United States:
U.S. Retail Sales Post Broad Rise in Challenge to Fed-Cut Case
U.S. retail sales posted a broad-based gain in May and the prior two months were revised higher, suggesting consumer spending is healthy enough to limit the case for a Federal Reserve interest-rate cut in the near term. The value of overall sales rose 0.5% from the previous month after a 0.3% increase in April that was revised from a decline, according to Commerce Department figures released Friday. The median forecast in Bloomberg’s survey of economists was for a 0.6% gain. Sales in the “control group” subset, which some analysts view as a more reliable gauge of underlying consumer demand, climbed 0.5%, topping projections, after an upwardly revised 0.4% gain. The measure excludes food services, car dealers, building- materials stores and fuel stations. Treasuries fell and the dollar rose, as the pickup signals steady wage gains and the lowest unemployment in a half-century are supporting consumer spending, which accounts for most of the U.S. economy. Amid signs of weakness in other indicators such as payrolls and inflation, investors have been expecting the Fed to lower borrowing costs in July as President Donald Trump’s trade war weighs on business investment. “Today’s report was a bit of relief for the Fed. It takes out a sense of urgency for them to act,” said Michelle Meyer, head of U.S. economics at Bank of America Corp. “The trend in the last three months for consumer spending was quite solid following the first quarter where it was soft.”
Europe:
Italy’s Euroskeptic Market Regulator Favors European Safe Asset
Paolo Savona, the euroskeptic who heads Italy’s market regulator, made a surprising admission on Friday: he supports a call by the European Central Bank to create a so-called European safe asset. In a speech in Milan, Savona said low-risk financial instruments that investors could hold instead of sovereign bonds could significantly contribute to financial stability. They would possibly be issued by the European Stability Mechanism. “The only safe asset in Europe now is Germany’s Bund,” Savona said. It’s managed by one country while the demand comes from all countries in the monetary union, he said, calling this “a factor of instability in the euro zone’s financial system.” Savona, whose nomination to run Italy’s finance ministry was vetoed last year by President Sergio Mattarella because of his extreme euroskeptic views, said an insufficient supply of Bunds pushes liquidity toward U.S. Treasury Bills. The ESM could use the proceeds to make loans to member states, Savona said, adding that the proposal doesn’t need to be linked to stricter regulation for sovereign debt holdings in banks.
Asia:
As Trade War Hits, China Factories See Slowest Growth Since 2002
China’s industrial output growth slowed to the weakest pace since 2002 and investment decelerated, highlighting the headwinds the economy is facing as it grapples with the U.S. tariff war. Industrial output rose 5% from a year earlier, while fixed-asset investment expanded 5.6% in the first five months. Both were slower than in April and below expectations. Retail sales was a bright spot, expanding 8.6% compared to May last year, partly because a longer May Day holiday encouraged more tourism and spending. Officials have repeatedly said that the economy is strong enough to overcome the trade war and the central bank governor said recently he had “tremendous” room to adjust monetary policy if the conflict deepens. This continued slowdown may encourage policymakers to use such capacity. “Beijing will surely step up policy easing measures to arrest the worsening slowdown,’’ said Lu Ting, chief China economist at Nomura Holdings Inc. in Hong Kong. “We expect Beijing to again allow local governments more freedom to scrap some restrictions in property markets to boost growth. We also expect Beijing to allow the yuan to depreciate further if the U.S. government decides to impose the 25% additional tariff on the remaining US$300 billion list.’’ While the government and central bank have unveiled various targeted measures to boost infrastructure spending, support credit growth, cut taxes and increase consumption, so far they have avoided a massive stimulus plan like in previous downturns.