European Outlook: Asian stock markets are narrowly mixed, with the Nikkei down -0.16%, while the Hang Seng managed a 0.24% gain. U.S. stock futures are heading south, while the FTSE 100 futures is managing marginal gains as Sterling slumps following last nights terror attack in Manchester. Greek officials sounded optimist on the progress of the bailout review after yesterday’s Eurogroup meeting and markets are preparing for a very full data round in Europe today, which includes detailed German GDP numbers at the start of the session as well as German Ifo, preliminary PMIs and the U.K. CBI retailing survey. Against that background, U.K. bond and stock markets are likely to continue to outperform, while Eurozone spreads could remain mixed, as markets assess political risks and data ahead of the June ECB meeting.
German Q1 GDP was confirmed at 0.6% q/q and 1.7% y/y (wda) – as expected. The breakdown, which was released for the first time, showed broadly balanced growth, with private consumption and government spending expanding below average, but investment picking up strongly. In particular equipment investment, which had continued to contract over the past quarters finally rebounded and surged 1.2% q/q. Construction investment meanwhile rose 2.3% q/q. and investment overall contributed 0.3% points to the quarterly growth rate, private consumption 0.2% points and net exports, which detracted from growth in the second half of last year, contributed 0.4% points, while stock changes detracted -0.4% points. The strong contribution from net exports will add to the ongoing criticism of Germany’s export surplus, but with private consumption also picking up and investment expanding strongly, this is a relatively broadly balanced recovery.
EU Commission calls on Germany to accelerate public investment and create conditions for wage growth to pick up. At the same time the country should use fiscal policy to support demand. Given that the German economy is already close or above capacity and that monetary policy remains very expansionary an equally expansionary fiscal policy is a controversial recommendation, but it reflects the prevailing sense that budget surpluses should be used for spending and investment rather than debt reduction, despite the fact that debt levels across the whole of the Eurozone remain high. German wage growth meanwhile remains above the Eurozone average, but admittedly looks rather low considering that the labour market is very tight. German Finance Minstry sees shrinking current account surplus. The ministry said in its latest monthly report that the German current account surplus is set to fall further next year, to a still very high 7% of GDP from an expected 7.5% this year and versus 8.6% in 2015. The report stressed that on a national basis the ground is prepared for a sinking surplus, and that the high surplus is mainly due to market forces.
Main Macro Events Today
- German IFO – German Ifo business confidence is expected to nudge slightly higher to 113.1 from 112.9, with both expectations and current conditions indicators likely to improve.
- Eurozone PMI – Eurozone PMI readings expected to move sideways in May at high levels, with the manufacturing PMI seen at 56.6, slightly down from the 56.7 in the previous month and the services PMI at 56.5, down from 56.4 in April.
- UK Public Sector Net Borrowing – The headline realized sales reading of the CBI survey expected to dip to 32 from 44 in the previous month. Meanwhile the GDP data expected to come in unrevised at 0.3% q/q and 2.1% y/y.
- US New Home Sales – New home sales are expected to drop 4.2% in April to a 595k unit pace after climbing 5.8% in March to 621k.
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