28/10/2011: Retail Sales for September

Retail sales for September came in with a major disappointment with a drop of 0.8% in Volume and an annual decline of 2.9%. The Value of retail sales fell 0.6% mom and declined 3.3% yoy. Given catastrophic collapse of the retail sales through the crisis to-date, the latest figures are grim.

Value of retail sales (seasonally adjusted) is now below 3mo average of 87 (September reading is 86.4) and below 6mo average of 87.6. In comparison, 2010 annual average is 88.8 and 2011 average to-date is 87.7. Volume of retail sales is now running at 91.0 against 3mo average of 91.7 and 6mo average of 92.2. 2010 annual average is 93.3 against 2011 average to-date of 92.1. Things are bleak across the board.

Relative to peak (chart below), Value of retail sales is now down 25.6% and Volume is down 21.2%.

Ex-motors - core - retail sales declined 0.2% mom and fell 3.4% yoy in Volume, in Value there was a monthly decrease of 0.1% and an annual decrease of 2.4%. Relative to peak, core sales are now down 20.4% in Value and 15.0% in Volume. 3mo average for Value of core sales is now at 94.6 against September reading of 94.3 and 2010 average is at 97.6 against 2011 to-date average of 95.7. For Volume, 3mo average is 98.7 against the current reading of 98.4 and 2010 average is 102.3 against 2011 to-date average of 99.7.

Quarterly series movements are showing substantial strain on retail sales, as detailed in the charts below.

Per CSO: "The only categories that showed month-on-month increases were Electrical Goods

(+2.7%), Department Stores (+0.3%), Oher Retail Sales (+0.5%) and Non Specialised Stores (+0.2%) in the volume of retail sales. Furniture & Lighting (-4.2%), Motor Trades (-3.4%) and Food Beverages and Tobacco (-2.8%) were amongst the categories that showed month-on-month decreases in the volume of retail sales."

Other revealing features included:

• Fuel sales were up 1.7% yoy in September in Value, but down 9.6% in Volume, reflective of deep price inflation and continued contraction in demand
• Pharmaceutical Medical and Cosmetic Articles sales down 8.9% yoy in both Volume and Value
• Clothing, Footware and Textiles down 4.9% in Value and 5.3% in Volume yoy
• Furniture & Lighting down a massive 15.1% in Value and 11.7% in Volume yoy
• Overall, in terms of Value of sales only 2 categories of sales posted yoy increases in September: Non-Specialized Stores (ex Department Stores) and Fuel. In terms of Volume only electrical goods (+3.2%) posted a yoy increase.
• In August 2011 (latest data available) Ireland recorded 6th largest yoy contraction in retail sales in EU27. In July 2011 we were the 8th worst performing economy in terms of retail sales.

But fear not, allegedly, exports of Viagra etc are going to replace all the jobs being lost in the retail sector as soon as we've turned another corner.

28/10/2011: Euro area leading indicator points to a recession in October

Euro area leading indicator for economic activity, Eurocoin, has crossed into contraction territory in October. Based on the latest data from CEPR, Eurocoin is now at -0.13%, with corresponding quarterly growth rate of between 0% and -0.05%, signaling the likelihood of a recession for the euro area as a whole.

We are now at the lowest reading since August 2009 when Eurocoin stood at -0.21% moving to the upside in September 2009. Eurcoin 3mo average is now at 0.04% and 6 mo average at 0.285%. Year on year Eurocoin has dropped 132%. Per CEPR: "The fall is the result of deterioration in most of the variables that are included in the indicator, and in particular of the worsening climate of confidence among firms and consumers."

Worsening Eurocoin now signals Taylor rule divergence for the future direction in the interest rates, as illustrated in charts below.

Inflation-consistent rates are in the 3%+ territory, while growth-consistent rates are in the range of at or below 2%.

