Retail Sales and euro dynamics


Fundamentally, the 8%+ US federal budget deficit continues to support sufficient aggregate demand for modest GDP growth. Market participants don’t seem to understand this and were discounting a far higher probability of a recession than otherwise.

The strong euro/weak dollar strong stock dynamic continues, with the ECB continuing it’s strong euro policy of forced austerity in exchange for funding. However, this policy also slows growth in the euro zone, which tends to push deficits higher through softer tax revenues and higher transfer payments. At some point this means the ECB has to reconsider a policy designed to bring deficits down that is instead causing them to rise. The problem is they have no such alternative policy, and instead are looking for tight fiscal policy to drive exports. The problem with that is that without a policy of buying $US (the old German model), instead of exports rising, the euro rises to the point where trade stays relatively balanced, as has been the case since the inception of the euro.

Meanwhile, they seem to have responded adequately to the solvency issue with the ECB writing the check as needed. But with a slowing economy the checks the ECB must write get geometrically larger, which, while not an operational constraint, are a daunting political challenge that can quickly throw it all into even more disarray.

Karim writes:

  • Better than expected at 1.1% headline and 0.6% control group, and net +0.5% revisions to July and August control group.
  • Motor vehicles and parts clearly lifted in mid to late Q3 from end of supply chain disruptions
  • And lower gas prices also helping
  • These forces are looking to bring Q3 and Q4 growth near 2.5%, lower than the 3% plus that the Fed was looking for in Q2, but stronger than the post-debt ceiling debacle private sector consensus.
  • Also strong enough to delay need for ‘additional measures’ from Fed, though they will continue to be discussed in light of risks from Europe (via trade impact as well as financial conditions impact (fx, equities, bank lending,etc).