The economic week ahead: Giving credit

How much credit do Europe’s leaders deserve for their latest efforts to confront the continent’s sovereign debt crisis? This is the central question likely to preoccupy markets in the week ahead. Investors will pay particular attention to the collective answers of the European Central Bank (ECB), credit rating agencies and bond investors. Their assessments will come as data releases scheduled elsewhere in the world likely illustrate the still fragile state of the global economy.

Market reactions to last week’s summit, central bank actions and a possible decision from credit ratings agencies will dominate European economic news in the week ahead.

At a summit this past week, European leaders agreed to a series of steps designed to save the continent’s common currency, the euro. Leaders from 26 of the European Union’s 27 member nations agreed to draft a new treaty for deeper economic integration in the region.

The treaty, which faces a risky drafting and ratification process over the months ahead, will be designed to impose centralised budget discipline on member nations. Britain, the region’s third largest economy, announced that it would not participate in the agreement, thus threatening a lasting rift between the island nation and mainland Europe.

Despite the historic accord, the threat of credit downgrades still hangs over much of Europe. The credit ratings agency Standard & Poor’s announced last week that it may cut the ratings of 15 nations, including economic powerhouses Germany and France.

A downgrade to these two nations would increase the borrowing costs of the European Financial Stability Facility—the temporary bailout mechanism used to fund rescue packages for Greece, Ireland and Portugal—thus threatening future bailouts of Italy and Spain, should the need arise. In the week ahead, markets will be nervously waiting to see if Friday’s agreement is enough to placate credit analysts.

Politicians at the summit also agreed to rush forward to 2012 establishment of the region’s permanent rescue fund—the European stability mechanism—and to increase its effective lending capacity to €500-billion. They also pledged to contribute an extra €200-billion to the International Monetary Fund (IMF) with the understanding that IMF officials will add this to the €250-billion they have already pledged to make available to debt-laden European nations.

Markets are broadly hoping that these steps will be enough to prompt the ECB to unleash billions more of its own funds to help lower the borrowing costs of Italy, Spain and other debt-laden European nations.

Until now, the ECB has seemed more focused on rescuing Europe’s troubled banking sector than its beleaguered governments. In a bid to spark additional bank lending, the central bank cut interest rates to 1% last Thursday, offered unlimited cash to financial institutions for three years and loosened collateral rules for loans.

Although these actions may ease the bank’s funding pressures over the next few months, they do not relieve pressure on government finances. Europe’s governments need to repay more than €1.1-trillion in debt in 2012. A substantial portion of this debt will mature during the first half of the year.

If Italian and Spanish bond yields continue to rise in the week ahead, investors will be watching to see if the ECB steps in with greater levels of bond purchases than it has done to date. They will also be watching to see if Friday’s agreement was enough to convince the ECB that the bank should now pledge further action to reassure markets and bring borrowing costs down on a more permanent basis.

United States
Retail sales figures, a central bank meeting, and two key measures of inflation dominate a full American economic calendar this week.

On Tuesday, America’s Census Bureau will release monthly retail sales figures for November. Consumer spending accounts for roughly two-thirds of the country’s gross domestic product (GDP), so economists watch these figures closely. Analysts expect November’s data to show a healthy 0.5% monthly gain, the same expansion rate reported in October.

Later on Tuesday, the Federal Reserve will announce its latest interest rates decision. Most economists expect policymakers to leave the central bank’s federal funds target rate unchanged at 0.0% to 0.25%. As always, investors will scour the bank’s post-meeting announcement for clues to any deterioration in central bankers’ economic outlook.

On Thursday, attention will shift to the first of two key inflation measures scheduled for release this week. The producer price index (PPI) measures price rises at the producer level, some of which are eventually passed along to consumers. Analysts expect to see a fall in the rate of monthly producer price rises from 0.3% in October to 0.2% in November.

The week’s second inflation measure will follow on Friday when the government releases its latest consumer price inflation (CPI) data. Economists expect November’s data to show a slight 0.1% monthly rise following a 0.1% decline in October.

In an otherwise light week for economic releases in the region, manufacturing data from China and business confidence figures from Japan will likely dominate Asian economic headlines in the week ahead. Both releases are scheduled for Thursday.

HSBC’s purchasing managers’ index (PMI), along with a similar survey from the China Federation of Logistics and Planning, are the two most closely followed surveys of China’s massive manufacturing sector.

PMI readings reached their lowest level since March of 2009 last month. Analysts expect to see further deterioration in December’s numbers, a worrying sign that the world’s second largest economic engine is slowing.

Across the East Sea, the Bank of Japan’s release of Tankan survey results is also likely to attract widespread market interest. The Tankan survey is a quarterly survey of business sentiment and expectations issued by nation’s central bank.

Japan’s businesses, like so many throughout the world, have experienced a difficult year. As a result, few economists expect to see a positive story in Thursday’s data. Adding to pessimistic expectations, a similar gauge of business sentiment released by Reuters last week turned negative for the first time in six months.

South Africa
South African markets are likely to focus on inflation this week as November’s consumer price index (CPI) and producer price index (PPI) figures are released along with the Bureau for Economic Research’s fourth quarter inflation expectations survey.

South Africa has been simultaneously confronting the dual threats of low growth and high inflation for months. Targeted CPI inflation hit the upper end of the Reserve Bank’s 3% to 6% target range in October. Producer prices recorded a 10.6% annual gain for the month. Analysts do not expect this week’s data releases to paint a prettier picture.

Reserve Bank officials expect inflation to continue to rise into 2012, with CPI peaking at 6.3% in the first quarter. Markets seem to agree. Yields on inflation linked bonds, which are viewed as a hedge against inflation by investors, fell at an auction on Friday. This is a signal that investors expect that inflation is likely to increase.

  • Matt Quigley writes the weekly economic preview for the Mail & Guardian. He is CEO of the African Foresight Network, a former divisional director at the US treasury department’s office of the comptroller of the currency and a former policy analyst at the Federal Reserve Bank of Boston.

Matt Quigley

Matt Quigley

Matt Quigley writes the weekly economic preview for the Mail & Guardian. His blog on the South African economy can be found at Read more from Matt Quigley

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