Politics trump data this week as the ANC's leadership conference gets underway, Japan's old leadership is back in power and Europe waits on Italy.
American politicians are careening toward a mess of their own making. Europe is waiting and watching for word on Italian Prime Minister Mario Monti’s future. Japan’s old leadership is back in power, but with new ideas. And in South Africa, the ruling ANC leadership conference is underway. Here is what you need to know.
With less than three weeks remaining until the United States plunges over its “fiscal cliff” – a mix of automatic spending cuts and tax rises that threaten to drag the world’s largest economy into recession – reports on the status of negotiations between President Barack Obama and Congressional Republicans will continue to drive market sentiment in the week ahead.
As investors await word from Washington, they will have plenty of data to mull over. First up, on Monday, the Federal Reserve Bank of New York’s regional manufacturing index is expected to improve to a reading of -1.0 this month from -5.2 in November.
On Tuesday, markets expect data to show that the country’s current account deficit narrowed to $103.5-billion from $117.4-billion in the previous quarter and the National Association of Home Builders (NAHB)’s housing market index is forecast to improve slightly.
More housing market information will follow on Wednesday. Economists expect housing starts to have risen 3.2% last month and the number of building permits issued to have risen 1.4%.
On Thursday, final third quarter gross domestic product (GDP) figures are forecast to show that the US economy expanded by 2.9% in three months to September. Existing homes sales are expected to show a 2.3% rise in November and the Philadelphia Federal Reserve’s manufacturing index is predicted to improve to a reading of -2.5 from last month’s -10.7.
Finally, on Friday, markets expect government data to show that Americans’ personal incomes rose 0.4% last month while spending rose by 0.3%.
Europe is anxiously waiting for word from Italy’s Prime Minister, Mario Monti, on his political intentions. Monti’s non-political, technocratic government has enjoyed support from both Italy’s centre-right People of Freedom (PDL) party and centre-left Democratic Party (PD) over the past year as it sought to steer deeply-indebted Italy away from crisis.
But 10 days ago, the PDL withdrew its support for the government, prompting Monti to announce his resignation once the country’s next budget is approved. This is expected to occur by the end of this week. Monti will stay on in a caretaker role until elections are held –probably in February – but has not said if he will participate in the elections, which could see former prime minister Silvio Berlusconi leading the PDL ticket. Berlusconi says he will not run if Monti runs atop a coalition of moderate and centre-right candidates.
On the data calendar, investors will be paying close attention to business confidence measures in Germany and France – Europe’s two largest economies – this week. Germany’s Ifo Institute will release its business climate index on Wednesday. A similar measure from France’s National Institute for Statistics and Economic Studies (INSEE) will follow on Friday.
Ifo’s closely followed gauge of business sentiment rose for the first time in eight months to 101.4 in November. Markets expect to see further improvement – to a reading of 102.0 – this month. INSEE’s business confidence index is expected to rise from a reading of 88 in November to 89 in December.
Global markets will respond to Japan’s election results on Monday. As was widely expected, voters in the world’s third largest economy returned the country’s Liberal Democratic Party (LDP) to power on Sunday after a three-year hiatus.
The LDP’s leader – former Prime Minister Shinzo Abe – campaigned on a pledge to radically reform Japan’s fiscal and monetary policies in a bid to end years of lacklustre economic performance and stubbornly persistent deflation. Investors liked his message.
Abe’s campaign promises had already pushed the yen down 5.0% against the dollar – strengthening Japan’s export sector’s competitiveness – and sent the country’s Nikkei stock index up 12.0% by Friday’s close. Stocks are expected to continue to rally and the yen to weaken further in the wake of the LDP’s resounding victory.
The LDP and its ally, Komeito, gained enough votes to achieve a two-thirds supermajority in the lower house of Japan’s parliament, the Diet. This supermajority will allow the new government to push reforms through parliament even if the Diet’s upper house – where the LDP is in the minority – tries to block them.
The first test of the election’s implications for policy will come on Thursday, when the Bank of Japan (BOJ) announces its final monetary policy decision of the year. Despite the LDP’s victory, few expect policymakers to announce any significant policy decisions at this week’s meeting, but believe that action will come soon now that Abe controls a sufficient number of votes to revise the 1998 law guaranteeing the central bank’s independence.
Brazil – the region’s largest economy – will dominate Latin America’s economic calendar this week.
The country’s central bank will auction as much as $1.5-billion in US dollars on Monday via two auctions with repurchase rates set to January 18 and February 19 2013. The sales are intended to help meet increased demand for dollars by multinational companies requiring dollars at year’s end to send profits and dividends to overseas parent companies.
Also on Monday, Brazil’s Ministry of Labour and Employment will release last month’s formal job creation (CAGED) figures. Analysts at 4CAST expect the numbers to show that employers added 45 000 positions in November, down from 66 988 in October and 150 334 in September.
On Thursday, Brazil’s central bank will release November’s current account and foreign investment figures. Brazil’s current account deficit – a broad measure of the country’s foreign transactions – totalled $5.4-billion in October, up from $2.6-billion in September. Fernando Rocha – deputy head of research at the central bank – told Reuters last month that he expects the deficit to widen to about $6.0-billion in November as companies remit profits overseas. Foreign direct investment is expected to fall to $3.0-billion in November from $7.7-billion in October, the largest figure for the month of October on record.
On Friday, Brazil’s Getulio Vargas Foundation will release its consumer confidence index and the central bank will release November’s personal loan default rate and lending data. President Dilma Rousseff’s administration has tried numerous initiatives to increase lending, so far with limited success.
South African markets will be closed on Monday in observance of the country’s Day of Reconciliation holiday. With no major data releases scheduled in the shortened trading week to follow, the ANC's leadership conference will dominate news from the continent’s largest economy.
President Jacob Zuma opened the ANC’s 53rd national conference in Mangaung on Sunday. Investors will be watching the gathering closely for hints at what direction the ruling party will take on multiple contentious issues, including the appropriate level of state involvement in the economy and land reform.
Ratings agencies Standard & Poor’s and Moody’s both recently downgraded South Africa’s ratings, citing myriad economic, social and governance problems. Zuma addressed the downgrades directly.
“Today, the rating agencies and investors are asking whether the ANC can continue to manage [South Africa’s] economy so that we can grow, create jobs, manage our debt and provide policy certainty,” Zuma told delegates. “Yes, the ANC will continue to provide strong economic leadership and steer our economy boldly, and we do have a plan to grow the economy and create jobs.”
Delegates will vote for their new leaders – who will govern for the next five years – on Monday. Deputy President Kgalema Motlanthe is challenging Zuma for the top job, but is widely expected to lose definitively.
Elsewhere on the continent, Nigeria – Africa’s second largest economy – will release private sector credit and money supply data this week, as will nearby Ghana. And Tanzania will release consumer inflation figures.
Matt Quigley writes the weekly economic preview for the Mail & Guardian. You can follow him on Twitter at @mattquigley.