction suggests that the housing sector continues to recover. But the recovery is beset with volatility, including a wobbly run of sales numbers lately. The biggest slice of market turnover is captured in existing sales data, and so today’s September report will be closely watched for deciding if the demand for buying homes is still trending higher.
Last month’s release suggests that the market is a bit sluggish. Existing sales in August dipped for the first time since March, settling at 5.05 million units on a seasonally adjusted annualised basis. For now, the latest decline looks like an anomaly, and a modest one at that.
Indeed, the labour market continued to grow at a respectable rate last month – a key factor for projecting ongoing growth for home sales. "I expect we will see a continued recovery [in housing] as job creation grows and consumers gain more confidence in the housing market," said the chief economist at the National Association of Home Builders after seeing last week’s update on starts.
Meanwhile, financing costs certainly don’t look threatening. The national average for the 30-year mortgage rate remained in the low 4% range last month, close to the lowest level we’ve seen since last year. That’s one more reason why economists expect to see a modest recovery in today’s report. The consensus forecast calls for a rise in existing sales to 5.10 million in September, up a bit from 5.05 million in August. That’s hardly a spectacular gain, but it’s enough to support the view that the housing sector is still moving forward.
Germany: 10-Year Bond Yield Berlin is nothing if not insistent that additional steps for fiscal stimulus in Europe are verboten. France thinks otherwise and its economy minister yesterday said so, advising Germany to bankroll a EUR 50 billion spending program. "It's in our collective interest that Germany invests," said Emmanuel Macron. The reaction from Europe’s biggest economy? Spending cuts and fiscal discipline are the only solutions.
It’s anyone’s guess if Germany will eventually agree to finance a new program of support for Europe as well as its own struggling economy. The signals to date from political leaders, all the way up to Chancellor Angela Merkel, haven’t been encouraging. That’s one reason why the crowd continues to pour money into the Eurozone’s safe haven asset – German bonds. Indeed, the benchmark 10-year yield continues to trend lower as the market bids up prices. But as interest rates slide, so too does the risk that the state of political and economic affairs for the Eurozone is straying deeper into the land of dysfunction.
If nothing else, the latest round of debate between Europe’s two largest countries reminds us that much of what ails the single currency union is bound up with politics. It’s the modern-day equivalent of Rome fiddling (while the rest of Europe burns). But if the lesson is that fiscal austerity has failed, that’s a conclusion that Germany seems willing and able to ignore. Even the sight of Europe slipping into a new recession (and potentially pulling Germany along for a ride) is not enough to persuade Berlin to change its strategy.
Then again, if the goal is to drive down interest rates to unprecedented levels, the strategy’s working brilliantly. But to what end? If you can borrow money at record low rates, why not partake of the virtually free lunch to invest in infrastructure and otherwise provide a degree of support for a stumbling economic trend? It’s a reasonable question – unless you’re caught up on the hard-money policies that dominate Germany’s policy decisions.