Week Ahead is about Clarity

Marc To Market's picture

The low volatility of the capital markets should not be confused with high confidence by investors at the moment.  The outlook for the US economy has been clouded by the unexpectedly large drop in Q1GDP and weak real consumption in April and May.  


There is great uncertainty over the world's second largest economy and the extent that the weakness in house prices the proverbial canary in the coal mine.  At its peak, the housing sector, broadly understood to include construction and furnishing, accounted for nearly a quarter of GDP.  


Japan, the world's third largest economy, is struggling after the retail sales tax increase.  However, official still sound confident--that the direct impact is not as bad as feared and the economy will bounce back quickly.  


The euro zone appears to be expanding, but enjoys no momentum.  France, with the second largest economy may be contracting again.   The impact of the ECB's negative deposit rate continues to be studied by investors and policy makers alike.   Neither the negative deposit rate nor the other rate cuts and promise to expand the central bank's balance sheet by another 400 bln euros before the end of the year has succeeded in driving the euro lower, yet.  


By the end of next week,  there is likely to be greater clarity of these issues and more.  Here is our top ten.  


1.  US:  A combination of robust auto sales and another 200k+ increase in non-farm payrolls may go a long way toward easing some creeping pessimism about the state of the economy.  The June auto sales figure will likely confirm the strongest quarter in seven years.  Jobs growth of more than 200k would extend the streak to five months, a feat not seen since the Sept 99-June 00 period, just before the  internet bubble burst.   The Market New International consensus is for a 208k rise; the Bloomberg consensus is for 215k while the Reuters consensus is for 217k increase.  The ISM/PMI readings also give no reason to expect anything but a sharp rebound in the US economy.  The cynics may talk about a contraction in Q2, while the pessimists talk about low-2% growth and the optimists are above 3%.


2.  Targeted government efforts and renewed exports appear to have helped the Chinese economy stabilize.  This will likely be confirmed by the June PMI data.    The yuan appears poised to appreciate further in the days ahead after finishing last week at a two-week high.  Money market rates are rising, and there appears to be heightened demand for yuan ahead of quarter-end.  In addition, there is a sense in some quarters that officials will not encourage yuan depreciation ahead of the next round of Strategic Economic Dialogue with the US.  


3.  The collapse in Japan's overall household spending in May (-8.0% year-over-year vs. -2.3% expected after -4.6% in April) warns that the tax may be taking a large toll on consumption than expected.  However, output does not appear to have been hit as hard.  This may be the message from the Tankan survey and May industrial output figures due out in the days ahead.  That said, sentiment among the large manufacturers is expected to have declined, snapping a five quarter advance. 


4.  The euro zone highlight will be the ECB meeting.  After significant steps in early June, it is unreasonable to expected anything but a re-articulation of the ECB's message.  It needs to monitor the impact of the new measures, and the TLTROS scheme is not launched until September.  The ECB stands ready to take additional measures if needed.  Among these measures could be purchasing asset-back securities, but more technical and regulatory work is needed.  As inputs into the ECB's decision will be the latest PMI prints, M3 and credit expansion (or contraction, as has been the case, into its third year), retail sales and the flash June inflation and unemployment report.  


5.  The UK's Cameron has suffered two stinging defeats.  The first was domestic when his parliament denied his will in Syria (Would other British prime ministers have resigned?).  The second was last week, at the hands of the other EU heads of state (save Hungary) who ceded authority to the 40% of the eligible voters who participated in the EU Parliamentary election in order to rebuke the UK.   If Cameron wanted to strengthen the anti-EU sentiment in the UK, he might not have been able to devise a better strategy.  On the other hand, many officials immediately had "buyers' remorse" and offered compromising statements (which do not appear to have legal standing, yet).   Nearly everyone agrees in the abstract that there needs to be reform in the EU, but nearly everyone disagrees with the particulars.  


6.  The March 2015 short-sterling futures contract has recouped about half of the loss suffered in response to BOE Governor's volta face at the Mansion House.  The monthly series of PMI reports are expected to suggest the UK economy continues to stabilize at a relatively strong level of activity. The FPC minutes that will be released Tuesday may generate insight into how prepared officials are to scale up their efforts and the market's nonplus reaction to the initial tweaking of macro-prudential measures.  


7.  The Reserve Bank of Australia meets on July 1.  It will not change policy, but it will update its forward guidance.  It will likely further evolve, helping investors realize that officials are somewhat less confident about the transition away from mining.  May retail sales will be reported on July 3 and will likely show the fragility of the consumer, especially following the announcement of tighter fiscal policy. The Australian dollar appears to be trading near its best level of the year on a trade-weighted basis.   The risk that the RBA dials up its rhetoric regarding the currency.  


