Global markets and the euro extended their rallies last week as investors bet on rumours that European leaders may finally move forward in their efforts to resolve the continent’s two-year-old debt crisis. This week will determine if this optimism was well-founded or premature.
Europe
European leaders’ efforts to address the continent’s escalating debt crisis definitively will continue to dominate economic news in the week ahead. A summit on Wednesday is widely seen as an all-important deadline for action.
Leaders of the European Union’s 27 member nations wrapped up two days of emergency meetings yesterday as markets and other world leaders grow increasingly impatient with the continent’s glacial pace of crisis management. The weekend’s events represented the group’s thirteenth crisis summit in 21 months.
In a series of news conferences, press statements and interviews following the gathering, officials reported progress in their efforts to construct a comprehensive rescue package. Policymakers appear to have reached agreement on requiring European banks to raise an additional €100-billion in capital to shore up their balance sheets, but have yet to reach consensus on Greece’s debt situation or expansions to the European Financial Stability Facility (EFSF), the continent’s rescue fund.
Reports suggest that leaders remain divided on how to handle an orderly default by Greece. Private sector bondholders agreed at a 21 July meeting to write-off 21% of the value of their Greek debt holdings. Some officials are now calling for “haircuts” of up to 60%.
A second point of contention appears to be how best to expand the €440-billion EFSF to ensure it has sufficient firepower to stop the debt crisis spreading from Greece to the much larger economies of Spain and Italy.
If final details are announced when Wednesday’s meetings wrap up, they could finally quash investor’s worst fears by eliminating the possibility of widespread financial collapse. If, however, European leaders fail to reach an agreement, markets will respond very poorly.
United States
News from Europe will continue to serve as the primary driver of American markets in the week ahead but, on the domestic front, investors will be digesting a slew of economic data throughout the week ahead.
On Tuesday, the Conference Board will release consumer confidence index data for October. Confidence affects consumer spending, which drives two-thirds of the American economy, so analysts watch these figures closely. Given the recent improvement of American stock markets’ performance, economists expect October’s reading to show a slight uptick to 46.0 from 45.4 in September.
On Wednesday, attention will shift to America’s manufacturing sector as the Commerce Department releases September’s durable goods orders data, a measure of how busy US manufacturers will be over the coming months as they work to fill the orders they have received.
Economists surveyed by the financial news and data provider Bloomberg expect Wednesday’s release to show a monthly drop of 1.0% in September, following a 0.1% slip in August. A separate survey conducted by Dow Jones Newswires expects the data to show a slightly smaller decline of 0.9%, month-over-month.
Also on Wednesday, the government will release new home sales data for September, a significant indicator of future economic activity. New homes sales fell to a nine month low of 295 000 units in August. Analysts expect to see a rebound in sales to 302 000 units in September’s data, the same level of sales recorded in July.
On Thursday, investors will be watching for the release of three important data sets, gross domestic product (GDP) figures, pending home sales data and weekly jobless claims. Economists expect the rate of GDP growth – the broadest measure of a country’s economic health – to have picked up from 1.3% in the second quarter to 2.5% in the third, easing some fears that the world’s largest economy is slipping back into recession.
The day’s other releases are not expected to provide the same type of good news. Pending home sales are expected to remain flat. Weekly jobless claims filed in the week ending 22 October are expected to edge up to 405 000 from 403 000 in the week prior, indicating continuing weakness in the country’s labour market.
Finally, on Friday, the government will release personal income and outlays data, an important indicator of the American consumer sector’s current and future prospects. Both income and spending are expected to have edged up by 0.3% in September.
Asia
Data releases in China, Australia and Japan, along with corporate earnings reports from the world’s two largest computer memory chip manufacturers, will dominate the economic news from Asia this week.
A closely watched measure of the Chinese industrial sector’s health was released early this morning. Preliminary or “flash” results from HSBC’s survey of manufacturers pushed the purchasing managers’ index (PMI) to its highest level in five months. September’s reading of 51.1 – up from 49.9 in August – rose above the 50 mark separating expansion from contraction and will help to alleviate fears that China’s economy is cooling significantly.
Also this morning, Australia released producer price index (PPI) data for the July to September quarter showing producer prices rose 0.6% from the second to third quarters of 2011 and 2.7% year-over-year. Economists will now focus their attention on Tuesday’s release of consumer price index (CPI) data. Analysts expect to see an easing in consumer inflation from 0.9% in the second quarter to 0.6% in the third.
Finally, on Friday, Japan will release CPI, household spending, unemployment and industrial production data. Of the four, industrial production is likely to attract the most attention from investors. Analysts expect data to show a drop of 1.8%, month-over-month.
On the corporate earnings calendar this week, analysts are likely to focus on quarterly earnings reports from three of the world’s largest computer memory chip manufacturers. Because chips are used in so many consumer and business products, economists watch chip makers closely for insights into the health of the overall economy.
Hynix Semiconductors, the world’s second largest producer of computer memory chips, reports results on Thursday along with Elpida Memory. Samsung, the world’s largest chip maker, follows with quarterly results on Friday. Analysts expect to see a 28% drop in revenues, year-over-year.
South Africa
Here at home, markets will focus on Tuesday’s medium-term budget policy statement from the Treasury and Thursday’s release of producer price inflation data by Stats SA.
Analysts expect Tuesday’s statement to show that officials to have revised growth forecasts downwards from February’s 3.4% figure. This lower rate of economic growth is expected to result in lower than budgeted tax revenues and, consequently, higher than anticipated budget deficits. Investors in South Africa and abroad will be scrutinising the size of these projected budget deficits thoroughly.
On the data front, the week’s most closely watched release will come on Thursday as Stats SA releases producer price index (PPI) data for September. Economists expect producer prices rose by 10.4% in September, following a 9.6% rise in August.
- 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.