The world markets breathed a sigh of relief as the French decisively elected Macron over Le Pen. Had Le Pen won, an EU referendum would have been next and, had they French voted to leave the EU, that trade block would have crumbled. But that does not mean Macron has an easy job ahead of him. French growth is weak, unemployment his high and the overall economy is in weak shape. Compounding the problem is Macron’s lack of experience and hardened position of various French political players. Finally, Le Pen’s party will likely win a fairly large number of seats in the upcoming parliamentary elections while Le Pen herself will most likely return as a candidate in the next election.
The ECB released their latest Economic Bulletin for the period from early March to late April, which reported a very good overall economic environment. Financially, The French election caused a safety bid for government bonds, with yields declining between 10-70 basis points. Equity prices increased slightly. GDP is increasing at a .5% rate:
Domestic demand – which increased .5% Q/Q and 1.9% Y/Y -- is the primary driver of growth. Lower unemployment and increasing incomes should spur additional increases, which are evidence in rising retail sales and car registration. Investment increased 3.3% in the 4Q16, primarily on the back of intellectual property expenditures. Exports rose 1.8%, stimulated by the slightly lower euro. Overall the picture is very positive. And recent readings from the Markit numbers point to continued expansion.
The Bank of England maintained rates at .25%. But the underlying picture is mixed. Unemployment is 4.7%, which is full employment from the BOEs perspective. But inflation is 2.3% and is expected to be over the bank’s 2% target in the medium term. Part of the reason is due to the sterlings low level versus the dollar and euro. Further compounding the policy picture is potential consumer sector weakness. Auto registrations are down, tighter credit conditions are slowing home sales and retail sales are now declining. All of this is occurring against the backdrop of Brexit.
There was a smattering of news from other countries. Australian retail sales were .1% lower M/M and 2.5% higher Y/Y. There is a potential troubling trend developing in the M/M data, with the pace of growth slowing:
However, there are only a few months of data so we shouldn’t draw any firm conclusions yet. Canadian building permits were down 5.8%. However, this statistic has trended between $6.5 billion and 8.5% since 2015. And building starts declined 15%:
But this drop is from a very high level, so this drop could easily be interpreted as being a simple return to more normal levels. Finally, Japan’s LEIs rose slightly while the CEIs declined a bit. But the overall trend, especially in the LEIs is very positive:
The overall trend of international news continues to be positive. The EU, Canada and Japan are clearly on the economic upswing. Australia is holding, largely thanks to China's insatiable appetite for raw materials. Only the UK is showing signs of problems, but they're self-induced and will probably be contained on the island.