The Week Ahead: Hold On To Your Hats!

When it comes to the global economy, it seems like the fun is just getting started: Regulators are now  calling for extra capital to be imposed on the largest banks, Bank for International Settlements urge economic growth to slow down in order to curb inflation, central bankers are screaming for rate hike and Greek deputy prime minister warns that rebels may block new economic reforms.

“You can’t ask for more taxes in an already overtaxed country, in a market that has been sucked dry, with economic activity at zero and a huge recession.”

Antonis Samaras

Yup! Just when you thought the Chinese was going to save the day, it turns out that it’s not that easy after all. No matter what the bureaucrats of Brussels asks for; the people of Greece may very well give them the middle finger. But that’s not all. The central bankers – who have declared the worst is over  every other week for two years – has suddenly discovered that it’s probably not.

Right now rather disturbing news reports are pouring in.

Here’s some of the headlines of the financial press at the moment:

FINANCIAL TIMES

• Economic growth must slow, warns BIS. Bank for International Settlements says that with scope for rapid growth closing, monetary policy should be quickly brought back to normal.

• Regulators agree extra bank capital protection. Extra capital charge of 1%-2.5% of risk-adjusted assets to be imposed on the largest banks in a bid to protect them
• Lloyds has largest exposure to risky loans. Bank of England data show loans representing more than a quarter of mortgage book are worth at least 90% of property value they are secured against.

REUTERS

• Greek rebel lawmakers may block austerity: deputy PM. Greece‘s deputy prime minister warned on Sunday that rebel lawmakers may block some reforms sought by international lenders, though parliament will probably back an overall austerity package this week to avert national bankruptcy.
• Protesters demand French nuclear plant. Thousands of demonstrators formed a human chain outside France’s oldest nuclear power plant on Sunday to demand the site be closed.
• Greek debt restructure inevitable: PIMCO’s El-Erian.  Greece’s sovereign debt restructuring is inevitable, PIMCO co-chief investment officer Mohamed El-Erian said on Sunday, warning the nation’s problems.
• BIS warns investors on slimmer bank returns. Investors in banks may need to scale back their profit expectations as new rules to curb risk-taking will likely halve pre-crisis returns.

AP

• Biden warns GOP on debt ceiling talks. US Vice President Joe Biden said Saturday the Obama administration wouldn’t let middle class Americans “carry the whole burden” to break a deadlock over the national debt.

THE WALL STREET JOURNAL

• French Banks Seek Greek Debt Rollover. French banks have proposed a plan to reinvest half the proceeds from maturing Greek governments bonds ahead of a meeting of key players, in efforts to encourage private investors to contribute to a new bailout for Greece.
• Nokia, Siemens fail to secure investors. Nokia Corp and Siemens AG failed to secure a deal for investors for a controlling stake in their unprofitable joint venture.

DER SPIEGEL

• Complaints Against Rescue Fund:  Germany’s Top Court May Attach Strings to Euro Bailout.
• Massive Protests in Madrid. Thousands of protesters are raging in the streets of Madrid after the government have imposed a temporary ban on all demonstrations.

THIS WEEKS NUMBERS

Well, I have a feeling we might get a surprise or two, also, during the week.

When it comes to the economic data, European investors will look closely at the PMI surveys, that will indicate whether global soft-patch continued into June.

Th week also sees a raft of data on inflation, the US housing market and consumer trends, plus business conditions in Japan.

Monday
A week in which market attention will remain firmly set on Greece starts with the publication of Italian wages data before attention shifts across the Atlantic to the US, where personal income and outlays numbers will be used to gauge the strength of the consumer sector.

 

 

 

 

Tuesday
Greece’s Parliament is scheduled to vote on its new package of austerity measures on Tuesday. The reforms are a requirement for the next tranche of the IMF/EU loans to be released in time for the funding of bonds in mid-July.
The day also features a number of key data releases, starting with Japanese retail sales numbers for May, Gfk consumer confidence in Germany, plus business confidence and producer price numbers for Italy.
In the UK, final gross domestic product (GDP) numbers for Q1 are released, as well as current account data. According to official estimates, the UK economy expanded at only a modest rate of 0.5% in the first quarter of 2011.
After cooling in May, German consumer price inflation is expected to quicken from an annual rate of 2.4% to 2.6%.
Weekly US Redbook store chain sales are published before the release of the S&P Case-Shiller home price index takes centre stage. The index of home prices in the nation’s largest cities fell below its April 2009 low towards the end of Q1, raising worries about a double-dip in house prices.

