UK Retail, US Jobless Claims And Home Sales: December 20, 2012

The November read on Britain's retail sales is on tap for today, followed by an update on jobless claims and existing home sales in the US.

UK Retail Sales (09:30 GMT)
A few months ago, retail sales appeared to be in recovery mode. Some analysts reasoned that inflation's stable/slowing pace was a key source of support for higher consumption. The outlook looked even brighter when the news hit that Q3 GDP popped 1.0 percent, which marked the end of the UK's latest recession. But optimism faded with October's sales report: retail volumes slumped a surprisingly steep 0.8 percent.

One theory making the rounds is that the renewed jump in inflation is the culprit. Perhaps, although by that standard retail sales for November may perk up in today's report. The consumer price index for Britain rose a relatively mild 0.2 percent last month, a substantial slowdown from October's 0.5 percent pace.

One month may not mean much, of course, although the annual inflation rate remains relatively elevated at 2.7 percent through November - unchanged from the previous month and still well above the Bank of England's 2.0 percent target. Nonetheless, few analysts expect that retail sales will slide again in the November read, although no one's particularly upbeat either. “Consumers’ spending power is being tightly squeezed in the run-up to Christmas,” London-based economist Samuel Tombs tells The Telegraph. “Looking ahead, inflation looks set to hover between 2.5 and 3 percent for the best part of the next year as further increases in utility and food prices kick in.”

It is worth noting that GBP/USD recently bottomed at around 1.58 in November, at roughly the time of the release of the gloomy October retail sales numbers. Fast forward several weeks and GBP/USD broke above 1.63 this week for the first time in months. Given GBP/USD's recent upside momentum lately, even a flat number in today's retail sales report may inspire the bulls on the theory that anything that's an improvement (or a less punishing number) versus October is a reason to buy.

US Jobless Claims (13:30 GMT)
New filings for unemployment benefits have fallen in each of the past four weeks, a drop that all but confirms that the dramatic increase in early November was a temporary distortion linked to Hurricane Sandy. Last week's retreat was particularly encouraging for the economic outlook: claims fell to a seasonally adjusted 343,000, or just above a five-year low.

The streak will probably end for a bit with today's update. That doesn't mean that the labour market is headed for trouble, or that claims will not zig-zag lower in the weeks and months ahead. But the slow-growth economy of the moment is not strong enough to push claims lower week after week.

The consensus forecast sees a modest bit of backtracking upward to around 360,000 for today's release. That is in line with my econometric models. Assuming such a rise, the market won't make a fuss. Weekly claims in the 360,000 range, after all, is more or less the level before Sandy brought havoc to the economy in the Northeast US.

In other words, the sluggish labor market is back to where it was in October: muddling along and providing some forward momentum to keep the economy growing at a modest pace. Today's claims report isn't likely to change that trend.

US Existing Home Sales (15:00 GMT)
Economists expect that existing home sales for November will rise, matching a two-and-a-half-year high. It is clear that the housing market is recovering and today's report will probably strengthen the narrative. A combination of demography and demand are pushing sales higher.

Indeed, household formation continues to trend northward, as it has for several years after the sinking in the 2006-2009 housing crisis. It has taken a few years, but the fundamental realities of housing are finally starting to reverse the excess supply and depressed pricing that has plagued the market in the recent past.

"Rising home prices have already resulted in USD 760 billion growth in home equity during the past year," the chief economist of the National Association of Realtors noted in last month's update of existing home sales. "Given that each percentage point of price appreciation translates into an additional USD 190 billion in home equity, we could see close to a USD 1 trillion gain next year."

It does not hurt that the Federal Reserve continues to purchase bonds to keep mortgage rates low. It all adds up to bullish expectations for today's report. That is good for real estate, of course, and it is good for the economy. The wealth effect tied to housing, as one economist reminds, "can be quite powerful."