The Big Five: Themes for the Week Ahead

August 17, 2009

Five things to think about this week:

APPETITE TO CHASE?
– Equity bulls have managed to retain the upper hand so far and the MSCI world index is up almost 50 percent from its March lows. However, earnings may need to show signs of rebounding for the rally’s momentum to be sustained. Even those looking for further equity gains think the rise in stock prices will lag that in earnings once the earnings recovery gets underway, as was the case in past cycles.

TAKING CONSUMERS’ PULSE
– A better picture of the health of the consumer will emerge next week as U.S. retailers’ earnings (Wal-Mart, Macy’s, Nordstrom, JCPenney, Home Depot, Target, Gap, Kohl’s) coincide with the release of U.S. July retail sales data and the UK BRC retail survey comes out on the other side of the Atlantic. With joblessness still rising (UK unemployment due out too), the reports will show how willing households are to spend and whether deep discounts, which eat into retailers’ profit margins, are the only thing that will tempt them to shop.

CENTRAL BANK WATCH
– After the past week’s Bank of England surprise, all eyes turn to what sort of signals the U.S. Federal Reserve and Bank of Japan will send on the outlook for their respective economies and QE programmes. After the BOE’s expansion of its QE programme the short sterling strip repriced how soon UK rates would rise. But the broader trend recently in the U.S., euro zone and the UK has been to discount rate rises in 2010 — and possibly as soon as this year in Australia. 

PRICE PROTECTION
– The coming week’s inflation data (from Germany, France, Italy, euro zone, U.S.) is unlikely to contain any nasty surprises. But the U.S. Treasury’s willingness to consider bringing back the 30-year TIPS suggests that enough investors and reserve managers are looking beyond current subdued price data to future inflation risks from QE programmes, etc. That will ensure a close eye is kept on breakevens and whether the main issuers of inflation-linked products in the euro zone are inclined to increase issuance of such products.

TRADE
– Official resistance to currency appreciation has been evident in some developed countries (Switzerland, RBA, RBNZ, among others) and there are suspicions that some Asian central banks may also be inclined to check such trends given the fierce competition among the world’s exporters to grab what orders there are. Trade data next week (US, China, Canada) will show how trade flows are faring (some slippage seen recently in the Baltic Dry) and the extent to which Chinese economic activity is driving them.

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