Global stocks have lost more than $10-trillion in value over the past five months. After last week’s carnage, the MSCI All-Country World Index of stock markets officially entered a “bear market” for the first time in more than two years, having dropped 20% since its May peak. As concerns about a slowing global economy and European debt mount, the question on everyone’s mind is how bad can things get? This week will provide some clues.
Escalating stress on debt-laden European nations and banks will remain at the centre of global economic news in the week ahead. Until leaders convince investors that they have found a permanent solution to the crisis, markets are likely to remain volatile.
“Frequent bouts of extreme volatility are unlikely to disappear any time soon,” Mohamed A El-Erian, CEO of the bond giant Pimco wrote yesterday in the Huffington Post. “Brace yourself for another week in which markets fluctuate wildly in response to any and all signs of policy movements, both forward and back.”
European officials are under increasing pressure to act swiftly and definitively to end the crisis. “The threat of cascading default, bank runs, and catastrophic risk must be taken off the table,” US Treasury Secretary Timothy Geithner warned in a speech to the International Monetary Fund on Saturday.
Economists and investors fear that European banks could be dragged down by their exposure to bad debt from Greece and other troubled eurozone nations. Analysts estimate that a bailout fund of about €2-trillion — much larger than the current €440-billion European Financial Stability Facility (EFSF) — would be needed if the crisis spread from Greece to the much larger economies of Italy and Spain.
Policymakers remain divided over an expanded rescue fund, however. With Germany, the continent’s largest economy, vocally opposed to providing additional funds, attention appears to be shifting toward how administrators can most effectively use existing mechanisms.
The European Union’s top economic official, Olli Rehn, said on Saturday that as soon as Europe’s governments confirm new powers for the EFSF, expected to be ratified within the next few weeks, attention would shift to how to best leverage existing funds. A critical ratification vote by the German Bundestag is scheduled for this week and is certain to receive considerable attention from the financial press.
Although developments in Europe will undoubtedly dominate news, several important indicators of consumer and business demand in the US will also capture headlines this week.
On Tuesday, the Conference Board will release September’s consumer confidence index data. Consumer confidence is strongly correlated with retail sales, which are enormously important to the US economy. Confidence fell 14.7 points in August to an index reading of 44.5, the lowest in two years. Economists expect September’s number to show a slight rebound in the index to a 46.5 reading.
On Wednesday, the US Census Bureau will release data on durable goods orders for August. For consumers, durable goods include items such as refrigerators, washing machines and other costly items. For businesses, durable goods include expensive plant equipment, trucks and other transport equipment. When consumers and businesses are confident in their economic futures, they tend to order more. When they are pessimistic or unsure of what the future may bring, they tend to hold-off on big-ticket purchases.
New orders, lead by a strong surge in motor vehicle sales, rose 4.1% in July. The consensus forecast among economists polled by the financial news and data provider Bloomberg is for Wednesday’s release to show a more modest increase of 0.2%, month-over-month.
Another key data set follows on Thursday when the US Commerce Department releases final gross domestic product (GDP) figures for the April to June quarter. GDP is the broadest measure of an economy’s health.
Preliminary estimates, released in late August, showed weak economic growth of only 1% in the second quarter. Economists expect Thursday’s figures to show an upwards revision to 1.2% growth, year-over-year. A lower than expected number would be a big blow to already nervous global markets.
Japanese data releases and possible confirmation of an economic slowdown in China will dominate this week’s economic news from Asia.
On Thursday, Japan will release retail sales data for August. July’s figures showed a 0.7% yearly growth rate for the month, lower than the 1% rise that many economists had forecast. Analysts will be watching August’s figures for further signs of weakness.
This sales data will be followed on Friday by releases covering consumer prices, unemployment and industrial production. Analysts are likely to focus primarily on whether businesses were able to improve on July’s weak industrial production. Data showed meagre growth of 0.6% for the month, disappointing economists’ expectations for a 1.5% increase.
Also on Friday, the global bank HSBC will release final August figures for its Chinese purchasing managers’ index (PMI), a closely watched measure of manufacturers’ economic expectations. Preliminary findings released last Thursday showed a reading of 49.4, below the score of 50 separating expansion from contraction. The disappointing figure precipitated a sharp decline in Chinese stock markets last week. Any downward revision to the preliminary data would likely have the same result.
With concerns about Europe’s debt crisis escalating, global forces are more likely to drive South African news and markets this week than domestic economic events. Nevertheless, at least one data release will garner attention in the week ahead.
On Thursday, StatsSA will release August producer price index data (PPI), a measure of inflation at the producer level. Economists will scrutinise the release closely because some of the costs captured in the PPI survey are passed on to consumers.
“The most important thing we look at is the food index,” says Tebogo Mosepele, an economist at Standard Bank, “the reason we do this is that [increases] will be passed through to consumer food inflation”.
Some analysts fear that rising food prices, coupled with a weakening rand, could push inflation well above the Reserve Bank’s targeted limit of 6% by early next year. This would further complicate future interest rate decisions for policymakers.
A series of dismal data releases over the past several weeks has raised market expectations for a possible interest rate cut at the Monetary Policy Committee’s November meeting. Evidence of rising inflation would force officials to choose between a rate cut to stimulate economic growth or a rate hike to curb rising prices.
- 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.