As the business week begins, investors are hoping for calm but are haunted by a foreboding sense of the unknown. Last week, the United States’ Dow Jones Industrial Average fell or rose by over 400 points in four straight days, an historic first. European, Asian and South African markets proved similarly volatile. What’s in store for the week ahead?
Europe
Watch for continuing developments in Europe’s debt crisis. Two weeks ago the situation appeared to be getting a whole lot worse. Concerns over governments’ ability to continue paying their debts spread from Portugal, Ireland and Greece to the much larger economies of Italy and Spain. The return investors were demanding on the two nation’s bonds — yields — rose to record levels. Many began to fear that if pressure on Italy and Spain continued, the two countries might find themselves unable to raise additional funds to finance their expenses. Since Italy and Spain are Europe’s third and fourth largest economies respectively, such a scenario could devastate all of Europe.
In an effort to cool a rapidly heating situation, the European Central Bank (ECB) began buying Italian and Spanish bonds. The ECB believed that buying the debts of these countries would help to lower yields, thereby lowering the countries’ borrowing costs. The intervention appears to have worked, at least temporarily. Yields fell in the past week and the situation stabilised. Concerns nevertheless remain. Past ECB purchases of Portuguese, Irish and Greek bonds did little to hold down bond yields in the long term. So economists will be watching for any signs of renewed pressure.
Many analysts believe the ECB action was designed to buy time for Europe’s political leaders to construct a more lasting solution to the continent’s debt woes. German Chancellor Angela Merkel and French President Nicholas Sarkozy will meet in Paris on Tuesday. The two leaders are scheduled to discuss the debt crisis as well as the future of governance within the eurozone. Expect extensive coverage and parsing of the leaders’ post-meeting statements.
Aside from the debt crisis, two of the most eagerly anticipated pieces of economic news out of Europe this week will be Tuesday’s release of gross domestic product (GDP) data for Germany and for the eurozone as a whole. Last Friday, French GDP data failed to meet economists’ forecasts of 0.3% growth for the April to June quarter. These disappointing numbers raised concerns about potential economic weakness in other large European economies.
Another item likely to generate headlines will be Wednesday’s release of minutes from the most recent meeting of the Bank of England (BofE). Economists expect the minutes to reflect increased worries that the UK’s economy is deteriorating. They will be looking for any hint that policymakers may pursue another round of “quantitative easing”. Under this monetary policy, the central bank purchases government bonds and other securities from financial institutions. The hope is that these institutions use the cash they receive from the central bank to increase their lending to businesses and consumers, stimulating economic growth. With interest rates in the UK already at record lows, and government stimulus effectively off the table, quantitative easing is one of very few tools left in government’s toolbox should the UK hit another rough patch.
United States
Is the US slipping back into recession? Or is the world’s largest economy simply returning to economic health at a maddeningly slow pace? The answer remains unclear. Indications either way will dominate the data from the US this week.
The US Federal Reserve (Fed), for its part, is concerned. Citing increased downside risks, the Fed announced the unprecedented decision last Tuesday to keep interest rates at record low levels until 2013. Data released last week showed that small business optimism in the US fell for the fifth straight month and that consumer sentiment slipped in August to its lowest level since 1980. Yet weekly jobless numbers were a pleasant surprise. With that as a backdrop, economists will be looking for signs of improvement or deterioration over the next few weeks. They will receive some clues this week.
On Tuesday, the US government will release data on new construction permits and housing starts for July. This is the most closely followed report on the US housing sector and an important overall indicator of economic optimism. Builders will not usually begin construction unless they are reasonably confident of selling houses once they are completed. And most people will not borrow money to buy a house unless they expect to have income sufficient to meet their future repayment obligations. A rise in housing starts therefore signals confidence in the economy among builders and purchasers. Given the current state of the US economy, most analysts expect housing starts in July to have fallen slightly from June levels. Better than expected numbers would ease recession fears significantly.
Also on Tuesday, the Federal Reserve will release two important industrial indicators for July. First, the Fed will release industrial production data, measuring the total amount of physical goods produced by US manufacturers. Industrial production rose 0.2% in June and forecasters expect to see an increase of 0.5% in July. Second, the Fed will release data on capacity utilisation rate, a measure of the amount of actual production taking place as a percentage of the country’s maximum production potential. An increase in the capacity utilisation rate is seen as a good sign for business, indicating that companies are not letting expensive machines sit idle. Analysts expect this rate to have edged up slightly from 76.7 % in June to 77.0% in July.
South Africa
The news to watch in South Africa this week will be retail sales figures scheduled for release on Wednesday. Economists expect sales to have increased in June after unexpectedly falling by 4.7% in May. Last week, data showed that South Africa’s mining and manufacturing sectors both shrank in the April to June quarter. Economists will be watching this week’s sales figures for signs that South African consumers are pulling back on spending too.
Matt Quigley writes the weekly economic preview for the Mail & Guardian. He is a former divisional director at the US Treasury’s office of the comptroller of the currency and fiscal policy analyst at the Federal Reserve Bank of Boston.