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The Global Markets Weekly – 5-11/12
No Golden Dawn for Investors Yet
We discovered this week that the election of more near-term importance to investor thinking was in Greece not France, even though the French election results may be the more important longer-term. DE increasingly thinks that a fresh election is likely in Greece, which will usher in a new coalition opposed not only to additional measures that are needed to meet austerity targets but would roll back existing ones. This is anathema to the rest of the Eurozone, which seemingly makes a Greek exit from the euro club increasingly likely this summer. But this would be a “managed exit” in an effort to reduce the chances of the “Greek moment” becoming the next “Lehman moment.”
The events of the last week support DE’s suggestion that a Hollande victory might help Germany ease its austerity above all pledge more rapidly. Policymakers signaled that they could accept an inflation rate as high as 3%, well above the 2% Eurozone average as well as a faster pace of wage gains. This would not only help boost German growth which is currently stagnant but would also reduce how much the hard-pressed peripheral nations would have to internally devalue in order to become more competitive with Germany. In addition, Brussels suggested its willingness to stretch out the 3% deficit target from 2013 to 2014.
While these are important step, they will make little difference to the short-run economic situation even though they assuage investors. Right now, the periphery needs more money, particularly to bail out the Spanish banks. The money has to come from somewhere, ranging from the rich nations in the EU to the members of the IMF. Fiscal transfers are a way of life in the U.S., why not within the Eurozone, some argue.
- U.S.: A busy midmonth calendar awaits investors lead by a possible modest gain in retail sales, a decent gain in IP, a modest bounce in housing starts, and a modest gain in the CPI. The closely watched Fed regional PMIs are expected to rebound modestly after the big drop in April. Still, all this is unlikely to change the consensus view that Q2 will be at best not much faster than the 2.3% pace of Q1.
- Eurozone: Major bond auctions this week may exaggerate the market reaction to unfolding developments. The EU may agree to stretch out the 3% deficit targets this week, as discussed above. Merkel meets with Hollande for the first time this week and are sure to show some unity regarding Greece. The Q1 GDP data may show a slightly larger contraction than Q4 but this may be distorted by the weather as the upcoming March IP figures may show a rebound. Car registrations and the ZEW survey may support the notion that the weak Eurozone may be on a firmer footing into Q2. Finally, the HICP data will confirm the drop in the headline rate to 2.6%.
- UK: The upcoming BoE Inflation Report will hint that asset purchases may resume, albeit also hinting that the MPC was split on the issue. The labor market report this week may be weak after some mixed messages. In particular, the average earnings data may be even weaker, implying more erosion in household purchasing power.
- Japan: This weeks Q1 GDP report should show growth probably accelerating to 0.8% in Q1 thanks to a good boost from household spending after a 0.2% drop in Q4. Domestic goods prices will temporarily dip back into deflation. Tertiary activity may decline, while machinery orders will drop sharply in March after huge gains earlier in the year. A steady uptrend in capex seems underway.
- Emerging Markets/Regions: With no central banks we follow on tap, data flow will be watched. Price gains in India will show easing. Hungary and Czech Republic GDP will see declines from spillover effects form the Eurozone, while Russia GDP shows commodity-based strength. Low interest rates and inflation bolster growth in Mexico.