Q2 BOUNCE WATCH
Sales surged 1.2% in May, and a flat April was revised higher to show 0.2% growth. The upturn pushes sales 1.7% higher so far in the second quarter. That compares with a 1.0% decline in the first quarter.
Over the latest three months, sales are 1.5% higher than the prior three months, which is the best performance since June of last year. (…)
The official data also showed core sales rising for a third month after declining in the first two months of the year. The 0.5% increase in May follows a 0.3% rise in April and lifts core sales – a useful guide to GDP trends – 1.0% higher than the first quarter.
Upward revisions to March core sales data also now means core sales rose 0.3% in the first three months of the year, suggesting GDP could be revised higher from its current estimate (which points to a 0.7% annualised decline).
US core sales and GDP final sales
Not only have Markit’s PMI data shown the economy to have fared better in the first quarter than the downturn signalled by the latest GDP data, but also point to GDP rising by a solid 2-3% in the second quarter alongside buoyant employment growth. The PMI’s Employment Index hit a post-recession high in May, correctly anticipating the upturn in non-farm payroll growth.
The steady corroboration of the buoyant survey data from the recent flow of official statistics builds the case for the Fed to start hiking interest rates, with September looking the most likely date.
The core figures of ex-auto sales and the retail control group both beat expectations and saw upward revisions to earlier months. This implies that the first quarter didn’t end quite as weakly as previously believed and that pent-up consumer demand is finally being released. (…)
Retail control, which is a direct input into GDP, rose 0.7 percent in May following an upward revision to April (0.1 percent vs. flat as previously reported). This bodes well for second-quarter GDP:
on an annualized rate, the growth in retail sales over the second quarter relative to the first stands at 3.6 percent versus 0.9 percent prior to this release. In addition, because the March control group was revised higher as well (to 0.9 percent vs. 0.5 percent), the prior quarter’s annualized growth rate was revised upward to flat from minus 0.6 percent. (…)
The latest retail sales data show that the U.S. consumer is back. The trend may be even more bullish if the effects of deflation are stripped down and spending on services is factored in.
The retail gain was broad-based, with 11 of 13 major categories rising, but it doesn’t show the full story. Retail sales are overwhelmingly goods-related. Other than restaurants and bars, there are very few services represented.
This is a problem for two reasons: First, Americans consume more services (65.8 percent of the total) than goods (34.2 percent). Second, there is more of a deflationary trend in goods than services.
Goods prices fell 3.1 percent in the 12 months to April, while services inflation rose by 1.7 percent. So while the Street focuses on retail sales as a proxy for consumer spending, it is not the best measure.
The other issue is that retail sales data are not adjusted for inflation, making interpretation of trends difficult. (…)
- The WSJ:
The forecasting firm Macroeconomic Advisers now projects the first-quarter figure will be revised to a flat reading and estimates a 2.5% advance in gross domestic product for the second quarter. That forecast would put first-half growth at the same pace as last year. PNC projects the economy to grow at just above a 3% pace in the second quarter. J.P. Morgan Chase pegs the second-quarter rate at 2%.
For the week ended Thursday, the average rate of a 30-year, fixed-rate mortgage rose to 4.04% from 3.87% the previous week to the highest level since last October, according to mortgage-finance company Freddie Mac.
The increase followed a Treasury-market selloff over the past week that drove yields higher on most kinds of bonds. Bond yields rise as prices fall.
At the end of the first quarter, 15.4% of homeowners with a mortgage—or about 7.9 million—had mortgage balances that surpassed their homes’ value, according to real-estate information company Zillow Group Inc., down from 16.9% in the fourth quarter of last year.
But 4 million of the underwater borrowers owed at least 20% more than their homes were worth, Zillow said, leaving them little reason for cheer even as the housing market heats up around them. (…)
More than a quarter of owners with a mortgage on the least-valuable third of homes were underwater, Zillow said, compared with 8% in the most valuable third of homes. Housing markets with the highest levels of negative equity included Atlanta, Chicago and Las Vegas. (…)
On the other hand, some of the country’s hottest housing markets, including San Jose, Calif., Denver and San Francisco all had negative equity rates below 7%. (Chart from Bloomberg)
The euro declined against the dollar as German Chancellor Angela Merkel said the common currency’s strength was making reforms hard in the region’s most-indebted nations, the latest official to comment on exchange rates this week. (…)
A too-strong euro makes it harder ‘‘for countries like Portugal, Spain, Ireland, but especially Spain and Portugal,’’ to harvest the fruits of their economic reforms, especially in terms of exports, Merkel said in a speech at a family-enterprise conference in Berlin. (…)
Emerging Markets Suffer Largest Outflow Since 2008 Global investors yanked $9.3 billion from stocks in developing countries over one week, the most since the 2008 financial crisis.
Asia has been particularly vulnerable with $7.9 billion pulled out of the region’s equity markets, the most in almost 15 years, according to data provider EPFR Global. (…)
“Currency is a major culprit,” Goldman Sachs analysts said in a note to clients this week. The U.S. bank forecasts another 4% drop in emerging-market currencies against the U.S. dollar over the next year.
Massive outflows from China have contributed to the selling in Asia and come in the wake of increased volatility in the domestic market. The Shanghai benchmark lost 6.5% in a single session on May 28, sparking worries about a potential selloff amid a clampdown on margin trading.
The Shanghai Composite Index is still up 12% month to date, bid up by local investors, compared with Hong Kong’s Hang Seng, which is down 1.4%. Broadly, the MSCI Emerging Markets Index is down 2.7% this month. Stocks in Indonesia and India have suffered most this month in Asia, with their benchmarks each down more than 5%.