Following yet another week of high political drama, the financial world’s collective stare will remain firmly fixed on Europe in the week ahead. The continent’s two-year-old debt crisis has likely already pushed much of the continent to the brink of recession. The question on the minds of many economists and investors is whether or not Europe’s hapless politicians are dragging the rest of the world down with them.
Europe’s debt crisis, the slow-motion train wreck that has dominated economic headlines for two-years, will remain the centre of attention this week.
With Greece seemingly stabilising, at least temporarily, economists and investors are likely to focus chiefly on political and market developments in Italy, the Eurozone’s third largest economy. The market for the country’s debt — currently 120% of gross domestic product (GDP) — is the continent’s largest.
A lack of confidence in Silvio Berlusconi’s government pushed yields on Italian bonds to euro era highs of above 6.4% last week. The spread of Italian debt over German bunds, considered to be Europe’s safest bet, also hit record levels last week.
This cost of borrowing for the Italian government is close to the levels that forced the far-smaller economies of Portugal, Ireland and Greece to seek bailouts from the European Union (EU) and International Monetary Fund (IMF). The concern for global markets is that Italy’s public debt of €1.9-billion is far too large to bailout. As a result, investors will be closely watching bond markets for signs of further pressure on Rome.
On the data front, markets will receive industrial production data for a number of European countries this week. Germany reports figures on Monday, the UK reports on Tuesday, and France and Italy release on Thursday. All are expected to show slowing activity.
In an otherwise light week for economic data releases, American investors are likely to focus primarily on weekly jobless numbers, international trade figures and consumer sentiment data in the days ahead.
New weekly jobless claims unexpectedly fell to 397 000 total filings in the week ended 29 October, a drop of 9 000 from the prior week. This Thursday’s release, covering the week ended 5 November, is expected to show a slight uptick to just under 400 000 total weekly filings.
Despite this widely anticipated increase, the data set’s four-week moving average — a less volatile and more informative measure than weekly figures — is slowly trending down. This suggests that America’s labour market is improving, albeit at a frustratingly slow and erratic pace.
International trade figures, also scheduled for release on Thursday, are expected to show that America imported $46.3-billion more in goods than it exported during the month of September, a slight increase from August’s $45.6-billion trade gap. Imports can act as a drag on a nation’s economy, so economists watch trends in this data closely.
Finally, on Friday, the University of Michigan’s preliminary consumer sentiment data for November is expected to show some measure of improvement. The consensus forecast among economists surveyed by Dow Jones is for a reading of 63.1, up from October’s final 60.9 figure. Analysts surveyed by Bloomberg expect to see a more modest rise to 61.5 in Friday’s numbers.
Higher consumer sentiment, or confidence, translates into higher consumer spending. As America heads into the all-important holiday shopping season, analysts will be paying particular attention to how consumer attitudes are holding up amid high unemployment, a struggling housing market and extreme market volatility.
China’s release of several important monthly data sets will dominate Asian economic news in the week ahead. Officials will release industrial production, retail sales, consumer price index (CPI) and producer price index (PPI) data on Wednesday followed by merchandise trade data on Thursday.
The headline number of the week is CPI, the most closely followed measure of inflation (price rises) in the world’s second largest economy. Inflation reached a 3-year peak of 6.5% in July, but eased in August and September. Economists generally expect October’s data to show a further drop in consumer inflation from last month’s 6.1%. Producer inflation, measured by PPI, is similarly forecast to decline.
Chinese officials, concerned with high inflation, have been using a variety of policy measures to slow growth over the past few months. Lower inflation figures would allow government to take its foot off the brake, likely prompting a broad bounce in equity markets, particularly in Asia.
Among the other data to be released on Wednesday, economists expect monthly industrial production statistics to show a slowdown in the rate of China’s output growth from 13.8% to 13.3%, year-over-year. Yearly growth in retail sales are also expected to have decreased slightly from 17.7% in September to 17.4% in October.
On Thursday, China will release October’s merchandise trade balance data. Economists expect figures to show that the value of China’s exports in October exceeded the value of the country’s imports by US$24.1-billion, a 66% increase over September’s surplus.
Domestic markets will focus on a meeting of the South African Reserve Bank (SARB)’s monetary policy committee this week. In making their rates decision, policymakers are wrestling with the question of whether they should raise rates to combat inflation or lower rates to spur economic growth.
Consumer prices rose 5.7% in September from 5.3% in August and SARB has forecast that inflation will breach the upper-end of the bank’s 3% to 6% target range in the final quarter of 2011. In theory, rising inflation raises the possibility of a rate hike to curb demand for credit and slow an overheating economy. In practice, however, South Africa’s economy is far from overheating.
Recent data showed that South Africa’s economy grew at a mere 1.3% in the April to June quarter, the slowest rate of growth in two years. And National Treasury officials recently cut the country’s economic growth forecast from 4.1% to 3.4%, far below the level of growth needed to put a significant dent in unemployment. Given this slow growth, some economists argue that the Reserve Bank should follow the European Central Bank’s surprise move last week and cut rates to spur growth.
A poll conducted by Reuters last week showed that most analysts surveyed expect policymakers to leave the repo rate unchanged at 5.5% at this week’s meeting. All 10 economists in a similar Bloomberg survey agreed.