26/10/2011: Irish GNP projections under new US tax proposals

Much ignored by irish media so far, the US Congressional proposals to reform corporate tax system are gaining speed and have serious implications for Ireland. In the nutshell, today, US House Ways & Means Committee Chairman Dave Camp described some of his report proposals (see Bloomberg report here), which include:

• Lower corporate tax rate to 25 from 35%
• Exempting 95% of overseas earnings from US tax
• Introducing a tax holiday on repatriated profits

For US MNCs operating in Ireland this will serve as a powerful incentive to on-shore profits accumulated in Ireland. While the full impact is impossible to gauge - it is likely to be significant, running into 50% plus of retained earnings. 

This will, in turn, translate into higher Net Income Outflows from Ireland (see QNA) and thus directly depress our Gross National Product.

I run two scenarios - based on IMF WEO (September 2011) forecasts for Irish GDP, current account and Government expenditure and on historical data from CSO QNA. The baseline scenario assumed that MNCs will expatriate the same share of their profits relative to GDP as they have done before (3 year moving average). The first adjustment scenario adds a 10% uplift on the above scenario and expected growth in GDP to repatriation of profits. The second adjustment scenario adds a 25% uplift. The results are in the charts below.

Pretty dramatic. And this is for rather conservative assumption on increased outflows.

26/10/2011: ECB madness

Updated: includes latest data through September 2011:

ECB's past policy in a pic:

And he above madness is consistent with price stability mandate. No, I am not kidding - it was consistent with price stability mandate, even though it was killing weakening euro area economy...

In fact, price stability at 2% target for HICP would require current ECB rates to be in the neighborhood of 2.5-2.75%.

And note from the second chart below - of all major central banks, ECB is the only one to have raised rates since November 2010.

Let me provide a quote from the economist I rarely agree with: "The bitter truth is that it’s looking more and more as if the euro system is doomed. And the even more bitter truth is that given the way that system has been performing, Europe might be better off if it collapses sooner rather than later." Paul Krugman (source: here)

25/10/2011: Residential property prices: September

According to CSO Residential Property Prices index, September 2007 saw the historical peak in prices for overall RPPI at 130.5. Today's data shows that the index now stands at 72.8, implying that property prices have fallen nationwide by 44.2% on average since 4 years ago. Miserable news.

Now, September RPPI for all properties has fallen 1.49% mom and 14.25% yoy, exceeding (in terms of fall) analysts expectations for 13.4% decline. 12mo MA of monthly declines now stands at 1.27% and year-to-date average monthly decline is at 1.41%.

Relative to Nama's cut-off valuation date of November 30, 2009, factoring in average LTEV uplift of 10%, Nama residential properties-linked assets portfolio is now on average 29.52% under water. Factoring 5% burden-sharing (subordinated bonds), the downside is now 26.2% which means that Nama will need a lift-up of 35% on current values to break even.

For Houses, nationwide, RPPI fell to 76 in September from 77 in August a decline of 1.3% mom and 13.93% yoy. The index is now down 42.4% on peak of 132 achieved in September 2007. Apartments sub-index is down to 53.2 in September from 54.9 in August, with mom contraction of 3.1% - the sharpest monthly decline since March. Yoy the sub-index is down 19.03% and relative to the peak of 123.9 (February 2007) the sub-index is down 57.06%.

Nama holds loads of apartments, so applying the earlier assumptions on LTEV, Nama apartments-linked sub-portfolio is under water 36.9%, implying, net of subordinated bonds, a 33.9% decline in valuations to November 2009 cut-off date. This suggests an average required uplift in apartments prices of 55.12% for break-even.

Dublin properties prices are now 51.6% off their peak, with sub-index for Dublin declining to 65.1 in September from 66.5 in August - a drop of 2.11% mom and 15.56% yoy.

Annual forecasts, updated to include September figures, are below

24/10/2011: Euro CDS disaster Redux?

A picture (table) worth a 1,000 words...

via CMA.