European Market Update - German Retail Sales Drop Sharply in Jan Due to the VAT Hike

- The European indices opened higher, but drifted into negative territory as we moved further into the session. Some analysts attributed the equity decline to speculation and concern that the Chinese economy may slow after Chinese regulators announced overnight that they planned to tighten controls on short-term foreign borrowing. European markets dropped as investors watch for any developments in China that may affect the recent market volatility. The European indices are currently rebounding back towards the middle end of the respective session ranges.
- European government bonds are currently trading off of session highs, and sit right above the unchanged level. EBGs are likely to post a gain for the week after a the sector rotation out of equities and into fixed income earlier this week due to a sharp increase in equity market volatility, which, is still lingering, but was relatively short lived. According to some analysts, this is just the “tip of the ice berg”. Over in the UK gilts are trading higher as well, shadowing their European counterparts.
- German retail sales for the month of January were sharply lower than expectations, falling to –5.1% m/m, their lowest level since April of 1999. Retail sales slumped as consumers reduced spending after the German government implemented their VAT hike. Shortly after the release of German retail sales the Bundesbank reported that total seasonally adjusted retail sales were –9.7% m/m in January as compared to +4.4% in December. Despite the sharply lower retail sales figures, the German HDE Retail Association reiterated its 2007 nominal retail sales forecast of +0.5 to +1.0%, and its real retail sales forecast of –1.0%.
- The IMF’s Rato made some comments overnight in addition to those made earlier in the week. Rato said that he does not see any inflationary pressures in Europe at the moment. Furthermore Rato said that European growth spreading into consumption, noting, that in his view, Europe has a restrictive monetary policy.
- Spain’s registered unemployment fell by 7.2K during February as an accelerated rate of economic growth prompted companies to higher more employees in order to meet demand. When compared to the same period in 2006, the unemployment level fell by 4.3%, to 2.08M.
- Construction growth in the UK slowed from January; the construction PMI fell to 57.3, below estimates of 57.5. While the dub-indices for employment and delivery times rose, the total activity and commercial construction components fell. Despite falling from December’s reading, the headline figure remained indicating expansion.
- January producer prices fell below estimates for the month of January in the Euro-Zone. The y/y measure fell to its lowest level since July of 2004, with some of the largest declines seen in Belgium, Denmark, and Greece. Excluding energy, producer prices were +0.4% m/m. Producer prices were weighed down by lower energy prices, which dropped 1.0% from December.