Three snapshots for Wednesday
Euro zone factories sank further into decline last month but manufacturers in Asia upped their tempo to meet growing demand from the United States and China, exposing a widening gulf between Europe and the rest of the world.
Unemployment in the euro zone rose to a 15-year high of 10.9 percent in March – as this chart shows the level of youth unemployment paints a worrying picture:
U.S. private employers hired a far fewer than expected 119,000 people in April, the smallest gain since September 2011, a report showed on Wednesday, adding to concerns that the economy has lost some of its momentum. This chart shows the relationship between the first release of ADP figures and non-farm payrolls which are released on Friday.
Three snapshots for Monday
ISM report on U.S. manufacturing shows PMI at 53.4 in March against 52.4 in February:
Euro zone unemployment rose to 10.8% in February, with youth unemployment in Spain reaching 50.5%
China’s official Purchasing Managers’ Index (PMI) hit an 11-month high with a stronger-than-expected reading but a separate private survey by HSBC, which focuses more on smaller factories than the large state-owned enterprises captured in the official data, painted a gloomier picture:
Three snapshots for Thursday
The euro zone’s economy took an unexpected turn for the worse in March, hit by a sharp fall in French and German factory activity. The manufacturing purchasing managers indexes for France and Germany were both worse than even the most pessimistic expectations from economists polled by Reuters.
China’s HSBC manufacturing PMI also fell to 48.1, below 50 for a fifth straight month.
“Reflation trade”? Equities have been tracking the 5yr breakeven inflation rate derived from inflation-protected bonds.
The Big Five: themes for the week ahead
Five things to think about this week:
GOOD RUN - Stocks have managed to extend their rally but potential hurdles, such as this week’s U.S. non-farm payrolls, could prove increasingly hard to leap given valuations — European stocks are trading at their highest multiples of earnings since May 2008 while the multiple for the S&P is the highest since mid-September 2008. If investors are to boost equity holdings — which Reuters polls show already back to pre-Lehman levels — it may require more concrete evidence of economic expansion, rather than just economic stabilisation, and signs that profit margins will be supported by revenue growth, rather than cost cutting.
BOE – HANGING IN THE BALANCE - The Bank of England will have to decide this week whether to end its asset-buying programme or extend it. Concern about potential longer-term inflation implications will have to be weighed against the signs of economic weakness still manifest in recent Q2 GDP data. With economists split on the outcome, markets look set for volatility, not least as the MPC’s decision is likely to be viewed as a indication of when other central banks could start to halt/unwind their credit easing strategy.
SQUARING CIRCLES - The dexterity with which China can manage surging lending and potential price pressures without unsettling markets with any rapid reversal of stimulative policy is increasingly in focus and will have financial market and macroeconomic repercussions well beyond its borders and Asia, as last week showed. Australia, which felt the spillover effect of the China jitters, has its own policy dilemma as the RBA is trying to push back against its currency’s appreciation while giving markets another reason to buy A$ by its more upbeat view on the domestic economic outlook. The RBA policy meeting this week will give the central bank a chance to show how it squares this circle.
INVENTORIES AND EXPORTS - Detailed PMI data and UK, Italy industrial output reports will be scanned for signs of whether the inventory decline that accompanied a rise in Japanese industrial output is being seen elsewhere, with the inventory-shipments, inventory-orders ratios remaining firmly in focus as key signals for the outlook for production. The extent to which Asian economic activity is helping trade flows will also be flagged by German and French June trade data (all the more interesting given May exports rose in both countries, despite their differing export specialisations.
LOAN PROVISIONS - European banks reporting this week will be closely watched for the extent to which they follow in Deutsche Bank’s footsteps by making higher loan loss provisions. The ECB’s latest lending survey shows euro zone banks’ expect to continue to tighten credit conditions in the coming months, albeit at a slower pace; heftier loan provisions will make this all but guaranteed.
The Big Five: themes for the week ahead
Five things to think about this week:
RESULTS RUSH - The early wave of Q2 earnings last week prevented any major risk shakeout but there are plenty more results this week, including from banking, technology (Apple, Microsoft), and other sectors (Lockheed Martin, Coke, McDonalds). Investors with bullish inclinations will be looking for the VIX to stay subdued after it fell last week to lows last seen in September 2008, especially if more pent up cash is to be released from money market funds. Bears will be thinking that what might be the S&P’s best weekly performance since mid-March could be setting the market up to be more sensitive to bad news.
BANKS – IS THE BEST PAST? - It is hard to see how bank results this week can top the boost which Goldman and JPM gave stocks last week. More of a mixed bag is likely with the U.S. slate including Bank of New York Mellon, Morgan Stanley, Wells Fargo, Capital One, and American Express while Credit Suisse will be the first major European bank to report. Defaults and delinquencies will be in focus for banks more exposed to the retail sector — both for what it means for their outlook and for what it bodes for household solvency and spending.
DRILLING DOWN - The breakdown of company results this week (ABB, Texas Instruments, Caterpillar, DuPont, Boeing, 3M) will show the extent to which the inventory rebuilding story, which has helped lift world equities almost 40 percent from their March lows, can offer more sustainable support to stocks in the weeks and months ahead. Earnings this week will be closely scanned to see how inventories are stacking up verus orders. How deeply firms are cutting into costs to defend profit margins, as well as their business investment plans, will be key for unemployment and other macroeconomic data.
FLASH IN THE PAN? - Flash PMIs will show whether the positive surprise of the German orders and output data was a flash in the pan for the euro zone, and whether Chinese growth is generating orders in key euro zone countries. British Q2 GDP — the first out of any G7 country — will show the relative strengths and weaknesses of domestic demand, exports and inventory components and it will be particularly interesting in the UK’s case to see just how supportive sterling’s past slide has proved for net trade.
QE STEER - Minutes from the Bank of England’s last policy meeting and congressional testimony from Federal Reserve Chairman Ben Bernanke should give a clearer steer on where quantitative easing programmes are heading. Key questions investors want answered are why the BoE deferred making a firm decision on whether to extend QE beyond August, and whether the Fed will increase its bond purchases. Government bond markets will be particularly sensitive and signs that central bank appetite for buying government debt is cooling — perhaps because of concern over long-term inflation — could trigger heavy selling, particularly in an climate of strong U.S. bank earnings and rebounding equities.
