Position: Long British Pound (FXB)
European retail sales for March registered -1.7% Y/Y versus 1.3% in February. It appears that a late Easter this year (April 24) versus an early Easter last year (April 4) contributed to some of the negative performance with a difficult comparison of +1.7% in March 2010 (see chart below). Expect stronger performance next month. Equally, the austerity measures across the region continue to weigh to the downside on spending and consumer and business confidence, a trend we expect not to veer considerably for the balance of the year.
Below are recently reported MAR retail sales by country, and APR Eurozone confidence figures, for reference.
Spain Retail Sales -7.9% MAR Y/Y vs -4.6 FEB
Portugal Retail Sales -6.6% MAR Y/Y vs -3.6% FEB
Germany Retail Sales -3.5% MAR Y/Y vs 1.5% FEB
Eurozone Business Climate Indicator 1.28 APR vs 1.43 MAR
Eurozone Consumer Confidence -11.6 APR vs -10.6 MAR
Eurozone Economic Confidence 106.2 APR vs 107.3 MAR
Eurozone Industrial Confidence 5.8 APR vs 6.7 MAR
Eurozone Services Confidence 10.4 APR vs 10.8 MAR
Manufacturing and Services PMIs across Europe continue to reveal a mixed outcome. For Manufacturing PMI, we see confirming negative inflections for Italy, Spain, and the UK, economies that are underweight manufacturing versus some peer nations, and laced with the repercussions of austerity programs: slower growth prospects and weak consumer and business confidence as inflation pressures push higher. The corollary remains Germany and France with continued strong Manufacturing results from domestic and global markets (see table below).
Of the countries that released Services PMI today (see chart), we see a clear negative divergence from Germany month-over-month, a play off mean reversion from the heavy resistance line of 60. Notably, France powered ahead, with a final reading of 62.9 in April versus 60.4 in March. In particular, we expect Services to hold up better (and higher) in Germany and France for the balance of the year.
Unimpressive UK Data (continued)
Below are recent data points out of the UK. While we continue to like the GBP-USD currency trade via the etf FXB due to the BoE’s more hawkish stance on inflation (rate decision announcement this Thursday) as US policy continues to debauch the greenback, economic fundamentals in the UK remain weak. The housing and construction data below speak to this point. While mortgage approvals ticked up month-over-month, they’re up marginally and well off historical levels.
UK Nationwide House Prices -1.3% APR Y/Y vs 0.1% MAR
UK Hometrack Housing Survey -3.3% APR Y/Y vs -3.2% MAR
UK Mortgage Approvals 47.6K MAR vs 46.7K FEB
UK PMI Construction 53.3 APR vs 56.4 MAR
Below is one of our familiar charts of 10YR government bond yields for the PIIGS. While yields have come in over recent days for Greece, Ireland, and Portugal, including due to the well-telegraphed bailout of Portugal announced last night (an agreement for a €78 Billion EU-led bailout package over 3 years to help reduce Portugal's budget deficit from 9.1% in 2010 to 3.0% in 2013) we continue to maintain that these short-term band-aids are no fix for the longer-term fiscal imbalances that these peripheral countries must work through. Remember that as the denominator (GDP) is reduced in the deficit as a % of GDP equation, the deficit will rise. We expect austerity to choke off growth, and especially for a country like Portugal that has averaged only 1% annual GDP over the last decade (vs Greece at 2.6%).