Article / 05 July 2016 at 5:01 GMT

3 Numbers: Germans power Eurozone retail revival

editor/analyst /
United States
  • Eurozone retail spending in expected to rise for the first time since February
  • US factory orders headed for a fall in May after rising in previous two months
  • Will the benchmark 10-year Treasury yield sink to a new record low this week?
  • Brexit blowback has pushed back expectations for a Fed hike, perhaps into 2017

By James Picerno

Europe’s retail sector is in focus today via the May report on consumer spending. Later, US factory orders are the main macro event as markets reopen in America after Monday’s holiday for Independence Day.

A key market event for the first day of US trading will be how the 10-year Treasury yield moves after touching an all-time low last week.

 There are hopes for a revival in retail sales in Europe, but lingering effects of the Brexit shock could weigh on data in coming months. Photo: iStock

Eurozone: Retail Sales (0900 GMT) Survey data suggests that the decelerating trend for retail spending in Europe will see some relief in today’s update on the hard numbers for May.

Last month, Markit reported that its Eurozone Retail PMI rebounded to 50.6, the first rise above the neutral 50 market in three months and the highest reading since February.

The revival was led by Germany, however, raising questions about the strength and breadth of the improvement. The profile for France was modestly brighter, but Italy’s numbers remained subdued.

“Akin to their Italian counterparts, French retailers reported job losses and the scaling back of spending on goods for resale as operating margins remained under pressure,” said the Markit economist who oversees the Eurozone survey data for retail.

Softer retail spending isn’t encouraging, of course, but for the moment it’s not obvious that a cautious consumer is a clear and present danger to the broad trend.

Last Friday’s weekly GDP estimate for the second quarter via hinted at a relatively stable albeit slow increase of 0.37%. That’s still well below the 0.6% gain in Q1, but the Q2 nowcasts have been rebounding in recent weeks.

Economic growth remains sluggish, but the slightly firmer Q2 GDP estimates imply that the trend isn’t deteriorating further.

That’s also the outlook among economists. In fact,’s consensus forecast sees a rebound for retail spending in May: a 0.4% rise against no change in the previous month. The rise is on track to lift the year-on-year trend to 1.7% - the first improvement in the annual comparison in three months.  

Even if the report is upbeat, there’s still the mystery of how the economic data will fare once the full effect of the Brexit shock shows up in the data in the months ahead.

Nonetheless, a firmer report will at least hint at the possibility that the consumer sector had a tail wind going into what could be a turbulent second half for 2016.

US: Factory Orders (1400 GMT) Orders at US factories have been firming up lately. The back-to-back monthly increases in March and April delivered the first run of two straight gains in nearly two years.

Much of April’s gain was led by a 65% surge in the volatile non-defence aircraft and parts group. But new orders still increased a moderate 0.5% in April after excluding transport.

Is this a sign that manufacturing is finally emerging from a lengthy period of weak to negative comparisons? Economists have their doubts.’s consensus forecast sees orders slipping back into the red by 1% for the monthly change in May. If so, the year-on-year trend will remain negative, albeit at a relatively modest 1% slide.

The outlook for June, however, offers the potential for stronger data, or so last week’s flash numbers for the US Manufacturing PMI suggest.

The headline index ticked up to a three-month high for last month’s preliminary estimate, although “producers are struggling in the face of the strong dollar, the energy sector decline and presidential election jitters,” said Markit’s chief economist.

The outlook for manufacturing, in short, remains challenged and it’s unlikely that today’s update on factory orders is going to offer an alternative forecast.

US: 10-Year Treasury Yield How low can it go? Lower than most analysts expected before the Brexit vote reordered the global appetite for the safe haven of the US dollar and Treasuries.

At one point last week, the bid yield on the benchmark 10-year Treasury note dipped to a new all-time low of 1.385 percent, according to The Wall Street Journal.

By the end of last Friday’s trading, the yield had rebounded to 1.446%, but traders are bracing for the possibility that another push into record territory on the downside may be near.

Despite the latest leg down, Treasuries remain attractive in comparison to yields in Europe and Japan, which implies that the buying may roll on, which will push US yields even lower.

Downward momentum on rates will also find support in expectations that global central banks are poised to roll out more monetary easing in the wake of heightened economic concerns in the post-Brexit world.

Indeed, economists are projecting that the UK may slip into a recession later this year. In addition, there could be blowback for Europe, which was already struggling with a downshift in growth projections for the second quarter even before the Brexit vote.

The US economy may be stronger, but the macro outlook has been clouded recently in the wake of the dramatic slowdown in the employment growth in May.

But for the moment, the US equity market likes the prospects that interest rates will remain lower for longer. Brexit blowback has pushed back expectations for a rate hike, perhaps into next year.

It’s going to be tough to argue otherwise if the 10-year yield continues to slide.

Source: US Treasury

-- Edited by Adam Courtenay

James Picerno is a macro analyst/editor at Follow James or post your comment below to engage with Saxo Bank's social trading platform.



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