The Global Markets Weekly – 7/20/12

Posted July 23, 2012 by Editor

 Watch What They Do, Not Say[private]gmw_072012

Most analysts expect U.S. Q2 GDP growth to be only 1 ½% in Q2, down from the anemic 1.9% in Q1 and well below the near 2 ½% pace expected just 6-8 weeks ago.  There is always the possibility of surprises, in part because the volatile inventory and trade components are estimated with only two months of data.  In addition, estimating Federal purchases confounded analysts last quarter, who anticipated a rebound after a big drop in 2011 Q4.  The rebound may materialize in Q2, which could put growth above 2%.  But investors will discount this “strength,” since they know the growth of Federal purchases is on a long-term downtrend.

Unlike this time last year, investors are not grumbling about the chances of a double dip.  Perhaps one reason is that two interest-sensitive sectors, motor vehicles and housing, are showing signs of life.  Vehicle sales remain at a healthy 14M unit annualized pace.  The implied level of housing starts would be about twice the current 500K plus pace for single family starts.  And the latest actual housing starts data are the strongest in two years.  The homebuilders survey is the strongest since 2007 and points to eventual doubling of single family starts.  Home prices are moving higher in many cities, with 15 of the 20 cities in the Case-Shiller Index experiencing increases over the last three months.

All this seems a bit at odds with what the consumer confidence surveys are telling us.  Both measures that we follow have fallen sharply in the last several months and are suggesting that things could get a lot worse.  But it is always important to look at what people are doing rather than what they are saying.  What they are doing suggests that GDP growth may recover modestly in the second half of the year.  As long as business thinks GDP growth will be 2%, that attitude has a good chance of being self-fulfilling.  Unfortunately, the implied inventory situation could change in a hurry.  Inventory levels that look “fine” on July 20 may not look “fine” after Labor Day.

U.S.: Bernanke suggested that the Fed was not ready to ease further without some signs of softer growth.  The numbers this week will not suggest further weakness.  New home sales will be steady, durable goods should consolidate the May rebound, and consumer sentiment will stabilize (at a soggy level).  Even a surprise in Q2 GDP growth above 2% (relative to the 1 ½% expectation) may mean little if it comes from a temporary rebound in Federal purchases.

Eurozone:  Investors will focus first on the weak flash PMI readings, suggesting no end to the ongoing recession.  Other updates such as the German ZEW are less downbeat.  Still, the mfg. portion of the ZEW is weakening.  The consumer confidence reading should continue to buck the softness seen in industrial sentiment.  The German CPI figures will hit a new cycle low, indicative of the emerging disinflationary trend, while monetary data will be mixed with very weak lending.

UK:  The CBI mfg. survey will be looked at closely, particularly since it is not replicating the weakness seen in other mfg. evidence like the PMI.  The Q2 GDP reading may be slightly negative, as weather distortions may more than offset the favorable Olympic impact.  This will be no surprise to the BoE.  The latest Minutes suggest a continued split about further stimulus, with some still worried about inflation.

Central bank roundup:  The RBNZ recent decision to examine what a neutral rate is will have little policy impact at this week’s meeting.  The NZ central bank will be on hold at 2 ½% until 2013 as the Eurozone crisis escalates and commodity prices fall.

Japan:  A number of senior BOJ officials will speak on the outlook this week.  The upcoming trade data will show deterioration in exports.  Consumer price inflation will turn positive but interest remains on how much core inflation has moved from deflation.  Retail sales should show improvement.

Emerging Markets/Regions:  Three central banks (Thailand, Philippines and Hungary) meet this week.  All are expected to keep rates on hold, with a small possibility of a rate cut in the Philippines.[/private]