Global Daily – A cushion during the freeze

by: Peter de Bruin , Georgette Boele

Global-Daily-Insight-27-February-2014.pdf ()
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  • The winter weather distortions in the US should not have a dramatic impact on the spending…
  • …as gas and electricity consumption will partially offset drops in goods consumption
  • Contagion from the events in Ukraine on other EM currencies have been limited

US services consumption should provide a cushion for weather related weakness in goods consumption,…

We have been continuing to assess the implications of the unseasonably adverse winter weather on the US economy. At face value, January’s dire retail sales report point to sluggish consumption growth, at best. But a couple of points are worth making. For a start, the retail sales data only tell us something about non-durable consumption, which makes up just 22% of total consumption. Granted, judging by the latest vehicle sales data, durable consumption has also been impacted by the winter weather, but we think that services consumption may actually surprise a bit to the upside. That is because typically once the weather deteriorates, households are likely to spend more on gas and electricity consumption to heat up their homes. Indeed, we looked at the spending behaviour during unseasonably cold spells of winter weather in the past and find that firm gains in spending on utility services tend to prevent total consumption from deteriorating too much.

…while pent up demand should support consumption once the weather normalises

Furthermore, given the background of sound consumer fundamentals, we are likely to see significant payback for the weak durable and non-durable consumer spending figures once the weather normalises again. With a bit of luck this could already happen in March. This should underpin spending at the end of the first quarter or, if it takes longer, at the beginning of the second quarter. We have not had any data on investment yet, and are eagerly awaiting tomorrow’s durable goods report to see whether and to what extent investment has been affected by the dire weather. But here too, the rationale suggests that any weather related weakness should be temporary in nature and bound for significant payback later in the quarter or in the second quarter. All in all, we continue to judge that the weather related weakness will only temporarily distort activity and that while there is a risk that Q1 GDP may disappoint to the downside, this then most likely will be followed by Q2 GDP surprising on the upside.

Ukraine contagion limited to the region

The political situation in Ukraine has continued to grab the headlines. The Ukrainian Hryvnia has lost almost 14% this week and is down for the year by around 21%. The central bank said it ended support for the currency amid dwindling international reserves and customer withdrawals from bank deposits. Ukraine will most likely default without external support. Support from Russia has become more uncertain, while support from Europe will take time. The rating agencies are closely monitoring the situation. The problems in Ukraine have undermined the Russian rouble (RUB), which is down by around 9% for the year versus the USD. On Wednesday, sentiment deteriorated even further. The market is concerned about a wider geo-political conflict. The trigger for this concern was the news that President Putin had ordered test of the readiness of Russia’s military. The market was quick to interpret this as Russia preparing for a potential military conflict in the area. This concern has manifested itself in a 8% increase in Russian sovereign CDS spread since Tuesday and a 1% drop in the RUB. Up to now the contagion only has been regional (Ukraine hryvnia, Russian rouble, Kazakhstan tenge) and other emerging market currencies have barely been influenced by these events. Going forward, we do not expect a contagion beyond the region. Furthermore, the Russian rouble is a managed currency and authorities will likely step in if weakness goes ‘too far’.