Goldman recaps the past tumultuous week, and looks at events in the next 7 days, of which the key feature will be the next "latest and greatest" and most disappointing European summit on Thursday and Friday, where not even Greece is going any longer, and which not even the most resolute Europhiles expect to resolve anything.
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Week in Review: Something for Everyone
Last week contained something for everyone - Politics, monetary policy, leading indicators. The Asian markets opened to a more conclusive outcome for the Greek election than expected and a pro-bailout coalition was established in the middle of the week. The rest of the week's political events were less inspiring. The G20 and Ecofin meetings were long on commitments, short on implementation. Monetary policy was neutral to slightly more hawkish than expected and the swath of leading indicators broadly disappointed.
On the monetary policy front, the week started with quite a bit of anticipation of easier policy, however decisions panned out neutral to slightly more hawkish than expected. The key monetary policy meeting of the week was the Fed. The FOMC announced an extension of Operation Twist to the end of the year, and the statement and forecasts held a dovish bias. While the outturn was a touch less dovish than we had anticipated, judging by the price action thereafter, it was pretty much in line with broader expectations. Several other monetary policy meetings of the week were more hawkish than expected. The RBI decided to keep rates on hold in contrast to broad expectations of a 25bp cut, and the RBA minutes revealed that the decision to cut by 25bps at the June meeting was a much closer call between a cut and unchanged than anticipated. Norges Bank kept rates on hold, but suggested that rates could be hiked sooner than they previously flagged. However, as the week ended, the ECB expanded the pool of securities eligible as collateral with a lower threshold. Residential mortgage-backed securities and loans to small and medium enterprises rated at least BBB- by S&P will now be accepted with a haircut of 26%.
The swath of leading indicators published towards the end of the weak broadly disappointed summed up by the sharp drop in momentum recorded by the advanced reading of our GLI for June. Momentum dropped to -0.26%mom from -0.06%. The Philadelphia Fed survey produced the biggest negative surprise, printing at -16.6 against consensus expectations of a rise to 0 from -5.8. The HSBC Flash China PMI fell slightly, the Euroland flash PMI was unchanged on the previous print and the German IFO was a shave weaker than expected. Taiwan export orders remained weak, but the first 20-day trade data from Korea recorded its strongest month-on-month improvement in six months, providing one glimmer of light.
Given the rest of the events of the week, the Euro area balance of payments data for April went largely unnoticed. A BBoP deficit of 3.4%of GDP was reported, the third monthly deficit of the year, however the 12-month average remains close to flat, which highlights the seasonal nature of these flows. In the June FX Monthly, we looked at what could turn an orderly EUR decline into a capital flight crisis.
We opened the week with a long NZD/$ trade designed to capture Dollar weakness into and as a result of Fed easing, and also to reflect better than expected NZ data. The trade did move in the right direction in response to the Fed, however we closed the recommendation at a small loss in the face of the sharp Dollar strength on the back of the weaker than expected Philly Fed survey. We continue to hold a short GBP/NOK recommendation which was largely flat on the week despite the slightly more hawkish tilt from Norges Bank. In fact, despite a week packed full of events most crosses are only slightly weaker vs the Dollar. INR, IDR, JPY, RUB are all notable underperformers and the HUF a notable outperformer.
Week Ahead: EU Summit
The key event of next week is the EU summit. The latest European Economics Analyst details our expectations. In brief we expect to see finalization of the much-anticipated growth compact, involving financing for infrastructure investment and a restatement of the agenda for structural reform. We also expect announcement of a plan for ‘banking union’ in the Euro area, even if, owing to unresolved political differences, details are likely to remain sketchy on key issues—notably on how the implicit cost of providing fiscal backing for the Euro area banking system will be shared across countries.
Otherwise, the schedule for the week is pretty light. After the surprise delivered by the Philly Fed survey last week, the Chicago PMI is likely to be the key data print. We basically expect a flat reading on the previous month. US durable goods orders will also likely attract attention, and again we expect a flat reading.
In light of the weakness of the INR, the Indian Balance of Payments data, which will be published on June 30th, is a key piece of data out of Asia. As highlighted previously, we consider the INR and IDR to be the most vulnerable currencies in the region.
Monday 25 June
- Singapore CPI (May): We expect May CPI inflation to come in at 5.1%yoy from 5.4%yoy in April and the same as Bloomberg consensus expectation. The interest-rate-sensitive components of the CPI, e.g., transport and accommodation are expected to stay elevated.
- Also of note: Thailand Trade data.
Tuesday 26 June
- Singapore IP (May): Consensus expects a rise of 6.1%yoy after a decline of -0.3% previously.
- US Consumer Confidence (Jun). We expect a fall to 62.5 from 64.9. Consensus expects a reading of 63.5.
- Also of note: US Richmond Fed survey, Philippines trade data,
Wednesday 27 June
- Germany Harmonized CPI (Jun). Consensus expects a print of 2.1%yoy from 2.2%yoy previously.
- US Durable Goods Orders (May): We expect a flat reading, unchanged on the previous month. Consensus expects a rise of 0.5%.
- Also of note: NZ trade data, Italian business confidence,
Thursday 28 June
- EU Summit
- Germany Unemployment (Jun): Consensus expects a rise of 3k from 0k previously.
- US Q1 GDP Third reading: We and the consensus expect the reading to be unchanged at +1.9%.qoq ann.
- US initial jobless claims.
- Also of note: Korea Balance of Payments, Thailand IP, UK GDP Q1 - third reading.
Friday 29 June
- EU Summit
- Euro area Harmonised CPI (Jun). We expect inflation to remain unchanged at 2.4%yoy.
- Switzerland KoF Leading Indicator (Jun). Consensus expects a barely changed reading of 0.78 from 0.8 previously.
- US Chicago PMI: We expect a reading of 52.5 from 52.7 previously; consensus expects a rise to 53.0.
- US Reuters/U. Mich Consumer Sentiment - Final (Jun): We expect a reading of 76, from 74.1 previously. Consensus expects a barely changed print of 74.2.
- US Core PCE Price Index (May): We expect a rise of 0.15%, consensus stands at 0.2% and the previous reading was 0.1%.
- US Personal Spending (May): We and the consensus expect a rise of +0.2%, the same as the previous month.
- Also of note: Korea IP, Japan CPI, Japan IP, Australia private sector credit, German retail sales.
Saturday June 30
- India Current Account Balance (Q4 FY12): We expect the current account deficit (CAD) to come in at US$20.8bn (4.3% of GDP) in 4QFY12, from US$19.6 bn (4.3% of GDP) in 3QFY12, led by a higher trade deficit. We expect slackened global demand to keep exports weak and the adverse effects of higher oil prices to keep imports high, thereby keeping the CAD high. This is also visible in the monthly trade data