The Week Ahead: 27th May 2014

27th May 2014

Thursday: US second GDP estimate

No sooner was the dire US first quarter reading of 0.1 per cent annualised growth released, than market rumours started that growth would be revised higher in later releases. Most agreed with the Fed’s assertion that meagre growth was weather-related and that March would see a rebound.

Subsequent personal spending and retail sales data has shown that the GDP number had underestimated consumption’s contribution to first quarter output, albeit slightly. The sector was the sole positive contributor to output at the start of the year and now it appears consumers had a bigger impact in offsetting declines across exports, inventory, investment and government spending. Early hopes for an upward revision in GDP were soon reversed with downgrades in construction spending and soft factory orders and, while inventory growth was upgraded for February, overall it fell short of provisional estimates already pencilled in by the Department of Commerce.

The initial estimate of 0.1 per cent annualised first quarter growth was actually an optimistic view by the US Commerce Department. Now policymakers face the reality that growth could be revised into negative figures. The second GDP estimate could reveal that output contracted in the first three months of the year, between -0.3 and -0.2 per cent annualised. While only a slight fall, it is significant as this is the first time we have seen negative growth in the US since the dark days of 2008-2009.

 

Thursday: Japan’s April Sales Tax Hike

There is a host of market speculators betting that Japan’s April Sales Tax Hike will push the economy back into decline, extinguishing domestic demand and reversing all recent economic headway, in a rehash of the 1997 experience.

Futures positioning data suggest the market is sitting on substantial yen short positions in the belief that a sharp reversal in domestic demand will force the Bank of Japan to ramp up its quantitative easing policy. April Retail Sales will be the first indication of how these short yen bets have fared as the first broad measure of domestic demand in the aftermath of a 3 per cent sales tax hike.

A strong Japanese Retail Sales number could see a substantial short squeeze and a shift higher in the yen. Preliminary indicators are, as expected, showing a fall off in consumption, but only from the elevated sales level seen in March when consumers front-ran the tax increase. A slump in vehicle, department store and convenience store sales were surprisingly light, not entirely reversing March’s sharp rise.

Firming domestic demand is evident beneath the skewed data and a robust 3.4 per cent annual import growth in April, following the 18.1 per cent spike in March, suggests an end to the anaemic Japanese consumer that characterised the last decade.

Speculators will be feeling tight around the collar ahead of the Retail Sales number and the Bank of Japan’s assertion that private demand remains on a firm trend suggests further easing isn’t looking so inevitable.

 

May 22-25: European elections

There is some irony in the fact that just as the euro crisis comes to an end and economic reforms are paying off in the form of improving employment in key countries, the upcoming European elections stand to see a substantial, collective anti-EU vote.

Anti-EU parties are expected to take up to 32 per cent of the seats in protest votes against austerity and labour mobility. The biggest support for anti-EU parties is expected to come via the UK’s UKIP party, France’s National Front and Greece’s Syriza party. Under the new divide in the European parliament, the default pro-EU parties will still account for at least 68 per cent of the seats and in any parliament, national or continental, this is a substantial majority that have more than enough support to get the necessary work done.

The European elections will have little impact at the European level but they risk reverberating at the national level and making a dangerous political statement. This risk is most elevated for Greece where the junior coalition party has threatened to withdraw from government if the party does badly at both municipal and the European elections. Considering the current coalition with New Democracy’s wafer thin majority, this would lead to the collapse of the government, snap elections and the prospect of Syriza, and its apparently inherent aim for Grexit, taking power.

The UK’s UKIP party is expected to be the outperformer of anti-EU parties at the 22-25 May elections. The result wouldn’t jeopardise the UK coalition but it makes a strong statement at an international level that the UK is pulling away from Europe. This has implications for the Scottish independence vote, with Scotland attempting to pull away from England towards the EU, and a potential UK referendum on EU membership in 2015.