Week End Blog – US growth sluggish as S&P hits new high

No news from the Eurogroup ‘get-together’ this week, so I can deal with Greece later. US retail sales continue to disappoint. The headline number for April, published on Wednesday, revealed that retail sales did not grow at all last month. From a year ago, retail sales increased less than 1.0%. We have to go back to 2009 to find numbers that are worse. Whatever happened to the massive gasoline windfall?

[tweet https://twitter.com/jsblokland/status/598472144008454145 width=’500′]

The retail sales were another ‘miss’ that raises doubts about the economic recovery going forward. The GDP growth forecast from the Atlanta Fed GDPNow model, or ‘nowcast’ as they like to call it, was lowered to just 0.7%. And that’s annualized. If this is a temporary slowdown, it sure does take quite some time to get that confirmed.

[tweet https://twitter.com/jsblokland/status/598952665947742208 width=’500′]

Not that any of that matters for US equities, though. This week the S&P 500 index managed to reach another all-time high. Earnings data showing that profits and sales are not completely wiped out by a stronger dollar made investors happy.

[tweet https://twitter.com/jsblokland/status/598954712138932226 width=’500′]

Concerning the dollar, the fact that the greenback is depreciating also positively adds to investor mood. After a massive rally up to March, the trade-weighted US dollar has come down roughly 6%, giving (export-related) companies a break.

[tweet https://twitter.com/jsblokland/status/598445875862601728 width=’500′]

Moving over to the Eurozone, where overall GDP growth was in line with expectations. Growth equaled +0.4% for Q1 and 1.0% YoY. Differences between countries are significant, though. Compared to a year ago Italy’s economy did not grow at all, while Spanish GDP increased by an impressive 2.6%. The overall trend for Eurozone GDP growth has improved, however.

[tweet https://twitter.com/jsblokland/status/598413466693697536 width=’500′]

Greece remains the main outlier. After a solid start of 2014, Greece has slid back into recession, recently. In Q1 GDP decreased 0.2% after a 0.4% fall in Q4 2014. The budget surplus has completely vaporized and we have yet to see any agreement on the unsustainable amount of Greek debt.

[tweet https://twitter.com/jsblokland/status/598417942909419520 width=’500′]

Just as a reminder, the Greek debt-to-GDP ratio equals a whopping 180%. Moreover the ratio has not come down at all, apart from the debt adjustments that were made back in 2011. Looking at the development of the debt-to-GDP ratios of countries like Italy and Portugal isn’t that comforting either. These companies have lower absolute levels of debt-to-GDP than Greece, but they too have not managed to get their debt pile down. In fact, the only county that did manage to lower its debt-to-GDP ratio is Germany…

[tweet https://twitter.com/jsblokland/status/597722664258637824 width=’500′]

On a positive note: Greece paid the IMF this week and (obligatory) pledged to pay back all outstanding debt. If this turns out to be true (not all that likely at this point in time) the issue is under which circumstances this will happen. A quick look at the upcoming bond payments Greece will face in the next couple of months will tell you that ‘Greece-related anxiety’ will stay with us at least through Summer.

[tweet https://twitter.com/jsblokland/status/597729875739463680 width=’500′]

Meanwhile, the correlation between debt (bonds) and equities has increased in recent weeks. Especially in Europe, rising bond yields have been accompanied by falling stock prices. Europe has offered few places to hide for investors.

[tweet https://twitter.com/jsblokland/status/598509703656775681 width=’500′]

Perhaps the time of year will help. Historically, bond yields have peaked around May, followed by a continued decline up until November. Sell in May does exits in bond markets too!

[tweet https://twitter.com/jsblokland/status/597990122961903617 width=’500′]

As I successfully completed a wine course this week the graph below offers an appropriate way to wrap up this Week End Blog. During the last couple of years the correlation between Chinese GDP growth and changes in the prices of fine wine (all Bordeaux) has been pretty strong. Does the recent uptick in wine prices suggest a Chinese rebound?

[tweet https://twitter.com/jsblokland/status/598639763864719362 width=’500′]

Thanks for reading, enjoy your weekend!

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