Retail Sales, Gasoline Price and the Impact of Brexit

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1 July 20, 2016 : Retail Sales, Gasoline Price and the Impact of Brexit US US retail sales rose by more than had been expected in June as Americans bought furniture and spent more at gas stations, pointing to sound domestic demand. Gasoline prices peaked in late June, and then continued to decline after the busy July 4 th travel weekend. The decline will likely continue after the summer vacation season ends as demand wanes, boosting consumer spending. Following the UK s shocking vote to leave the European Union (EU), US stocks tumbled briefly before accelerating and the US dollar surged. Despite heightened global macro uncertainty, a strong US dollar will likely have a positive overall impact on US consumption. US consumer borrowing ticked up in May, after slowing in April. We think that consumer credit will pick up further in the coming months, following strong retail sales growth in the three months ended June 30. Europe The UK s vote to leave the EU has affected consumer confidence and caused a sharp decline in the exchange rate of the British pound against the US dollar. A weak pound is likely to push up UK inflation. Consumer sentiment in Europe overall has been optimistic, especially in Germany, where the economic mood was positive in June, according to the GfK Consumer Climate Indicators. Latin America In Latin America, consumer confidence has improved. Brazil s consumer confidence jumped by 8.3% year over year in June, while the year-over-year decline in Mexico s consumer confidence narrowed in May.

2 US Indicator Period YoY Change Impact on Consumption GDP Growth 1Q 1.1% 0.6% 50 bps + Gas Price (USD/Gal.) Jul $2.23 $2.80 (20.4)% + PCE Deflator May 0.9% 0.3% 60 bps + Savings Rate May 5.3% 4.8% 50 bps Unemployment Rate Jun 4.9% 5.3% (40) bps + Wage Growth May 4.6% 5.3% (70) bps The S&P/Case-Shiller 20-City Composite Home Price Index Apr % + University of Michigan Index of Jun (2.7)% Consumer Sentiment Source: Bureau of Economic Analysis/ Bureau of Labor Statistics/US Census Bureau/S&P Dow Jones/University of Michigan/ Energy Information Administration/Fung Global Retail & Technology Europe/Latin America Indicator Period YoY Change Impact on Consumption UK Consumer Confidence Jul (9) 4 13 points France CPI Jun % Germany CPI Jun % Brazilian Consumer Confidence Jun Mexican Consumer Confidence May (1.2) Brazilian Retail Trade Apr (6.4)% (2.4)% 400 bps Source: OECD/Destatis/INSEE/GfK US: Retail Sales Growth Sustained in June US retail sales rose by more than had been expected in June as Americans bought furniture and building materials, and spent more at gas stations, pointing to sound domestic demand. Retail sales increased by 0.6% in June over the previous month, extending the growth momentum that began in April. Sales of building materials rose by 3.9% in June over the previous month. Excluding automobiles and parts, retail sales rose by a solid 0.7% in June. The University of Michigan Index of Consumer Sentiment edged down slightly in June, to Over the past 18 months, the index has shown an overall positive trend, with minor fluctuations, and the June reading was slightly higher than the average. The general stability reflected in the index indicates a gradual improvement in consumers assessment of current economic conditions. 2

3 Figure 1. US: Retail Sales (%) and Consumer Sentiment 6.0 Retail Sales 12 Consumer Sentiment () 6 (4.0) Jun 11 Jun 12 Jun 13 Jun 14 Jun 15 Jun 16 Total Retail Sales Retail Sales ex Autos Motor Vehicles and Parts 4 Jun 11 Jun 12 Jun 13 Jun 14 Jun 15 Jun 16 University of Michigan The Conference Board Source: US Census Bureau/University of Michigan/The Conference Board/Fung Global Retail & Technology Although the level of the PCE price index gives the Fed room to raise interest rates this year, there is still uncertainty regarding the impact of Brexit. So, a rate hike may be kept on hold, according to the Fed s June meeting minutes. Gasoline Prices Continued to Decline After July 4 th The US personal consumption expenditure (PCE) deflator, which is the Federal Reserve s preferred inflation measure, moderated to 0.9% in May, after reaching 1.1% in April. It has remained below the Fed s 2% inflation target since May The core PCE deflator excluding food and energy prices remained unchanged at 1.6%. Gas prices peaked in late June and had declined to $2.23 per gallon as of July 18. The decline will likely continue after the summer vacation season ends due to a fall in demand and the fact that refineries will begin production of cheaper, winter-blend fuels. Figure 2. US: PCE Deflator (YoY % Change) and Gas Price (USD/Gal.) PCE Deflator May 11 May 12 May 13 May 14 May 15 May 16 Headline Core $3.00 $2.75 $2.50 $2.25 $0 $1.75 Gas Price 7/18/ $1.50 Jul 15 Jan 16 Jul 16 Source: US Bureau of Economic Analysis/Energy Information Administration Outcome of Brexit Vote Favors US Consumption The Brexit vote has led to a stronger US dollar, weaker European currencies and lower global crude oil prices, which will likely put more pressure on summer gas prices and drive US consumption. A strong US dollar also benefits imports, which is favorable to the US consumer. Further increases in the value of the US currency will add more pressure on exports and the manufacturing sector, and the uncertainty regarding Brexit could lead to more stock market turbulence in the short term. 3