8.  On July 3, the same day that the ECB meets and the US reports the monthly employment data, Sweden's Riksbank meets.  It is expected to announce a 25 bp rate cut. Demand, reflected in the recent retail sales report and the trade balance, is weaker than expected, and the country is still flirting with deflation.  Consumer prices have declined by 0.2% in the year through May, though the core measure is still up 0.4%.  Governor Ingves has been most reluctant to cut rate rates, but finally has succumbed the weight of logic and the preponderance of evidence.  At his press conference, he is likely to suggest that this is a one-cut.  The ECB's rate cuts have signaled an end to the euro's uptrend against the Swedish krona, which carried to its highest level since late 2011.   The euro faces initial resistance in the SEK9.20-SEK9.22  and then SEK9.27-SEK9.30.  


9.  Canada appears to be moving in the opposite direction. After a weak start to the year, the Canadian economy has accelerated.  An April print of 0.4%, due Monday, will put it on track for 3% growth in Q2.  Markets are closed on Tuesday for Canada Day, but on Thursday, Canada is likely to report a smaller trade deficit, with some risk of a surplus after the Vancouver Port strike ended. 


10.  There are several geopolitical situations coming to a head.  The EU is threatening top levy a new rounds of sanctions against Russia unless it begins cooperating with Organization for Security and Cooperation in Europe (OSCE) and respecting the ceasefire.  Japan's Prime Minister is likely to affirm a controversial new interpretation of its Constitution that would permit it to come to the military assistance of its allies.    On July 1, the Iranian parliament is expected to formally begin talks that will likely lead to a new government.

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Comte d'herblay's picture

Once again, this Monday, I am reminded that I know this week even less than I did last week.

At this rate of attrition, I will soon have the mentality of new born babe.  And I'm thinking that total ignorance might not be all that bad.



CH1's picture

Clarity is not easily acheived via government numbers.

Rocket De Stock's picture

This guy still writes everything from the persepctive / using the information provided by main stream media to suggest "everything is going fine" just slower than expected blah, blah.

Japan is completely fukt and the data week over week just gets worse n worse.

U.S is completely fuct and can't possibly post second quarter GDP and "not" reflect full blown recession, and the E.U banking system is leverged to the nuts with not even the smallest chance of getting out of this without severe economic strife.

Forex Kong on U.S Dollar:


BeetleBailey's picture

Great post Marc.


My take?

USD; weak and poopy, akin to Fuckbama post Moochie-induced cleansing Summer's Eve treatment....



CAD: OILLLLLLLLLLLLL...and no slave history....




stalking pairs as I type this.....

lasvegaspersona's picture

A recession is 2 consecutive quarters of negative growth.

I wonder if they packed all the bad news into Q1 numbers so they could show a positive number in Q2. It could have been done after the Q1 numbers were shown not to be + 0.1% but rather a negative number. Why not show a really bad Q1 and make Q2 look like a vast improvement?

It seems we may see a negative overall H2 even if we do come close to 3% in Q2.

Everyone knows recessions cannot be allowed...bad for morale, especially among the chronically unemployed....err loafing and not even looking for work cuz lifes good and why waste it at a job?...

disabledvet's picture

Maybe the President could declare July 1st "National Naked Day"? A day where "whatever is being done...it is to be done with absolutley no clothes...nor facsimile of said wear... on." Weed whacking, bartending, providing customer service on the phone. "On this day...and this day alone...it will be understand that since we cannot hide anything from anyone anymore...hencefore and going forward June 30th will be recognized as National Naked Day." Thus ending the peculiar internet suspicion of "are you wearing anything?"...if only for a day. Perhaps a Proclamation or something there of. I do thing the President should be excepted from said "notice" of course. Do wonders for getting Americans back in shape that's fer sure. "Furthering the First Lady's goal of 'lookin' good in the hood.'"

it's not like people don't want to dance just cuz.

Billy Shears's picture

Yes, I only read through the 2nd bullet point before I picked up the phone and called my broke to enter market buys for the open. I'm going all in!

Dead Canary's picture

Um... Ok...

Who is this guy anyway?

Cult of Criminality's picture

The word  "unexpected" invited me to leave the article before reading.

Thanks anyway

gmak's picture

[Canada] risk of surplus. * snort *


Only in wonderland would a trade surplus be considered a risk. Now if only we could stop the spending in Ontario which is an anchor around the country's neck and will slowly but surely drag it into the abys - waving to Quebec as it falls past our French cousins.