3 Numbers to Watch: SP Retail, IT Conf., US pending home sales
Today’s updates on retail sales for Spain and confidence in Italy’s manufacturing sector will provide the year’s final data points for evaluating macro conditions in the Euro zone. Later, we’ll also see an update on the Pending Home Sales Index for the US.
Spain Retail Sales (08:00 GMT) Is Spain’s economic recovery at risk? The question will be front and centre today with the update on retail sales for November. Recall that the September report was widely hailed as a pivotal event on the news that retail spending rose for the first time in three years on a year-over-year basis. But spending slumped again in October, raising questions about what comes next for Europe’s fourth-largest economy.
The good news is that consumer confidence remains near a two-year high, according to the European Commission (EU). In the November read on sentiment among Spain’s consumers, the confidence indicator for the country was just below September’s level, which reached the highest level since December 2011. Today's release of hard data will provide timely guidance for deciding if the upbeat sentiment is translating into real economic activity.
When it comes to looking for factors that will contribute to Spain’s recovery, economists advise that exports are likely to offer more support compared with domestic consumer spending. Nonetheless, some voices from the country’s retail sector say that the healing process rolls on. “We have seen a change in the trend since August,” Javier Millán-Astray, the director-general of Spain’s association of department stores and retail chains, told the FT last week. “Sales have still been falling, but the drops are much smaller than before. And the truth is that the first weekend of the Christmas season was much better than the year before.”
Italy Manufacturing Business Confidence (09:00 GMT) Italy’s economy is still struggling, but sentiment in the manufacturing sector is rebounding. Broadly defined industrial activity remains sluggish, however, although there are some early signs that we may see better numbers in the near term. If today’s December report on the mood among manufacturers remains firm, we’ll have a bit more support for thinking that the hard data will soon follow in a meaningful way.
In the previous update, the confidence index for Italian manufacturers increased to 98.1 in November. That’s up a bit from the October level. More importantly, November’s increase reflects the highest reading in more than two years. Some mild support for optimism can also be found in the latest GDP data for the third quarter, which revealed that economic activity overall was flat, according to Istat, Italy’s national statistics institute. On the face of it, that doesn’t sound like much, but by Italy’s battered macro standards the Q3 GDP report was a breath of fresh air compared with the previous eight quarters of non-stop decline.
Technically speaking, Italy has emerged from recession, or so the latest GDP report implies. Deciding if that’s a reliable analysis will take time, however, starting with today’s release. For the moment, there’s room for cautious optimism if the cyclically sensitive manufacturing sector is still anticipating better days ahead.
US Pending Home Sales Index (15:00 GMT) The housing recovery has been a critical pillar of support for the economy this year, but rising interest rates will slow the momentum. Some analysts expect the worst and argue that the rebound in housing is history. Maybe, but the data doesn’t support that dark outlook, at least not yet. House prices continue to rise and new residential construction jumped to a five-year high last month, for instance. But there’s no doubt that the higher financing costs have taken some of the wind out of housing’s sails. Existing home sales, after running higher for most of the past three years, have slipped in each of the last three monthly updates — November’s sales were the lowest of the year so far.
Today’s update on pending sales will provide context for assessing the outlook for sales in the New Year. Today’s report tracks the number of home resales currently under contract, which is a proxy for projecting the level of existing sales in the months ahead. As you can see in the chart below, pending sales have been trending lower since peaking in May of this year. With mortgage rates drifting higher, it’s reasonable to assume that pending home sales will remain soft in today’s release. Indeed, last week’s update on the number of mortgage applications tells us to manage expectations down.
“Following the Federal Reserve’s taper announcement, mortgage application volume dropped again last week, with rates increasing and refinance application volume falling to its lowest level since November 2008,” observed an analyst at the Mortgage Bankers Association in a Christmas Eve press release.
But there’s still an economically robust distinction between a housing recovery that’s maturing versus one that’s hit a wall. With the US economy generally posting stronger numbers of late, including a moderately faster rate of growth in the labour market, it’s too early to say that the housing cycle has run its course. The residential property market faces new headwinds in 2014, but the headwinds are part and parcel of a growing economy. As long as interest rates are rising for the right reason — stronger growth — housing will continue to expand, albeit at rates that look soft by the standards of the past couple of years.
This is my final post of the year — after a brief holiday, I’ll return on Monday, January 6. In the meantime, thanks for reading and best wishes for a prosperous 2014!