29 April, 2016
FX News Today
German retail sales unexpectedly dropped 1.1% m/m in March. Expectations had been for a rebound from the initially reported decline in February, but even if last month’s number was revised up to 0.0% m/m from -0.4% m/m, it still means the correction in March was a surprise and disappointment. Retail sales cover only part of overall consumption and the most recent confidence numbers, which show a marked improvement in the willingness to spend suggest consumption will continue to underpin overall economic activity, but the data nevertheless suggest a downside risk to Q1 GDP numbers.
French Q1 GDP came in at 0.5% q/q, up from 0.3% q/q in Q4 last year thanks to a sharp pick up in consumption which expanded 1.2% q/q. It is difficult to say how much of this is due to the Easter effect, with the early timing of the holiday likely to have inflated the consumption number, but also translating into less hours worked. Import growth slowed markedly, while exports contracted -0.2% q/q. Gross fixed capital formation rose 0.9% q/q, a further acceleration from the 0.7% q/q in Q4 last year, which is encouraging. The annual rate still fell back though to 1.3% from 1.4% and while data confirms that the economy continued to expand in the first quarter, confidence indicators already point to a slowdown in the second quarter, so even if the better than expected French number leaves some upside risk for the Eurozone data later on, the backward looking numbers won’t change the ECB policy for now.
The Eurozone and Brexit Risks: Brexit concerns may have receded somewhat as warnings over the consequences for the U.K. are getting louder. However, while the direct economic impact of an exit from the European Union may be bigger for the U.K. than for the EU, the damage such a step could do to confidence not just into the EU, but also the single monetary union, should not be underestimated. Anti-establishment forces are gaining strength as the debate over the costs and benefits of closer cooperation intensifies and a reform-push is needed to keep the project of ever closer cooperation in Europe on track. Ultimately though, this will be easier within the union than from an outsider position.
Main Macro Events Today
Euro Area GDP: Eurozone Q1 GDP releases kick off with France and Spain early in the session, followed by overall Eurozone numbers later on. We expect broadly stable quarterly growth rates of 0.3% q/q in France and 0.7% in Spain, with the latter marginally down from the 0.8% q/q in Q4 last year. Italy and Germany only release numbers later in the month, but the preliminary overall Eurozone rate is also likely to be 0.3% q/q, unchanged from Q4 last year.
Euro Area HICP: We have lowered our forecast for Eurozone April HICP inflation to -0.2% y/y from -0.1% y/y after the weaker than expected German and Spanish numbers. The drop back into negative territory is not really a surprise and was already flagged by Bundesbank and ECB officials ahead of the releases, so that in itself the data won’t change the policy outlook. Officials are still expecting headline rates to pick gradually later in the year, but will keep a close eye on developments in the exchange rate as well as oil prices ahead of the next forecast revisions in June.
Canada GDP: We expect GDP to fall 0.2% in February (median same at -0.2%) after the 0.6% surge in January. The components that underpin the February GDP estimate were mixed, but with a negative bent. We anticipate a 2.5% Q1 GDP performance that will be in the ballpark of the BoC’s 2.8% estimate from the April MPR.
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