The US Conference Board publishes its June barometer of consumer sentiment. Confidence waned in May amid rising fuel and oil prices and concerns about the employment situation. This apprehension among consumers likely continued in June.

Wednesday
Preliminary industrial production numbers for Japan will be eagerly anticipated after trade data showed exports falling at a faster-than-expected rate.
French GDP data (final) for Q1 are released in advance of UK consumer credit, mortgage lending/applications and money supply numbers.
European Commission economic sentiment figures for June follow.
Weekly US mortgage applications data are released, as well as pending homes sales numbers, which plunged in April. However, there is evidence to suggest that temporary factors, such as bad weather, were behind the severity of the decline.

Thursday
The Gfk consumer confidence survey for the UK is published ahead of the Markit/JMMA Manufacturing PMI™ for June. The PMI™ pointed to renewed output growth in May, as easing supply chain pressures enabled firms to restart production lines.
Euro zone inflation comes under the spotlight with producer price data for France and the preliminary estimate of consumer price inflation for the single currency area as a whole. After dipping unexpectedly in May, a further easing in the rate of inflation will make a rate hike later in the year less likely. German unemployment numbers are also published for June.
The usual US weekly jobless claims date are accompanied by the Chicago PMI, which will be watched closely due to its good track record with the ISM manufacturing index, published Friday.

Markit’s release of Manufacturing PMIs for Asia follow, notably final data for China, where the flash HSBC PMI™ survey pointed to a stagnation of output and easing price pressures across the sector. HSBC PMI™ releases for South Korea and Taiwan will be monitored for trends in global trade flows.
The Markit Euro Zone Manufacturing PMI™ data follow last week’s flash estimate, which showed the region’s economic growth surge losing momentum at a worrying rate.
The publication of the Markit/CIPS UK Manufacturing PMI™ follows shortly after. May data signalled that manufacturing moved from rapid expansion to near-stagnation.
Italy publishes final GDP numbers for Q1 and jobs numbers before the unemployment rate for the euro zone is released.
The week ends in the US, where the University of Michigan consumer confidence index will shed light on consumer spending patterns. Construction spending numbers follow.

However, the ISM Manufacturing PMI will be the key release in the US; the headline index posted its lowest reading for 12-months in May, reflecting a marked slowdown in output and new order growth.

Friday
Friday starts with the release of unemployment, consumer price inflation and household spending numbers for Japan, plus the Bank of Japan’s quarterly survey of business conditions.

Now, hold on to your hats, and trade with attitude!

Related articles:

• QE3? Don’t even think about it, says BIS (olafstorbeck.com)
• Flood berm collapses at Neb. nuclear plant (cbsnews.com)

Global Economic Growth Drop To Lowest Level In Two Years

Well, almost. According to the latest PMI survey by Markit, the pace of global economic growth slowed to a 21-month low in April, and not merely due to an increased rate of contraction in Japan following the earthquake.

“Some signs also appeared that inflationary pressures may have begun to ease.“

Markit Economic Research

The JPMorgan Global PMI, compiled by Markit, indicated the weakest rate of growth of the global economy since the recovery began in August 2009. Although much of the deterioration could be linked to the Japanese earthquake, the pace of expansion also slowed outside of Japan.

The Global PMI, which measures private sector output growth across manufacturing and services, fell for a second successive month from February’s five-year high, down from 54.5 in March to 51.8 in April.

The steep deterioration in the rate of growth has largely reflected the disruptions to business caused by the Japanese earthquake of March 11.

However, even excluding Japan, the PMI surveys indicated the weakest growth for seven months in April, signalling a slowdown of approximately half of the magnitude that the index including Japan has registered since the quake struck. Reassuringly, despite the decline, the index excluding Japan is still consistent with global gross domestic product (GDP) rising at an annual rate of 2.5%–3.0% at the start of the second quarter, having signalled a rate of approximately 3.5% during the first quarter, including Japan, the quarterly GDP growth rate signaled in April was approximately 1,5% – 2,0%, the report says.

