The Week In Hindsight, 18 July 2014

US economic data for the week continued to paint a murky picture of underlying economic performance as disappointing retail sales data preceded a surprise drop in UoM Consumer Confidence.

The week also saw Janet Yellen adopt a cautious tone in relation to the recovery. The Chair of the Federal Reserve stated that although medium term expectations remain positive and well founded, some economic barometers had returned less than appetising figures over the course of the year and that policy makers would watch closely for signs of a broader underlying deficiency.

In detail, US retail sales missed estimates for the previous month when the Core measurement, while below forecast, held steady with its May reading. This was as the broader retail sales measure (inc autos) fell from 0.5% MoM to just 0.2%, against forecasts for a moderate increase to 0.6%.

In addition to poorer than expected sales figures, the issuance of building permits and new housing starts also slowed during the month of June. Housing activity has been a persistent laggard, in terms of economic performance at the sector level, since summer 2013 when mortgage rates rose sharply in response to the FOMC’s announcement that it would soon consider tapering off its asset purchase program.

On a more positive note, weekly first time unemployment claims fell to 302,000, down from 305,000 the previous week. This compares well with the official forecast for a weekly print of 310,000 and underlines the continued improvement in the labour market. UoM Consumer Confidence fell from 82.5, down to 81.3 during the months which, according to Capital Economics, was as a result of higher gasoline prices.

Our takeaway from the week’s datas is that although the US economy continues to heal, the recovery is remains tentative. While forecasts continue to suggest a return to trend level growth in Q2, following the weather induced contraction in Q1; there are risks to this scenario.

Most notably, recent actions in Ukraine (airline) threaten to rapidly escalate the preexisting crisis, with co-ordinated high impact sanctions upon Russia now a genuine likelihood. Such sanctions would be likely to attack the nation’s energy industry, given its dominance over the economy.

Should the above scenario become a reality then an adverse impact upon European economies (Inc UK) would be difficult to avoid. The most probable effect would be in the form of higher (energy induced) inflation, which could have a knock on effect upon confidence, investment and general economic activity.

Further implications of this scenario, if protracted over time, could include lower growth figures for 2014 and a prolonged period uncertainty and stagnation.

US indices closed higher for the week on better than expected results updates from some of North America’s heavyweights, while investors betting on lower for longer following Janet Yellen’s testimony and negative housing data may also have been a factor.

The next major events scheduled in the calendar for the US economy are CPI inflation numbers, which are followed by more housing data and core durable goods orders on the Friday.

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