Commenting last week on Europe’s deepening debt crisis, German chancellor Angela Merkel said that Europe faced “perhaps the toughest hour since the second world war. If the euro fails, then Europe fails, and we want to prevent and we will prevent this”. Investors are nowhere near as sure. Will bond markets signal optimism or deepening scepticism in the week ahead?
Economists and investors will be monitoring developments in Europe’s bond markets particularly closely this week for signs that the continent’s ongoing debt crisis is deepening.
On Tuesday, the Netherlands will auction three-year bonds and Spain will auction six-month securities. Germany will follow with the sale of 10-year bunds on Wednesday and, in an important test of investor confidence, Italy will auction bonds on Friday.
Demand at recent debt auctions has been weak and bond yields have been rising, making debt increasingly costly for European governments. Heavy buying by the European Central Bank (ECB) brought yields on Spanish and Italian debt lower last week, easing pressure on the two countries temporarily but markets do not view this intervention as indicative of a permanent solution to the crisis.
On Friday, ECB president Mario Draghi suggested that the central bank is unlikely to move more aggressively to contain the crisis, stepping up its bond buying and acting as a “lender of last resort” within the region. He indicated that Europe’s politicians, not its central bankers, must solve the crisis through the implementation of policy reforms and austerity measures.
With American markets closed for the nation’s Thanksgiving holiday on Thursday, investors expect trading volumes to be low in the week ahead. Nevertheless, investors will be watching two key economic releases, along with political developments in Washington, closely in the week ahead.
The week’s most anticipated data release will occur on Tuesday when officials announce preliminary gross domestic product (GDP) data for the July to September quarter. Most economists expect figures to show that the world’s largest economy grew at an annualised rate of 2.4% in the third quarter, up significantly from the second quarter’s anaemic 1.3% growth rate. A number at or above consensus expectations would serve as further confirmation to markets that America’s recovery is slowly gaining traction.
Personal income and outlays (spending) data — a key indicator of the health of America’s enormous consumer sector — will follow on Wednesday. Analysts expect data to show that personal income rose 0.3% in October, following a meagre 0.1% rise in September. Consumer spending is expected to fall, month-over-month, from 0.6% growth in September to 0.3% in October.
Beyond these two statistical releases, markets will be closely monitoring political developments in the week ahead. America’s legislative “supercommittee” — created by the US Congress in an August agreement to raise the country’s borrowing limit — faces a Wednesday deadline for reporting its plan to America’s full legislature. The committee has been charged with finding $1.2-trillion in budget savings, but reports suggest little progress has been made.
Republicans and Democrats remain deeply divided on the mix of spending cuts and tax rises necessary to reach their deficit reduction goals. Failure to reach agreement would trigger a series of automatic budget cuts beginning in 2013. Deadlock would also leave unresolved White House efforts to extend a temporary payroll tax cut and jobless benefits for the long-term unemployed. Coupled with the imminent expiration of certain investment tax cuts, a payroll tax rise and cuts in benefits could shave as much as 1.2% from America’s GDP growth in 2012.
In an otherwise light week for economic news in the region, Asian economists and investors are likely to focus on Japanese trade data and a Chinese manufacturing index this week.
Early Monday morning, Japan’s ministry of finance reported that the world’s second largest economy incurred a trade deficit of ¥273.8-billion, far below economists’ expectations for a surplus of ¥55.6-billion.
On Wednesday, HSBC — the global bank — will release initial results from the bank’s monthly purchasing managers’ index (PMI) survey in China. Last month’s survey results showed that manufacturing in the world’s second largest economy expanded slightly. The PMI’s headline reading increased to 51, just above the 50 mark separating expansion from contraction.
Generally speaking, markets would prefer the index to tick upwards but, at this point in time, a stagnant reading might actually encourage investors. Chinese officials, concerned with rising inflation, have undertaken a number of policy steps in recent months to curb a rapidly expanding economy. A tepid PMI reading, many economists believe, might allow policymakers to loosen monetary policy after having tightened it through much of the year.
A reading on business confidence and two key inflation measures will likely dominate domestic economic news this week.
On Tuesday, the Bureau for Economic Research (BER) will release business confidence index (BCI) data for the final quarter of 2011. After falling by seven points in the second quarter, the BCI fell a further nine in the third. Discouragingly, six out of 10 respondents indicated dissatisfaction with prevailing business conditions.
Economists and investors are not optimistic that Tuesday’s numbers will paint a brighter picture. Earlier this month, a similar index from the South African Chamber of Commerce and Industry (SACCI) fell to its lowest level since May of last year. The uncertain economic outlook and lack of supportive policy measures blamed for the weak SACCI readings are likely to appear in the BER’s findings as well.
Midweek, attention will shift to two key measures of price rises. Stats SA will release consumer price index (CPI) data on Wednesday and producer price index (PPI) results on Thursday. CPI measures inflation at the consumer level while PPI measures price rises at the producer level, some of which are eventually passed on to consumers.
Consumer inflation hit an 18-month high in September, rising 5.7%, year-over-year, from 5.3% in August. Most economists and investors expect October’s readings to show a further rise. The South African Reserve Bank (SARB), for example, expects price pressures to continue through the end of this year and into next.
In a statement following its most recent meeting earlier this month, SARB’s monetary policy committee wrote that it “assesses the risks to the inflation outlook to be on the upside, mainly due to cost push pressures” — a reference to higher electricity, fuel and food prices.
- Matt Quigley writes the weekly economic preview for the Mail & Guardian. He is a former divisional director at the U.S. Treasury’s office of the comptroller of the currency and fiscal policy analyst at the Federal Reserve Bank of Boston.