This week is set to be eventful, as markets weigh in on the EU's "Spailout" and key economic data emerges from around the world, writes Matt Quigley.
Global leaders rushed to praise this weekend’s news that Spain will seek up to €100-billion in external funding to shore up its ailing banks. But markets will render their verdicts on the “Spailout” this week.
Meanwhile, a series of key data releases will shed further light on the precarious state of the global economy. In the background, concerns that next week’s election in Greece could plunge Europe into further economic and political turmoil will keep investors on edge. Here is your guide to the hectic week ahead.
This week will be a busy one for data releases in the United States, the world’s largest economy. And analysts are not expecting much good news.
Wednesday’s retail sales report is forecast to show that US consumers pulled back on purchasing in May. Economists surveyed by Dow Jones expect to see a 0.2% drop in overall sales.
Consumer confidence figures, scheduled for release on Friday, are predicted to point to continued weakness moving forward. Analysts expect the University of Michigan’s consumer sentiment index to drop to a reading of 77.3 from 79.2 in May.
Economists do not anticipate better news from the country’s manufacturers. Industrial production statistics, due on Friday, are expected to show that output increased by a mere 0.1% last month after a 1.1% surge in April.
A separate regional gauge from the Federal Reserve Bank of New York is expected to show similarly disappointing results for June. The Empire State manufacturing survey’s general business conditions index is forecast to slow to a reading of 10.5 in June from 17.1 in May.
Two key inflation measures are also on tap for this week. Wednesday’s producer price index (PPI) release is expected to show that producer prices fell 0.7% last month following a 0.6% decline in April.
Thursday’s consumer price index (CPI) release will probably show a 0.3% fall in May after April’s flat reading. Excluding volatile food and energy prices, core CPI likely rose by 0.2%, the same rate of increase observed in the previous month.
Without specifying details, officials announced on Saturday that Spain will soon request up to €100-billion in external funding to assist the nation’s troubled banks. Economists, investors and policymakers around the world will be watching markets closely this week to see how they respond to the news.
In announcing the bailout, Spain’s economic minister Luis de Guindos stressed that the bailout funds were not a general rescue package, but would flow from the eurozone – most likely through the currency bloc’s temporary Emergency Financial Stability Facility (EFSF) or its permanent replacement, the European Stability Mechanism (ESM) – to the Spanish government’s bank bailout fund, the Fondo de Reestructuracion Ordenada Bancaria (FROB). The FROB would then funnel the money to the banks.
A concern is that Spain’s government will still be liable for the borrowed money, which could amount to as much as 10% of the country’s economy. This massive new obligation, coupled with uncertainty over whether or not private bond holders would be made subordinate to the eurozone’s loans, could further diminish investors’ willingness to finance Spain’s debt. These worries could drive sovereign borrowing costs even higher. A further rise in these costs could force the government to subsequently seek a second bailout package.
Spain’s central government needs to refinance an estimated €47.3-billion in debt by the end of 2012. An additional €15.7-billion in regional government debt will need to be refinanced over the same period.
Beyond Spain, investors will also be on the lookout for the latest industrial production figures from France on Monday, the United Kingdom on Tuesday and the eurozone on Wednesday.
A slew of Chinese data, released on Saturday and Sunday, showed the world’s second largest economy is slowing more significantly than most analysts had projected.
Retail sales rose 13.8% year on year last month, less than expected and down from 14.1% growth in April. The country’s industrial production, meanwhile, grew at an annual rate of 9.6% in May, less than the 9.9% rise economists surveyed by Reuters and Dow Jones had expected.
Consumer and wholesale price pressures also eased more than anticipated. May’s CPI – a measure of price rises at the consumer level – rose 3.0%, down from a 3.4% increase in April. Prices at the factory gate – measured by PPI – fell 1.4% following a 0.7% fall in April.
With inflation falling and growth slowing, markets are now expecting additional stimulus measures from the Chinese government. The People’s Bank of China – the country’s central bank – surprised investors last Thursday by cutting interest rates. The lending rate was lowered to 6.31% from 6.56% and the deposit rate was lowered to 3.25% from 3.50%.
In the week ahead, attention will shift to a series of data releases and central bank meetings elsewhere in the region.
Japan will release key machinery orders data on Monday and capacity utilisation and industrial production statistics on Thursday. India will issue industrial production statistics on Tuesday and wholesale price index (WPI) readings on Thursday. Central banks will meet in Indonesia on Tuesday, Thailand on Wednesday and Japan on Friday.
On Monday, Brazil’s Getulio Vargas Foundation (FGV) will release a weekly gauge of inflation which is expected to show a further drop in price pressures in the continent’s largest economy from a 0.52% rise to a 0.43% rise.
On Wednesday, a separate weekly inflation measure – the Foundation Institute of Economic Research’s CPI – is also expected to register a decline, from a 0.41% rise to a 0.33% increase.
On Thursday, Brazil will release May’s formal job creation statistics and April’s retail sales figures. Retail sales rose 0.2%, month on month, and 12.5%, year on year, in March. Economists expect to see further improvement in April’s data. Markets expect to see a monthly rise of 1.1% and an annual increase of 8.0%.
Finally, on Friday, Brazil, Argentina and Peru will report monthly economic activity indices. Brazil’s measure is expected to show a slight improvement, Argentina’s index is predicted to decline and Peru’s forecast to hold steady.
Elsewhere in the region, Argentina will release CPI and wholesale price index data on Wednesday. Chile’s central bank will gather on Thursday to consider interest rates. Analysts expect policymakers to leave the bank’s nominal overnight rate target on hold at 5.0%.
South Africa will release April’s retail sales figures on Wednesday. Markets expect the annual pace of sales growth to have slowed from 6.8% in March to 4.9% in April. Wholesale and motor trade data will follow on Thursday.
Elsewhere on the country’s data calendar, the Bureau for Economic Research will issue building confidence index results for the second quarter on Tuesday. The South African Chamber of Commerce and Industry’s May trade conditions survey results will follow on Wednesday.
Further north, Egypt will hold a presidential run-off election on Saturday and Sunday. Egyptians will choose between the Muslim Brotherhood’s Mohammed Morsi and ousted President Hosni Mubarak’s last Prime Minister, Ahmed Shafiq.
Ahead of the weekend’s voting, Egypt’s Parliament will, on Tuesday, debate the establishment of an assembly charged with drafting a new constitution. The country’s previous Constitution was declared invalid after the popular uprising in early 2011 that ended Mubarak’s nearly 30-year rule.
The military council that has ruled Egypt since last year’s revolution has pledged to hand over power to the winner of this weekend’s election by the end of the month, but without a new constitution in place, it is unclear what powers the new president will hold.
Matt Quigley writes a weekly economic preview for the Mail & Guardian. His blog on the South African economy can be found here.