“Most notably, among the world’s major G4 (developed) and BRIC (emerging) economies, a steep cooling in the rate of growth in the US non-manufacturing sector has been reported in the past two months, and growth also cooled in the UK, China and Brazil in April. The weakness is not universal, however, with the Euro zone continuing to grow at a strong pace, buoyed by surging growth in France and Germany, while India continue to boom and Russia saw robust growth.“

New Orders Disappear

New business growth in the US slumped to the weakest since August 2009, and China has also reported only modest growth in recent months – most likely linked to ongoing efforts by the authorities to cool the overheating domestic economy.

“The weaker growth of new business is perhaps the greatest worry in respect to future output and employment growth, and suggests that the rate of global economic growth may have peaked in the first quarter. There are many uncertainties, however, notably the extent to which manufacturing supply chains outside of Japan may have been affected by the earthquake, and therefore hit production and order book growth. Against this, though, is the fact that rates of growth have slowed sharply in both manufacturing and services across the world in the past two months, and it is the service sector which has seen the strongest deceleration and which, in theory, should be little-affected by supply chain disruptions,“ chief economist Cris Williamson writes.

This has – of course – a severe impact on employment and job creations.

It doesn’t look good, at all…

Here’s a copy of the report.

Latest releases by Markit Financial Information:

• Worldwide price pressures ease to four-month low, but autos a notable exception
• ECB poised to hike rates in July while US and UK rates look set to stay on hold through 2011
• Japan’s economy contracts at increased rate in April
• China’s growth rate slips to 25-month low, but Taiwan sees pick-up
• UK surveys point to sharp growth slowdown
• Consumer spending in UK jumps in April but fundamentals have not improved
• Euro zone starts second quarter on solid footing
• Broad-based easing in EU growth and price pressures in April

Related by the Econotwist’s:

Related articles:

• Leading indicators – global growth peaking mid-year? (businessinsider.com)
• Europe Manufacturing Growth Accelerates More Than Estimated (businessweek.com)
• Japan’s Current-Account Surplus Shrinks After Earthquake (businessweek.com)
• Japan Apr Watchers’ Index Rebounds Slightly From 2-Year Low (forexlive.com)
• You: Sekisui banking on big home-building boom (search.japantimes.co.jp)
• Earthquake Weighs on Japan’s Current Account Surplus (online.wsj.com)

IMF Update: The Recovery Continues (We Hope…)

The International Monetary Fund (IMF) is out with its first update on the global economy this year. Reading through the report, it seems like the IMF is trying to convince, primary themselves, that an economic recovery is just around the corner. The cold facts, however, don’t give any conclusive answer – the charts looks more like a flat-line on an EKG monitor.

“Financial stresses, however, are expected to remain elevated in the periphery of the euro area, where market participants are still concerned about sovereign and banking risk, the political feasibility of current and envisioned austerity measures, and the lack of a comprehensive solution.”

International Monetary Fund

Well, I don’t think anyone can blame the IMF for being uncertain about the world economic outlook. Most experts, including the US Federal Reserve, is. In its latest update, the IMF points to the fact that it is substantial differences in the economic conditions from region to region, and from nation to nation. The main message, however, seems to that the downside risks has increased since the last report in October 2010.

The report “World Economic Outlook Update – January 2011″ was released at 3 AM (EDT) this morning.

At the moment it’s being dissected by economist and analysts, hunting for clues to what may be in store for them in the months to come.

I don’t think they will find much, thou. Looking at the projected development of the global economy in 2011 and 2012, it shows an almost totally flat line.

