In the euro area, focus this week will be on the Eurogroup of 20 July, from which greater details could emerge on the rescue plan for Spanish banks,….
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Monday 16 July
Euro area
– The second reading of June CPI should confirm the preliminary estimate of 2.4% y/y (stable compared to the previous month). Risks to the forecast are skewed to the downside. The y/y figure is consistent with a one-tenth drop in prices m/m. The core CPI could be up slightly, from 1.6% to 1.7% y/y (the recent trend in CPI has been guided principally by the decline in energy prices). The CPI could stay broadly unchanged in the months ahead, and drop below 2% only at the turn of the year.
– The NY Fed’s Empire index should edge back up in July to 4, from 2.3 in June, in any case still on the decline from its 20.2 peak in March. In July the auto sector may show a contraction due to the temporary shutdown of facilities and seasonal adjustment effects, but present indications are not consistent with a contraction of the manufacturing sector at large.
Forecasts mostly point to a stabilisation of activity, or only slightly positive growth in the summer months. Regional surveys should therefore stay in the neighbourhood of zero, with the ISM at around 50 points, without pushing further into negative territory for the time being.
– Retail sales should be up in June by 0.2% m/m, with autos making a modest positive contribution. Net of the auto component, retail sales should be down by -0.1% m/m, dragged down by the negative contribution of gasoline prices, as well as by the weakness of a number of discretional components. Auto sales were up by 2.3% m/m in June: sales were in part accounted for by companies, but a part should also have come from households spending.
Net of autos, gasoline sales should be down due to a price effect, but weakness should also be evident in other sectors (clothing, other goods), based on the indications provided by weekly sales data. Consumption is expected to slow in Q2 to less than 2% q/q ann. growth.
Euro area
– Germany. The ZEW index on analyst and institutional investor expectations for the German economy is expected to be down again in July, and in negative territory for the third month in a row, again in the wake of lingering tensions on the financial markets tied to the sovereign debt crisis. Expectations may drop to -20 from -16.9 in June. Assessment of the current situation is expected to stay in comfortably positive territory, little changed compared to June (at 33).
United States
– The June CPI should be unchanged on a monthly basis, while the core index should keep rising at its recent pace of +0.2% m/m. The headline index will continue to be cooled by gasoline prices (-7% m/m in June). The core index should be up by 0.2% m/m, on the back of the uptrend in rents, which will strengthen the shelter component. The other items should come in weaker than in May (used autos, health care, education). However, the indications provided by surveys carried out with enterprises point to a significant drop in the pricing power of producers and distributors, whereas the trend of cost of labour is compatible with a slowdown of the core CPI in the next few quarters.
– Industrial production is expected to have risen in June by 0.4% m/m, based on the indications provided by the Employment Report. Work hours were up by 0.3% m/m in the manufacturing sector, and car manufacturers should mark an increase in production in June. Manufacturing output should therefore grow at a solid pace (+0,5% m/m). In the mining and extraction sector, work hours increased by +0.7% m/m, and should therefore make a positive contribution to overall output. On the other hand, utilities are expected to undergo a correction. Capacity utilisation is estimated to have increased to 79.3% from 79% in May.
– Bernanke will present the Monetary Report to the Senate Banking Committee. The testimony should signal caution on the economic outlook and concerns that the risks of a slowdown in growth are materialising. The risks the Fed is most concerned about are the European crisis and US fiscal policy. On both fronts recent news does not seem encouraging, while monthly data are revealing a sharper than expected slowdown of the US economy than highlighted at the June FOMC meeting. Therefore, we expect Bernanke to soon give further indications of openness towards a securities purchase programme that would include MBSs. We believe measures are more likely to be introduced at the September meeting, for at least two reasons.
In September (meeting on the 13th) the Fed will have an extra two months’ worth of data to assess, and in particular the July and August ISM and employment report. These will be important, as the ISM dropped marginally below 50 in June, and a second reading in negative territory would be decisive, not only in triggering the actual intervention (which in any case we consider likely even in the event of the ISM coming in just above 50), but also in terms of its size and composition. Also, for the time being the extension of Operation Twist is in place, and will last until December, and the announcement of a new programme is more likely to take place at a closer date to the previous one’s expiration. Lastly, more explicit indications, fuelling expectations for interventions on MBSs, would in any case already reap effects on the market, as has always been the case in the past.
– The homebuilders’ confidence index should be up in July to 30, from 29 in June. Sector data are positive across the board and compatible with an expansion in the forthcoming quarters.
Expectations for a round of QE3, to include MBS purchases, should strengthen the recovery under way in the residential construction segment.
United States
– Bernanke will present the Monetary Report to the House Financial Services Committee. The message should be the same as contained in the previous day’s testimony at the Senate.
– The Fed will publish the Beige Book ahead of the FOMC’s end of July meeting. The information contained in the report should be in line with the indications of monthly economic data, generally weak across the board. Information collected on labour market and prices are expected to continue to show no indication of wage increases, weak demand for labour, and reduced pricing power of companies. The Beige Book too should provide a go ahead to new monetary stimulus measures.
Euro area
– Italy. Industrial sales and orders could rebound in May, after dropping in April, as was also the case with the industrial production index. Anyway, the recovery should be only partial: sales are forecast to rise by only two-tenths, and orders by half a percentage point (after dropping by -0.5% and -1.9% respectively). Also, the rebound may be due to seasonal adjustment issues tied to the Easter period, which may have depressed the April figure. Year-on-year changes will in any case stay in markedly negative territory. No turning point seems to be in sight for industrial activity.
– The Philadelphia Fed index is expected to rise back to -3 in July from -16.6 in June. The June survey was extremely negative, and sent off signals that were much more negative than the indications of monthly data, also weak, and of other surveys. We expect negativity to moderate not only in terms of the overall activity index, but also of the other components of the survey: in particular, orders and deliveries should climb back to closer to zero from doubledigit negative levels in June. In June, 6-month indicators were still in markedly expansive territory (activity index 19.5, orders 38.2, shipments 38), on the rise from May. Therefore, the July survey should prove to be more balanced and consistent with a stalling of the trend, rather than with a sharp contraction of the sector.
– Sales of existing homes are forecast to rise in June to 4.65 million from 4.55 million in May, based on the positive indications of contract transactions. Sales of existing homes are rising moderately, and the real estate agent confidence index has accelerated significantly since the end of 2011. The stock of unsold homes is currently at 6-7 months’ worth of sales but is constantly fuelled by new foreclosures. However, the share of sales in the foreclosed property segment is dropping gradually (28% of the total in May).
Euro area
– Germany. Producer prices are expected to drop for the second month in a row in June, by -0.4% in our estimation, after declining by three-tenths in May. The year-on-year PPI would therefore slow from 2.1% to 1.6%, confirming that inflationary pressures in the pipeline are easing significantly.
Appendix
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