EU uncertainty took the euro 1.0% lower against the dollar this morning, as a rumor surfaced that France considered abandoning the EU's monetary union without German backing for Greek aid. That news overshadowed positive data on retail sales, business inventories and industrial production found below.
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Well, it looks like our last Topic of Debate entitled "Is the euro failing?" proved prescient. A rumor surfaced this morning that the President of France, Nicolas Sarkozy, considered a withdrawal from the European monetary union if Germany failed to support aid for Greece and the euro currency. You know, it is easy to enter into marriage when the sun is shining, and just as easy for many to exit it when the rain begins. There were several positive economic data points published today and covered below that were unfortunately, though rightly outweighed by market concern regarding Europe.
Retail Sales Report
Retail sales were expected to prove soft in April, given the fall of Easter early in the month. Easter related sales shifted to March this year, driving a 2.1% (revised from 1.9%) increase in the month. Thus, economists surveyed by Bloomberg expected April's sales to inch forward by just 0.2%. April's data surprised a bit, rising 0.4%, and excluding autos, still improving by the same rate (versus forecasted +0.5%).
The data was generally viewed positively by market participants this morning, especially given the combined sales data of March and April. Economists like to bunch the two together in order to get a clearer picture net of Easter. The two months' combined sales gained 7.3% against the prior year's dire data.
Closer inspection of the data exposes pockets of strength. Gasoline Station sales improved 30.1%; changes in volatile gas prices often drive wild swings in this component. A 6.9% increase in Building Material & Garden Equipment and Supplies Dealers might seem like a seasonal beneficiary, but the 12.1% year-to-year gain says something else. It seems home improvement and maybe even construction is seeing increased activity, something our real estate investors should find enthusing. One caveat: Furniture and Home Furnishing Stores saw a 1.2% decrease in sales in April, but we would expect the segment to lag building materials anyway. Wall Street Greek Real Estate Columnist Michael Douville is looking for population growth, inventory reduction and construction inactivity to bring about a housing shortage eventually. That prospect seems to us more than a support for housing, but a strong pull. My only concern is that tighter, more appropriate lending rules are currently eating into US home ownership. Unemployment also is a core hurdle for real estate ownership rates. Look for two new articles from Mr. Douville in the days ahead.
Retail Trade generally gained, rising 0.5%. However, Department Stores saw a 1.5% decrease (we advise considering Easter here). Clothing and Accessories fell 1.0%, and Sporting Goods, Hobby, Book and Music Stores fell 1.9%. Nonstore Retailers (Web and Catalog) saw a 0.2% increase, but remember that this segment continues to take market share from the physical store base. This is why every chain is producing and enhancing its online presence (benefits companies like Nasdaq: GSIC).
Reuters/University of Michigan produced its latest Consumer Sentiment Index this morning. Richard Curtin, the Director of Surveys, said that consumers responded negatively to a cut back in retailer discounts in May. The index marked 73.3, short of Reuters' consensus forecast of 73.5 and Bloomberg's consensus for 73.8. Still, May sentiment improved over April's 72.2 reading, and also enjoyed recovery from a dip in confidence seen at the start of the year.
Still, consumers are growing worried about the value of currency, as inflation expectations increased. Surely, European troubles have folks thinking about buying gold, something we recommended long ago. The survey showed 1-year inflation expectations up, as the related index increased to 3.1% in May, from 2.9% in April. The long-term inflation outlook also rose to 2.9% from 2.7% (5 to 10 year outlook).
Consumers are clearly unsure now of the outlook, and while economic data shows modest improvement in some sectors, it continues to note weak labor market conditions and ongoing credit concerns. Housing continues to languish, though pricing has stabilized, at least for now. Global concerns, increased geopolitical risk (tied to Iran especially), and disenchantment with government have consumers very worried, and that's not good for the shopping mood.
While so much continues to seem wrong with the global economy, certain economic statistics show a decent trend of improvement. Industrial Production and Capacity Utilization are two of those data points. Industrial Production gained 0.8% in April, reported today. This continued trend and also marked a better result than economists were looking for (+0.6%). A broad-based increase in manufacturing activity drove the gain, as manufacturing production improved 1.0% in April - as it stood 6.0% above last year's level of activity.
Capacity Utilization continued to fill, and at some point this will serve as fuel for labor demand. Utilization gained 0.6 of a percentage point in April, which is significant, rising to 73.7%; that compared against the revised 73.1% mark reached in March. Manufacturing hiring has already been affected, as jobs have been increasing in the sector. To get an idea though of how far we've fallen, compare April's capacity utilization to the average from 1972 to 2009 (80.6%).
Business Inventories were reported today for the month of March. The data again proved very positive, as Business Sales rose 2.3% in March, versus a smaller 0.4% increase in inventories. That took the inventory-to-sales ratio to 1.24, down from 1.46 in March of 2009.
As inventories are eaten away, businesses will be forced to invest in production and in renewed building of inventory levels toward demand. Again this represents a strong indicator for future manufacturers' and distributors' employment levels and capital investments. What it says is that end demand is improving, therefore overall economic recovery is on track.
Beware of building too much enthusiasm based on the proof of economic growth seen above, because it does not ensure its continuation. Europe is disintegrating and talk of Chinese asset bubbles has the Chinese equity market seriously reconsidering capital support. Sovereign risk is rising, and other geopolitical risks like Iran overhang (of course they always do). I believe the market is acting wisely here in hedging its bets a bit.
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