KBC Bank

Mixed bag of data
Personal spending was up a meagre 0.1% M/M in June (as expected) following a 0.6% M/M increase in May, while income increased by 0.4% M/M. The slow spending didn’t come as a surprise following the decline in retail sales reported earlier. The result shows that consumption goes into Q3 with very little momentum (0.14%), even if some improvement in sales occurred in recent weeks. However, consumption growth should be subdued in Q3 GDP metrics too. The core PCE deflator rose a tiny 0.1% M/M and 1.9% Y/Y, a tad below expectations and slowly moving in the right direction from the Fed’s point of view.

Q2 Employment Cost index rose by 0.9% Q/Q and 3.3% Y/Y, in line with expectations, but down from 3.5% Y/Y in Q2. Salaries rose 0.8% Q/Q and benefits 1.3% Q/Q, but on a yearly basis, both were up 3.4%. The data show that wage inflation is still modest and should give the Fed some comfort

The S&P house prices (20 cities) dropped 2.8% Y/Y in May, following a 2.1% Y/Y increase in April. However, the decline seems to have lost momentum in recent months, even if it is too early to draw the conclusion that the housing slump has hit the bottom. On a 3-month annualized basis, prices fell 2.98%, the fourth month of slowing in the pace of the decline. In a monthly perspective, 8 of the 20 cities reported higher prices.

The Chicago PMI manufacturing index dropped unexpectedly sharply to 53.4 in July from 60.2 in June. The decline was broadly based with the noticeable exception of the employment sub-index that surged to 61.6 from 52.7 previously. We wouldn’t draw too many conclusions from the report, as the correlation with the ISM index, to be released today broke apart in recent years. However, given the outcome of all regional manufacturing surveys, the risk is on the downside for the ISM.

Consumer confidence improved much more than expected in July. The headline index jumped to 112.6 in July from 105.3 in June. Both the present and the expectation sub-indices contributed to the good result. Of course, the recent turmoil in the markets wasn’t yet captured by the survey.

EMU Confidence remains at high level, while inflation eases slightly
EMU economic confidence slid slightly in July, according to EU confidence survey. Indeed, the headline index dropped to 111 from 111.7 in June. It was the second consecutive drop since the index reached its record peak at 112.1 in May. So, the slight decline isn’t a source of concern yet. Looking to the details, consumer confidence stabilized at –2 and service confidence at 21, industrial confidence eased to 5 from 6 in June and the cycle peak of 7 in May, while retail confidence improved one point to 3. There were few changes in consumer and business price expectations. Overall, the report suggests that while economic growth is levelling off, it is still consistent with strong, above-trend growth. A similar picture emerged from the EU Commission business cycle indicator that fell in July to 1.35 from 1.53 in June.

The June EMU unemployment rate stabilized at 6.9%, a record low, as the May result was revised down to 6.9% from 7% previously.

The EMU HICP flash estimate showed inflation slowed to 1.8% in July from 1.9% Y/Y in June and in the previous three months. The market was counting on an unchanged 1.9% reading. Indeed, after the rise in German HICP and the stable Italian HICP, the drop in the EMU area is a bit of a surprise. Of course, a stronger euro might have had some dampening effect on energy prices. Details will only be released when the final report is published. While this is good news negative base effects will soon kick in pushing inflation again above the 2% threshold.

UK consumer confidence drops, but no drama
UK consumer confidence weakened considerably in July according to a GfK survey. The headline index dropped to –6 from –3, while markets were looking for a slight fall to –4. Higher interest rates may be the factor behind the deteriorating confidence, but all in all one shouldn’t be too negative on the consumer. This seems consistent with the message from the July distributive trades report. The headline sales balance rose 1 point to +18, but the three month average of the sales balance, a better gauge, eased to +22 from +31, suggesting some slight easing in consumer purchases.