/ 31 October 2011

The devil is in the details: The economic week ahead

Last week, European leaders sketched the broad strokes of a comprehensive package designed to end the continent’s two-year-old debt crisis. Officials pledged to strengthen the continent’s rescue fund, reduce Greek sovereign debt and force Europe’s banks to shore-up their fragile balance sheets. In the week ahead, sceptical economists and investors expect details. A slew of economic data releases, and central bank meetings on both sides of the Atlantic, will keep them busy as they wait and worry.

Europe
A gathering of world leaders in France, a meeting of the European Central Bank (ECB) and several important economic data releases will dominate Europe’s economic news this week.

On Monday, officials will release preliminary estimates of inflation in the European Monetary Union (EMU). Economists expect the harmonised index of consumer prices (HICP) to show that the pace of price rises slowed slightly in October to 2.9%, year-over-year, following a 3.0% rise in September. HICP is a key determinant of interest rates, so investors watch these figures closely.

On Tuesday, focus will drift across the English Channel as the UK announces third quarter gross domestic product (GDP) numbers, the broadest measure of the nation’s economy. Analysts expect data to show that the country’s hobbled economy continues to limp along, growing by 0.3% in the July to September quarter following 0.1% growth in the previous three months of the year.

On Wednesday, investors will turn their attention to Germany as officials in the continent’s largest economy release retail sales and unemployment data for September. Analysts expect retail sales to have grown 1.0%, year-over-year, in September following a 2.2% rise in August. Unemployment is expected to remain steady at 6.9%.

The biggest news of the week hits on Thursday and Friday as the ECB announces its rates decision and leaders from the Group of 20 (G20), representing the world’s largest economies, gather in Cannes.

This week’s meeting of the ECB is the first under the presidency of Italy’s Mario Draghi, who takes over from outgoing president Jean-Claude Trichet on Tuesday. Given the deteriorating economic conditions plaguing Europe, Draghi and his colleagues are under increasing pressure to cut interest rates to stimulate growth. Despite this pressure, investors generally expect central bankers to leave interest rates unchanged at 1.5% this week, but will be watching Draghi’s post-meeting press conference for hints at a possible move in December.

Finally, markets will watch Friday’s G20 meeting for details fleshing out last week’s bare-bones plan by EU leaders to address the continent’s ongoing sovereign debt and banking woes. Any pledges of a coordinated effort among G20 nations to stabilise global markets in the face of a worldwide economic slowdown would also be welcome news to investors.

United States
A meeting of the Federal Reserve and snapshots of the country’s labour market will dominate the economic news from America this week.

Gross domestic product (GDP) data released last week showed that the American economy expanded at a rate of 2.5% in the third quarter, more than double the rate of growth recorded in the previous quarter. This number lessened fears that the world’s largest economy might be slipping back into recession, but personal income and outlays (consumption) data released on Friday signalled some areas of concern moving forward.

Data showed that consumer spending held up in September, but income growth disappointed expectations and savings declined. This raised questions in many analysts’ minds about the sustainability of consumer spending through the all-important shopping season of November and December.

With that backdrop, the Federal Reserve’s policy setting arm — the Federal Open Market Committee (FOMC) — will meet Tuesday and Wednesday to consider another possible round of “quantitative easing” (bond buying) to stimulate America’s slow rate of recovery. Given last week’s encouraging GDP numbers, most analysts expect central bankers will hold-off on further action until they have a clearer picture of America’s overall economic health.

Later in the week, attention will shift to America’s troubled labour market. Thursday’s weekly initial jobless claims figures are expected to show that 400 000 people filed for benefits in the week ended 29 October, down slightly from the 402 000 who filed in the previous week.

Friday’s October employment situation report is expected to show that America’s economy added a mere 95 000 jobs in September, not nearly enough to bring down the country’s 9.1% unemployment rate.

Asia
Asia watchers will focus on the release of two key Chinese manufacturing gauges this week.

Last week, HSBC released preliminary results — based on 85% to 90% of survey responses — for its purchasing managers’ index (PMI). The results showed the index breaking through the 50 mark separating expansion from contraction in October, reversing four straight months of decline. On Tuesday, HSBC will release the full results of the survey.

A similar, government-sponsored manufacturing survey is also scheduled for release on Tuesday. The China Federation of Logistics and Planning’s (CFLP) survey is more weighted to larger companies than the HSBC survey and is also closely followed by analysts.

Both the HSBC and CFLP surveys are significant market-movers, for Chinese stocks in particular, so investors watch these releases closely. Economists will scour the results of the two indices for clues of a possible rate cut by China’s central bankers in the near term.

South Africa
Several important domestic data releases will attract the attention of South African investors and policymakers in the week ahead.

On Monday morning, the Reserve Bank will release credit and money supply numbers for September. Analysts expect the data to show that growth in demand for credit slowed, year-over-year, from 6.06% in August to 5.77% in September. A lower than expected number would strengthen the case for another round of interest rate cuts to lower the cost of credit, boost demand and assist the domestic economy’s recovery.

Later on Monday, SARS will release preliminary trade data for September. Most economists expect demand for South African exports — the sale of which account for roughly 20% of GDP — to continue weakening through the remainder of the year as the economies of some of the country’s largest trading partners falter. The current account deficit — the amount by which imports exceed exports — is expected to grow only slightly, however, as a weaker rand suppresses domestic demand for overseas goods.

The argument for a near-term rate cut may get even stronger on Tuesday when the Bureau for Economic Research releases October’s purchasing managers’ index (PMI) data. The index rose by four points in September to break the 50 point barrier separating expansion from contraction. But if this month’s reading follows global trends, PMI may slip back into negative territory.

Finally, the government will release the third quarter’s unemployment rate. The unemployment rate rose from 24% in the final quarter of 2010 to 25% in the first quarter of 2011. Joblessness rose further to 25.7% in the April to June quarter of this year and is unlikely to show improvement on Tuesday.

  • 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.