The Global Markets Weekly – 7/27/12

Posted July 27, 2012 by rvillareal

(Euro) Zoned Out

In a volatile week, investors welcomed ECB chief Draghi’s comments that the central bank will do what it takes to preserve the euro.  This was taken as evidence the bank would renew the asset purchase program to help push down borrowing rates in the periphery, most notably in Spain.  While Germany will complain that this mixes fiscal policy with monetary policy, such policy purity must eventually go out the window when unemployment rates are 25% and rising in a big Eurozone economy like Spain. 

With Europe, Japan, and Europe mired in either very slow growth or a double dip recession, DE looks for a wave of easier credit from the respective central banks in the coming weeks and months.

While decisive action may not be taken with week by the Fed, the FOMC will adopt some form of unconventional policy and maybe even a policy rate cut pretty soon, particularly if this Friday’s jobs report prints below 100K.  Economic performance is failing on both mandates, with inflation below 2% and the unemployment rate stuck at 8% plus. 

The ECB will follow up with some policy fire after last week’s verbal smoke.  Such action may await another meeting to allow the soft inflation story to provide enough political cover to appease the Germans.

The BoE may also defer action, putting more emphasis on the innovative new funding for lending program which will take some time to evaluate.

And the BOJ is reviewing data prior to next month’s meeting to consider expanding their own asset purchase program.

U.S.: The Fed may defer taking more action this week, but should signal its intent to do more should growth remain disappointing.  The jobs report will come too late to impact the decision, which is expected to be soft, with a gain of 100K or less.  The ISM will show a mfg. sector treading water and a services sector expanding modestly. 

Eurozone:  The ECB is unlikely to cut the policy rate at this week’s meeting, opening the door to a cut in September by emphasizing the downside risks to inflation.  The bond purchase program will be renewed or at least strongly hinted at, given Draghi’s comments to do what it takes recently.  The Q2 GDP figures should point to deeper downturn in Spain.  The HICP should be soft, backing up the disinflation argument adopted by the ECB.  The unemployment and retail sales updates will also be weak.

UK:  With the MPC thinking the economy is doing better than the recent GDP figures suggest, the BoE will not alter policy this week but emphasize the funding for lending program.  While useful updates on how well it is working may not be available until November, this week’s BoE money and lending survey may allow the BoE to provide more details on how to assess the program.  On the data front, the mfg. PMI should consolidate the June rebound after the May collapse.  The services PMI will remain in expansion territory, while the construction PMI may rebound from the June tumble.

Japan:  The BOJ will sift through the upcoming releases to determine whether to not to expand the asset purchase program at next month’s policy meeting.  This week’s results will be generally positive.  A partial rebound in IP is likely while some demand-side strength should support the labor market report.  Housing starts should continue their upward grind. 

Emerging Markets/Regions:  Two EM central banks meet this week: India’s RBI and the Czech National Bank.  The latter brought interest rates to just 0.25% last month, and is unlikely to engage in further reductions this month.  The Reserve Bank of India is still worried about inflation even though growth has slowed.  The chances are increasing that they will cut policy rates but perhaps not at this meeting.