4 US consumer borrowing ticked up in May, indicating that Americans were feeling more optimistic about the economy. Consumer Credit on the Rise Again Outstanding consumer credit, a measure of nonmortgage debt, rose by a seasonally adjusted $18.6 billion from April to May, according to the Federal Reserve. The uptick in May consumer borrowing was supported by strong retail sales growth in April and May, and is likely to carry on with the positive retail sales growth in June. Figure 3. US: Interest Rate (%) and Consumer Credit (MoM % Change) Interest Rate Jun 10 Jun 11 Jun 12 Jun 13 Jun 14 Jun 15 Jun 16 Effective Federal Funds Rate US Treasury - 5 Year US Treasury - 2 Year US Treasury - 10 Year 0.9 Consumer Credit May 14 May 15 May 16 Source: US Department of Commerce/Federal Reserve Board Europe: Brexit Shock, but Strong Consumer Climate in Germany The UK s vote to leave the EU has affected consumer confidence and caused sharp reactions in financial markets. In GfK s special Consumer Confidence Barometer postreferendum survey, which ran from June 30 to July 5, the core index declined by eight points, to (9), which was its sharpest drop in 21 years. Before the referendum, the UK s consumer confidence had remained relatively weak, with the GfK UK Consumer Confidence Index standing at (1) in June, while consumer sentiment in Europe overall was much more optimistic. The GfK Consumer Climate Indicator for Europe increased considerably, by 4.1 points, to 13.1 points in June over the previous quarter. Germany s consumer sentiment has been especially bright. The GfK Consumer Climate Indicator for Germany is forecasting 10.1 points for July compared to 9.8 in June. The indicator of economic expectation in Germany jumped by 9.7 points, to 18, in June. Prices in France and Germany Rebounded The French and German Consumer Price Indices (CPIs) were up 0.2% and 0.3% on a year-over-year basis, respectively, despite decreases in energy prices of 3.1% in France and 6.4% in Germany year over year. 4

5 % FUNG GLOBAL RETAIL & TECHNOLOGY Figure 4. Germany and France: CPI (YoY % Change); Germany and UK: GfK Consumer Climate Indicator CPI 2 GfK Consumer Climate () (1.0) Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Germany France (1) (9.0) (2) (3) (4) Jul 11 Jul 12 Jul 13 Jul 14 Jul 15 Jul 16 Germany UK Source: Destatis/INSEE/GfK Weak Pound May Push Up UK Inflation Inflation in the UK remained low, at 0.3%, in May, far below the 2% target of the Bank of England, mainly due to a drag from energy and food prices. However, with the pound depreciating by 13% following the Brexit vote, it is likely that the currency effect will drive up inflation as imports to the UK become more expensive. It is also likely that importers will pass on price increases to consumers. Following the referendum, the pound plunged to a 31-year low against the US dollar. The exchange rate rebounded slightly on the news that Theresa May will take over as the UK s new prime minister, and improved further on the Bank of England s decision to keep interest rates unchanged in July, but the Brexit decision is still weighing on the currency. Financial markets recovered after declining sharply in response to the Brexit vote. The FTSE 100 Index declined by 5.6% in the two days following the referendum before rising to a level higher than in the weeks leading up to the vote to the Brexit vote. Figure 5. Currency Exchange Rate (USD/GBP) and FTSE 100 Index Exchange Rate 6/23/ /15/ Jul 15 Oct 15 Jan 16 Apr 16 Jul 16 6,750 6,650 6,550 6,450 6,350 6,250 6,150 6,050 5,950 FTSE 100 6/23/2016 6,338 6/27/2016 5,982 7/15/2016 6,669 5,850 May 6 May 20 Jun 3 Jun 17 Jul 1 Jul 15 Source: S&P Capital IQ 5

6 Latin America: Consumer Confidence Recovering Brazilian consumer confidence surged by 8.3% year over year in June, bouncing back from the lows of 2015 despite high unemployment and weak retail sales. Brazil s retail trade was down 6.4% year over year in April, but showed signs of improvement compared to previous months. The country s inflation has been gradually decelerating: 12-month inflation eased to 8.84% in June from 9.32% in May. Mexican consumer confidence dropped by 1% year over year in May. The decline in confidence narrowed compared to previous months. Figure 6. Mexico and Brazil: Consumer Confidence (YoY % Change); Brazil: Retail Trade (YoY % Change) 2 1 Consumer Confidence 6/ Brazilian Retail Trade 5.0 (1) (2) 5/2016 (1.0) (5.0) 4/2016 (6.40) (3) (1) (4) Jun 11 Jun 12 Jun 13 Jun 14 Jun 15 Jun 16 Mexico Brazil (15.0) Apr 11 Apr 12 Apr 13 Apr 14 Apr 15 Apr 16 Source: OECD Figure 7. Upcoming Economic Data Releases Date Indicator Period Covered Jul 25 MX: Retail Sales May 16 Jul 26 MX: Trade Balance Jun 16 Jul 26 US: S&P Case-Shiller Home Price Index May 16 Jul 26 US: Consumer Confidence Jul 16 Jul 27 US: Federal Reserve FOMC Meeting Jul 27 UK: GDP (1st Est.) 2Q16 Jul 27 MX: Unemployment Rate Jun 16 Jul 28 GE: CPI Jul 16 Jul 28 GE: Unemployment Rate Jul 16 Jul 29 FR: Flash CPI Jul 16 Jul 29 FR: GDP (Preliminary) 2Q16 Jul 29 US: GDP Annualized (1st Est.) 2Q16 Jul 29 MX: GDP (Preliminary) 2Q16 Jul 29 US: University of Michigan Consumer Sentiment (Final) Jul 16 6

7 Deborah Weinswig, CPA Managing Director Fung Global Retail & Technology New York: Hong Kong: China: Kiril Popov Senior Analyst Chim Sau Wai Research Associate Charlie Poon Research Assistant HONG KONG: 8th Floor, LiFung Tower 888 Cheung Sha Wan Road, Kowloon Hong Kong Tel: LONDON: Marylebone Road London, NW1 6JQ United Kingdom Tel: 44 (0) NEW YORK: 1359 Broadway, 9 th Floor New York, NY Tel: FBICGROUP.COM 7