US equity markets (NYSEARCA:SPY) are pricing in a new scenario in which the US economy decouples from the rest of the world. With Britain stuck in a post-Brexit-vote reality, the eurozone battling its structural imbalances, and China signaling domestic weakness, it would seem the US is well-positioned to take the lead. US retail sales and the consumer sentiment index are scheduled to be announced this week, and if they both come out as strong as last week's employment report did, then the decoupling scenarios may no longer seem like a long shot. This will hold especially true once the eurozone's GDP growth rates, UK retail sales, as well as China's CPI and industrial production are released, since they will reveal the momentum of the "other side." If they expose a weak or even stagnant state, the level of divergence between the US and the rest of the world will grow, providing much needed interest rate support to the US dollar.
US Economy Watch
The recent US solid payroll figures, the increase in hourly wages, and an unchanged unemployment rate despite a wave of new job-seekers, indicate that the US jobs market continues to support the most valuable consumer in the world. This brought major relief in US risky assets by extending their rally to new highs, and produced some meaningful sell-off in the fixed income market. Expectations for a US rebound are also supported by Atlanta Fed's GDPNow latest forecast, which points to an impressive real GDP growth rate of 3.8% for Q3.
This week's releases will put this to the test, since July's retail sales and Augusts' preliminary consumer sentiment reading will show how strong the main driver of the US economy is. Additionally, if the initial jobless claims manage to keep their long-term downtrend then they will add more substantial evidence for a bullish case.
Global Economic Watch
While there are many indicators pointing towards US acceleration, there are equally as many signaling a loss of momentum for the rest of the world. China's weak import numbers raised concerns about the strength of the Chinese consumer, and the upcoming Chinese CPI is expected to shed more light on the situation. Apart from the state of its consumer, the Chinese industrial production for July is also important when trying to understand the level of manufacturing activity. If all these figures lack strength, then a cooling down of the Chinese economy is quite probable, meaning that the main pillar of the global economy is losing its footing.
The expectations for Europe are not so sanguine either. UK's BRC retail sales monitor for July will definitely show what the immediate impact of the Brexit vote was in the domestic retail market. UK manufacturing production for June is also an important release as it will help paint a larger, and perhaps clearer picture of UK's standing. The German trade balance for June will not only speak to the vitality of Germany but to that of its trading partners as well (especially the big Eurozone economies, UK, and China). The direction of German exports becomes even more critical if the relatively stable Euro, in trade weighted terms, is taken into account. More importantly, though, the preliminary figures of the German and Italian GDP growth rates for Q2 will expose if the divergence between the core of the Eurozone and its periphery widens. Italian macroeconomic figures are becoming more impactful, given the systemic risk that the Italian banking sector carries for the European and global economy.
Another main market that has buckled under its own structural pressures is Japan. For this reason the Japanese core machinery orders and the tertiary industry activity index for June will show if the economy continues to lose steam.
This week tackles many fronts with releases that focus on the world's largest economies. As the US soars, the rest of the regions are either plummeting, or slowing down. The outcome of this week's calendar will provide some tangible figures to measure the extent of the divergence that exists between the US and the rest of the world. If this comparison starts forming a wide gap between the two, then a decoupling of the US economy might surprise the bears and all those who have lost faith in the biggest economy of the world.
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