- Some deterioration in sentiment
- Eurozone economy to have grown modestly in Q4, keeping downward pressure on inflation
- Chinese demand optimism supports gold
- US retail sales disappoint
Some deterioration in sentiment
On Thursday, sentiment on financial markets deteriorated somewhat, reflected by a widening of the yield spreads between Germany and Italy/Spain, lower German yields, lower equity markets, higher Japanese yen and Swiss franc, lower emerging market currencies and higher gold prices. Moreover, CDS spreads on mainly European financials and sovereign CDS spreads on the eurozone periphery increased. The trigger for this deterioration in sentiment was weaker-than-expected earnings reports from companies in the European financial sector. European banks are setting aside money for possible legal charges and in order to prepare for the changing regulatory environment.
Eurozone GDP growth to have picked up a touch
GDP growth in the eurozone probably was slightly higher in 2013Q4 than in Q3. We expect growth to have picked up from 0.1% to 0.2% qoq, which is in line with our scenario of a moderate recovery. Monthly economic data suggests that private consumption was flat in Q4 after it grew by 0.1% qoq in Q3, and that fixed investment expanded by roughly the same rate as in Q3 (0.5%). Meanwhile, net exports and industrial production probably contributed positively to growth. Looking forward, we think that growth will pick up further in the first quarter of this year. Exports will probably benefit from a strengthening global economy, while domestic demand should continue to grow modestly. Still, growth will probably remain too subdued to result in a recovery of employment growth or significantly reduce the amount of slack that has built up in the economy during recent years. Consequently, economic conditions should continue to bear down on inflation in the coming months.
Chinese demand optimism supports gold
Since the Chinese consumers and investors have returned from their New Year celebrations, the upward momentum in gold prices has increased. The market has confidence that they will buy large amounts of gold again this year after a strong 2013. Gold prices also received support from a weaker US dollar, weaker than expected US economic data and temporary concerns about the US debt ceiling. As a result of all the above-mentioned drivers, the market was able to clear the USD 1,275 per ounce technical resistance level. We judge that the good start of the year for gold, being the best performing precious metal (+7%), will come to end soon, when US economic data start to improve again and the USD and interest rate expectations rise. A crucial factor remains overall investor sentiment, though. This needs to be constructive.
US retail sales disappoint
Retail sales fell by 0.4% in January, which was weaker than the consensus forecast of a 0.1% gain in sales. Although this could be a reflection of the winter weather, there were downward revisions to December (from 0.2% to -0.1%) and November (from 0.4% to 0.3%). Part of the weakness of January´s sales could be explained by falling car sales, but the so called core sales, which exclude cars, gas, and building materials and are most closely related to real consumer spending, fell by 0.3% as well. In conjunction with downward revisions to December (from 0.7% to 0.3%) and November (from 0.2% to -0.1%) this paints a picture of weaker consumer spending than earlier thought. Indeed, the 3mo3m annualised growth rate of core sales fell from 3.9% to 2.0% in January. Overall, the downward revisions to December and November suggest that the second estimate of Q4 GDP growth will come in at around 2.3%, down from the 3.2% originally estimated, while the soft January reading suggests that there are downside risks to our Q1 GDP forecast of 3.5%.