Here’s the report’s executive summary:

“The two-speed recovery continues. In advanced economies, activity has moderated less than expected, but growth remains subdued, unemployment is still high, and renewed stresses in the euro area periphery are contributing to downside risks. In many emerging economies, activity remains buoyant, inflation pressures are emerging, and there are now some signs of overheating, driven in part by strong capital inflows. Most developing countries, particularly in sub-Saharan Africa, are also growing strongly. Global output is projected to expand by 4½ percent in 2011 (Table 1 and Figure 1), an upward revision of about ¼ percentage point relative to the October 2010 World Economic Outlook (WEO). This reflects stronger-than-expected activity in the second half of 2010 as well as new policy initiatives in the United States that will boost activity this year. But downside risks to the recovery remain elevated. The most urgent requirements for robust recovery are comprehensive and rapid actions to overcome sovereign and financial troubles in the euro area and policies to redress fiscal imbalances and to repair and reform financial systems in advanced economies more generally. These need to be complemented with policies that keep overheating pressures in check and facilitate external re-balancing in key emerging economies.”

Now, let’s see:

• “comprehensive and rapid actions”
• “policies to redress fiscal imbalances”
• “reform financial systems”
• “keep overheating pressures in check”
• “facilitate external re-balancing in key emerging economies”

I’m afraid the IMF is severely overestimating the European governments ability come up with, and agree on, common solutions.

And these recent economic indicators seems to be pointing in the wrong direction.

So, we better have a closer look at the IMF’s alternative scenario, which is pretty much the same as decried in their last report – WEO October 2010.

“The scenario—which is broadly similar to the one presented in the July 2010 WEO Update— assumes that a large shock followed by insufficiently rapid and strong policy action results in significant losses on securities and credit in the euro area periphery. This causes capital ratios to fall substantially in several countries, both in the periphery and the core.”

“Under such a scenario, European banks tighten lending conditions by a similar magnitude as during the collapse of Lehman Brothers in 2008. As a result, euro area growth is reduced by about 2½ percentage points relative to the baseline. Assuming that financial spillovers to the rest of the world are limited – with the increase in bank-lending tightness in the United States about half that in Europe – global growth in 2011 is lower by about 1 percentage point than in the baseline. But if financial contagion to the rest of the world is more severe – resulting in a spike in generalized risk aversion, a drying up of liquidity, and sharp falls in equity markets – the impact on global growth would be substantially larger, amplified by balance sheet weaknesses in other major advanced economies.”

Another Lehman-shock, hu?

Personally, I would not be surprised. Even the IMF has figured out that the financial sector is still in deep trouble, in spite of what the big-bank CEO’s might say.

“The risk of financial turmoil spreading from the periphery to the core of Europe is a by-product of continuing weakness among financial institutions in many of the region’s advanced economies, and a lack of transparency about their exposures. As a result, financial institutions and sovereigns are closely linked, with spillovers between the two sectors occurring in both directions. Although the periphery accounts for only a small portion of the euro area’s overall output and trade, substantial financial linkages with countries in the core, as well as financial spillovers through higher risk aversion and lower equity prices, could generate a slowdown in growth and demand that would hinder the global recovery. In particular, continued market pressures could result in serious funding pressures for major banks and sovereigns, increasing the likelihood that problems spill over to core countries. Figure 4 presents an alternative scenario that illustrates how larger spillovers can subtract from growth.”

Jepp, we can see that….the banks will – under IMF’s alternative scenario – completely stop lending money.

Hey, Ben! May we have another QE, please?

Here’s a copy of the report.

Related by The Econotwist’s:

• Europe In Debt (Part 1): Creating a Monster
• Yippee! Another European Stress Test Festival!
• Fitch: Euro Governments Borrowing To Drop by 9% in 2011
• Looks Like A Classical Pump&Dump Setup
• EU To Increase Bailout Fund, Brussels Demands More Austerity
• 2011 Key European Issue: Politicians And Politics
• Greece About To Enter The Death Spiral
• A Report To Make You Go ”Hmmm…”
• Global Economy On Fast Track To Disaster

Related Articles:

• IMF Ups 2011 Global Outlk On Stronger-Than Expected 2H’2010 (forexlive.com)
• I.M.F. Says European Debt Still Threatens World Recovery (dealbook.nytimes.com)
• IMF predicts faster global growth (bbc.co.uk)
• IMF: EU Needs Bigger Rescue Fund (huffingtonpost.com)
• Inflation as great a threat as European debt crisis, warns IMF (telegraph.co.uk)
• IMF downgrades Canadian outlook as global forecast improves (calgaryherald.com)