Key Events In The Coming Week
From Goldman Sachs
The past week was dominated by the Eurogroup statement over the weekend that Spain will seek financial support for its banks. According to the statement, Spain intends to make a formal request soon, with financial assistance expected to be around EUR100 bn and to come from the EFSF or ESM. Aid will be channeled through the FROB, and will increase the debt burden of the Spanish sovereign. There will be no macro or fiscal conditionality as in the bailouts of Greece, Ireland and Portugal, but only on bank sector restructuring. That said, there will be monitoring of the deficit and structural reforms as part of this bailout, though no conditionality, and the IMF is also invited to monitor progress under the program. Separately, the week also saw lots of commentary out of the Fed, including from Chairman Bernanke and Vice Chair Yellen. At this point, we see any easing as a close call between a modest extension of the “twist” and a broader purchase program involving mortgage-backed securities and long-term Treasuries, financed via balance sheet expansion. Our base-case forecast remains the latter. Finally, also over the weekend China data for May showed inflation coming down and a weaker activity picture, as had been signaled by last week's policy rate cuts. That said, China's trade balance surprised positive (Figure 1), with stronger-than-expected import growth, even if some of that came from holiday effects. Markets rallied broadly last week, presumably as they sensed a more activist stance from policy makers on both sides of the Atlantic. In FX, cyclical currencies that have been hard hit in recent weeks rallied back strongly (Figure 2), including RUB, HUF and MXN. Against this backdrop, we shifted our tactical recommendations in FX back to neutral, closing our short $/JPY recommendation that we had held since March 22.
Against the backdrop of policy progress in Europe and an FOMC that looks set to ease at least incrementally, what is notable is that USD positioning is max long, as we have flagged recently in our weekly IMM emails. To put this in perspective, we compare IMM positioning now with just prior to the announcement of the "twist" on September 21. Back then -- with Euro zone tensions also running high -- our proprietary positioning score for overall USD positioning was +8, just shy of the current reading of +10. Looking at positioning on individual currencies, what is notable is that positioning currently has much bigger shorts on NZD and AUD, while the EUR short is roughly comparable (Figure 3).
Looking to the week ahead, the key question for us is where to harvest excessive risk premia, bearing in mind that the Greek elections are around the corner. On the fundamentals, we like CNY, SGD and MYR the most, as we think balance of payments support offers some insurance against the Greek elections. In Latam, the risk premium in MXN looks excessive to us, but this currency will be vulnerable to any adverse Greek developments. In terms of policy talk and data, for the former Fed chatter ends on Tuesday when the blackout period begins ahead of the FOMC on June 19/20. For the latter, US retail sales and industrial production will be important to watch as we head into the FOMC next week.
Tuesday June 12th
- India industrial production (Apr) We forecast IP growth to remain weak at 1.3% yoy (consensus 1.7% yoy), from -3.5% yoy in March. There is general weakness in industrial activity, indicated by the April core sector data and our Current Activity Indicator (CAI), with the latter having shown a declining trend since the start of 2012. Apart from this, April IP is expected to be dragged down by negative seasonality factors, which generally keep the sequential activity momentum weak.
- Indonesia central bank meeting We expect Bank Indonesia to keep rates on hold at 5.75%, in line with consensus. Previously, the central bank has stepped up monetary operations to contain inflation risks. We continue to keep our baseline view for unchanged policy at 5.75% for the rest of the year unless fuel price hikes materialize further down the road.
Wednesday June 13th
- Thailand central bank meeting We expect Bank of Thailand to keep the policy rate on hold at 3.00%, in line with consensus. The post-flood recovery is progressing at a faster-than-expected pace so far—the central bank highlighted in its last statement that manufacturing production disrupted by the floods was projected to return to normal levels by end-2Q2012 (vs. the previous guidance of 3Q2012). We believe rate normalization against the backdrop of post-flood-reconstruction spending and the associated build-up in inflationary pressures will take place in 4Q2012.
- US retail sales (May) We forecast that retail sales growth cooled significantly in May, at -0.5% mom compared to consensus of -0.1% mom. Weaker vehicle sales and the decline in gasoline prices point to a likely decline in headline retail sales. However, we also expect that growth in “core” retail sales (ex-autos, gasoline and buildings) also stalled after steady growth earlier in the year, based on chain-store results for the month. We are looking for a flat reading here, compared to consensus of 0.4% mom.
Thursday June 14th
- India WPI (May) We expect May WPI inflation to come in at 6.9% yoy (consensus 7.5% yoy). We expect the divergence in headline and core WPI to continue, while weakness in activity, base effects and tight liquidity will keep manufacturing and core inflation low, at close to 4.5% yoy. We expect primary inflation to remain high on a yoy basis, held up by the food sub-component. On a sequential basis, however, we expect primary articles WPI inflation to moderate slightly, due to favorable seasonality trends generally seen in the month of May.
- Philippines central bank meeting We expect the central bank to keep rates on hold in its upcoming policy meeting, in line with consensus. The central bank has cut rates by a total of 50 bp since January 2012.
- New Zealand central bank meeting Consensus expects the OCR to remain unchanged at 2.5%.
- Switzerland central bank meeting We expect no change from the SNB at this meeting, in line with consensus. We recently changed our call for no re-peg in EUR/CHF higher.
- Euro zone CPI (May) Consensus expects a reading of 2.4% yoy, unchanged from the last one.
- US CPI (May) The CPI likely declined in May on a drop in energy prices, where we are looking for a reading of -0.31% mom, below consensus of -0.2% mom. However, we forecast another firm increase in the core, with growth of +0.20% month-over-month, in line with consensus.
Friday June 15th
- Japan central bank meeting
- US industrial production (May) Modest growth in manufacturing employment and a contraction in hours suggest industrial production expanded only moderately. We forecast a gain of 0.2% mom after a 1.1% increase in April (consensus 0.1% mom). Sluggish growth would also be consistent with the downshift in business surveys during the month.
- US Net long-term TIC data (Apr)
- US University of Michigan consumer confidence (Jun) Consensus expects a reading of 77.5 after 79.3 in the last report.
Sunday June 17th
- Greek elections