Morning Update

This morning there is more troubling news out of Europe with Euro-area GDP showing that the region is indeed in a recession. The European economy as a whole shrank 0.2% in Q2 while the Germany economy grew 0.3% and France stagnated. Spanish GDP fell by 0.4% and Portuguese GDP contracted by 1.2%. Furthermore Euro-area industrial production decreased by 0.6% Q/Q and 2.1% Y/Y. Though this was better than expected, there is a clear trend of deteriorating data out of the EU.

The economic data out of the US has been more optimistic this morning. July retail sales increased 0.8% versus a decline of 0.7% in June. This is the strongest number since February and stronger than forecast. The Producer Price Index (PPI) increased 0.3% M/M and 0.5% Y/Y in July, above expectations. This data is helping to push up S&P 500 futures moderately before the open. This is generally bullish for the market though it is important to remember how volatile retail sales numbers can be. It is also worth pointing out that June’s retail sales were revised downward from -0.5% to -0.7%, and July’s numbers could suffer the same downward revisions next month.

Traders will looking at this data through the lens of the Fed as they try to predict whether Bernanke will announce any easing at his speech in Jackson Hole later this month. The strength of this data suggests that there will be no such announcement. Strong retail sales show the economy is not quite out of steam yet and could foreshadow rising inflation. If the Fed has reason to believe inflation may naturally rise they are less likely to provide the market with more quantitative easing.