European Fundamentals Improve, Encouraging Hopes for Recovery

German April retail sales rose 0.5% m/m, more than our forecast of 0.2% m/m, but in line with the Bloomberg median. Sales were still down 0.8% in an annual comparison, and likely helped by Easter sales, but also an indication that consumption continues to stabilize after the 0.5% q/q rise in Q1, which was, however, boosted mainly by car sales.

At the same time, the U.K. May Nationwide house price data unexpectedly rose 1.2% m/m, against a median for a 1.0% m/m drop, as well as above our own -0.3% m/m forecast. This is the second month this year that has shown a m/m increase, suggesting that the housing market might start to stabilize. On the year, prices fell 11.3% in May, versus a drop of 15% in April. Nationwide attributed the May improvement to lack of supply in the housing market and warned that rising unemployment and tight credit availability is going to weigh on house prices going forward. Indeed, we still expect to see continued price declines, intercepted by the odd months of house price increases.