Euro area data spurs on the Euro

Euro area data spurs on the Euro
Equities performed well yesterday making gains on foot of surprisingly strong economic data from the Euro area and in spite of poor US retail sales figures. European equities gained strongly in the morning before losing out a little in the afternoon due to the retail sales figures. US indices did the opposite, overcoming early morning losses to end the day in the green.
In Europe, the German and French economies, unexpectedly, showed expansions in Q2 ending their recessions. Both countries indicated Q-on-Q growth of 0.3%, when small contractions were expected. As a result, Euro Area GDP for Q2 also beat expectations showing just a small contraction of just 0.1% Q-on-Q, a huge improvement on the 2.5% contraction recorded in Q1. The Euro area economy may be stabilising ahead of schedule. At the last ECB press conference, Jean Claude Trichet said that the ECB did not expect a return to growth until 2010 but said he had to wait for the ECB staff forecasts in September to give an updated outlook. We can now expect these forecasts to be revised upwards from the last set but the recovery will still be slow and protracted. The Euro gained on the dollar after this data getting up to over $1.43 several times. EURUSD has been in $1.40 to $1.44 range of over the past four weeks with the Euro breaking out to the topside briefly last week. The continued rally in equities is strengthening the Euro but there is now strong support at either end of the range. The annual rate of Euro area HICP inflation in July was slightly lower then initially estimated. The annual rate of inflation was -0.7% in July while the initial estimate was -0.6%.
On the flipside, US retail sales for July under whelmed. The market had been expecting a month-on-month increase of about 0.8%, partly due to the impact of the “cash for clunkers” scheme which was thought to have boosted auto sales. In fact, auto sales did increase in the month (+2.4%) but virtually all other sectors failed to make gains. Retail sales fell by 0.1% in July; excluding auto sales the fall was greater at 0.6%. The FOMC said that they saw signs of household spending stabilising on Wednesday which makes this data all the more disappointing. The US consumer remains entrenched and it’s hard to see any vast improvement until the economy returns to growth. Even then, consumer spending will be dampened by higher unemployment and an increased savings ratio. Consumers will remain very cautious – despite falling prices and low interest rates - until we see a return to jobs growth which is likely not to be until 2011.