Monday, July 11, 2011

The Week Ahead

The eagerly awaited US June employment figures disappointed BIG TIME Non-Farm Payrolls were up a measly 18,000, May’s were revised down to a paltry +25,000, Unemployment rose to 9.2% and those out of work for 5 weeks or less increased by 412,000. Average hourly earnings were flat at $22.99, up just 1.9% y/y, and the workweek shrank to 34.3 hours. 

The FX market, which had been extremely quiet, saw the USD weaken slightly with NZD hitting a new record high at $0.8351 and likewise the SGD 1.2176. Interest rate futures rallied, continuing the move that started Monday, taking benchmark 10-year Bund yields back down to last week’s low at 2.83% and 30-year to 3.51% (lowest since January). 

European and US indices reversed earlier gains, Spain, Athens and Belgium hit. US inflation numbers are unlikely to worry the Fed, either, with the pace of increase in headline CPI set to be slowed by recent falls in energy prices. Nonetheless, core CPI is set to grind higher, with core inflation expected to reach 1.6% y/y up from ‘just’ 0.6% in October.

Market focus in the Eurozone should remain on the Greek sovereign debt crisis. A meeting of Eurozone finance ministers is scheduled for July 11th to discuss details of private sector involvement in a second Greek bailout package. Developments in recent days revealed that there is a standoff between Eurozone policymakers, rating agencies and the ECB. Unless someone gives ground, discussions could last the entire summer.

The PBoC’s 25 bps rate hike this week is a set to be a harbinger of more bad news on inflation when June CPI data are released next week. --- (just released) China’s inflation rose to a 3 year high of 6.4% in June, a level that some analysts said may be a peak as price gains moderate in 2H. Today’s data came 3 days after the central bank announced the nation’s fifth interest-rate increase since mid- October. Inflation was mainly driven by a 14% gain in food costs, the biggest increase in 3 years --- Real economic activity remains weak. We forecast 2Q11F GDP growth at 9.3%, slower than 9.5% consensus and the slowest in 2 years. We believe the balance of risks for policymakers is shifting to growth from inflation and expect the July policy rate hike to be the last this year. 

Steady disinflation in Indonesia has removed the risk of Bank Indonesia rate hikes in 2H11. Rising core inflation leads us to forecast additional 25 bps hikes by the Bank of Korea and Bank of Thailand next week, which we believe will be their last in this cycle.

Published: 11 July, 2011
written by: Bill Hubard , Chief Economist at