Global Daily – Heating up again

by: Peter de Bruin , Arjen van Dijkhuizen , Georgette Boele

140415-Global-Daily-Insight.pdf ()
  • US retail sales suggest that the economy continued to heat up again at the end of the first quarter,…
  • …which is in line with our view that we will see a sharp snapback in growth in the current quarter
  • The situation in Eastern Ukraine also heats up … but impact on financial markets has faded

US retail sales suggest momentum continues to build

Retail sales rose by 1.1% in March, following an upwardly revised 0.7% increase (originally reported at 0.3%) in February. The outcome, which was stronger than the consensus forecast of 0.9%, marked the sharpest gain in sales since September 2012. This was partly due to a 3.1% jump in car sales, which together with the surge in March’s vehicle sales suggests that durable consumption showed a considerable amount of payback from the adverse winter weather in March. What is more, the part of the report that is used to estimate non-durable consumption in the National Accounts was also strong. Indeed, core retails sales, which exclude cars, gas, and building materials, were up by 0.8% in March, building upon a 0.4% increase the month before. All this suggests that consumers found their way back to the shops again in March following the winter slump earlier in the quarter. Indeed, the March data ranging from the ISM surveys to labour market developments all clearly suggest that while the economy almost grinded to a halt at the beginning of the quarter due to the bad winter weather, it picked up a considerable amount of momentum towards the end, which bodes extremely well for the current quarter. While growth in Q1 is likely to come in at a meagre 1.6%, we would not be surprised to see a sharp snapback in Q2 with growth possibly coming in excess of 4% as the economy continues to benefit from payback from the winter slump and favourable cyclical drivers increasingly come into play.

Tensions rise in Eastern Ukraine

In the past few days, pro-Russia separatists have continued to occupy government buildings in several eastern Ukrainian cities. On Sunday, clashes between government forces and protesters caused casualties on both sides. The Ukrainian authorities on Sunday announced a large-scale ‘anti terrorist operation’. The events have increased the risk of a military confrontation with Moscow. On the other hand, the Ukrainian authorities seem to have once more neglected a deadline submitted to the protesters. Moreover, Turchinov indicated that he is willing to organise a referendum on the way Ukraine is governed, coinciding with the presidential elections on 25 May. All in all, we expect unrest to continue or even escalate in the run-up to, and possibly also the aftermath of, the presidential elections. EU foreign ministers again discussed the Ukrainian crisis on Monday. The ministers have approved EUR 1bn of direct aid to Ukraine, as an element of the total of EUR 11bn committed, to be disbursed after the IMF Board approves the USD 14-18bn loan package. Meanwhile, the EU has warned for an expansion of the blacklist with persons encountering visa bans and asset freezes, pointing to the Geneva talks between Russia, Ukraine, US and EU on Thursday as the right moment for Russia to start de-escalation.


…but impact on financial markets fades

Even though the tensions between Russia and Ukraine are frequently in the headlines, their market impact continues to fade. There are several reasons for this. For starters, the perception of investors is that these tensions will not result in a full-blown military conflict or energy crisis. Therefore, investors have refocused on drivers they can better grasp and forecasts such as monetary policy developments in the US. Currently the 10-Y US yield is been driven more by interest rate expectations concerning the Fed. Even though gold prices have received support from the tensions, the most dominant driver continues to be the direction of the US dollar and interest rate expectations. There is a more mixed behaviour in more local assets. For example Russian CDS spread have widened, while recently the Russian rouble and Russian stock exchange have slightly recovered. Furthermore, the Ukrainian hryvnia has remained under pressure while Ukrainian CDS spreads have narrowed somewhat. The latter from a very high level. Barring a full-blown crisis, we continue to judge that the impact of these tensions on financial markets will ease further going forward.