Global Daily – Recovery story confirmed

by: Aline Schuiling , Peter de Bruin

140728-Global-Daily-Insight - Recovery story confirmed.pdf ()
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  • This week’s data should confirm US economic strength…
  • …with GDP likely to have bounced in Q2, and payrolls remaining buoyant in July
  • Fed should continue to taper, and sound more positive on economy
  • Meanwhile, the eurozone looks to have started Q3 on a good note

US Q2 GDP data should confirm the healthy stance of the economy…

This week will be one of the most important weeks in terms of economic developments for the US economy. After the economy unexpectedly shrank by 2.9% in the first quarter of the year, we should get more clarity about the health of the US economy. Fortunately, all signs are suggesting that Q1’s slide in economic activity was an aberration. Indeed, according to our projections, the economy should have rebounded by a sturdy 3.5% in the second quarter. Monthly data are indicating that consumer spending growth accelerated and that there was a rebound in investment in equipment and in residential investment, after these two components declined in the first quarter on the back of dire winter weather. At the same time, inventories should have contributed positively to growth after the first quarter inventory correction.

…while we are looking for a 250K gain in nonfarm payrolls

Furthermore, we also are continuing to see encouraging developments in the labour market. Granted, the sharp drop in initial jobless claims to 284K from 303K in the week ending July 18 was probably related to the annual auto shut down due to car companies retooling their machinery, but the trend in initial jobless claims has unmistakably been downwards over the past weeks. Indeed, between June’s and July’s survey weeks for the official nonfarm payroll figures, we have seen an improvement in both the weekly claims data and the four week-averages, suggesting that the separation side of the labour market has continued to improve. As such, we are forecasting a 250K gain in nonfarm payrolls in July, and expect to see another one tenth decline in the unemployment rate to 6.0%.

Fed set to continue tapering, statement more positive

Against this background, the FOMC should decide to taper its QE-programmes by another $10bn to $25bn (made up of $15bn of Treasuries and $10bn of MBS Purchases) on 30 July. While the meeting will not be concluded by a press conference, nor will there be an update of FOMC members’ forecasts, we do think that the tone of the statement will be slightly more upbeat compared to June’s statement.

Eurozone starts Q3 on a strong note, sentiment in Germany falls

The eurozone composite PMI was stronger than expected in July. It rose to 54.0 from 52.8 in June, erasing the declines that were recorded in May and June and returning to the level of April. At the current level, it is consistent with GDP growth of around 0.4-0.5% qoq at the start of Q3, which seems to be a slight pick-up compared to Q2. Recent hard economic data, such as industrial production and retail sales in May (-1.1% mom and 0% mom, respectively), suggests the economy lost some momentum during the course of Q2, but that GDP still expanded at a rate of around 0.3% qoq (preliminary estimate to be published on 14 August). Overall, the eurozone economy seems to have remained on a path of moderate recovery. Meanwhile, business sentiment in Germany declined in July, probably largely due to rising geopolitical tensions related to Russia-Ukraine. The Ifo business climate index fell to 108.0, down from 109.7 in June. The expectations component, which is the part of the survey that moves closest in line with GDP growth, declined to 103.4 from 104.8. Still, it has remained well above its long-term average value of close to 100, suggesting that the German economy will grow robustly in Q3, following a marked slowdown in growth in Q2, largely as payback for the weather-related surge in growth in the first quarter. The picture of continued robust economic growth in Germany was also painted by Germany’s composite PMI for July, which rose to 55.9, up from 54.0 in June.