In the euro area, market focus will be on the ECB. Spain will open the round of Q2 national accounts data releases:……
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Euro area
– Spain. GDP may have contracted by at least -0.4% q/q in Q2 2012, deteriorating from -0.3% q/q in the opening three months of the year. The year-on-year rate would therefore level off at -1% (from -0.4% the previous month). Both the monthly and annual rates should hit their lowest levels in more than two years. Fiscal tightening is constraining domestic demand, whereas the foreign channel could make a positive contribution to growth. Recession could continue at least until the end of the year, and could in fact increase in the closing quarters in the wake of the new austerity measures put in place by the Rajoy government.
Euro area
– France. Retail sales are estimated to have increased for the third consecutive month in June, by 0.3% (down from the average of the two previous months, following a volatile phase between February and March). In the month, auto sales accelerated compared to the previous month; also, clothing and apparel sales are expected to ease back after soaring in May. The figure roughly outlines a stagnation of consumption in the spring quarter, in line with the two previous quarters.
– Inflation in the euro area is forecast stable at 2.4% y/y in July. The figure would be compatible with a five-tenths drop in prices, in the wake of the usual discounts applied during end-of-season sales, while the energy component, after declining sharply for two months, seems to have made a broadly neutral contribution to the monthly trend in July. We expect inflation to stay close to its current level until the end of the summer, and to subsequently drop to around 2% by the end of the year.
– Italy. Based on provisional monthly data, unemployment could rise back to 10.2% in June after
dropping unexpectedly in May. Surveys show that companies are finding it increasingly hard to preserve employment levels. Based on our estimates, the jobless rate could peak at above 11.5% in mid-2013.
– Personal spending is estimated to have increased by 0.2% m/m in June. Retail sales were very weak in June, down by -0.1% m/m for the control group, which includes the items that make up the consumption definition. However, in recent months spending has shifted to the advantage of services, after many months in which durable goods were the main drivers.
Therefore, despite the weakness of sales (including auto sales), we believe consumption may have grown at a reasonable pace on the whole growth both in real and nominal terms, especially when compared to the weakness recorded in the first two months of 2Q. Personal income in June could accelerate significantly compared to the weak May reading. Based on the increase in work hours and wages, as surveyed by the June Employment Report, we expect personal income to grow by 0.3% m/m; the change will be the result of an acceleration in the wages and salaries component, offset however by the ongoing drop in income from unemployment benefits, which is continuing at an increasingly sharp pace, due to the almost total unwinding of the extension programmes financed by federal emergency funds. The savings rate should be up, to 4% from 3.9% in May, back to levels in line with January 2012, confirming the upturn started again in March.
– The Chicago PMI should stabilise in July at levels just above those seen in May-June (52.8 on average), climbing to 53.2. Indications form the auto sector remain positive, although the strong growth seen in the opening part of the year will not be matched in the remainder of 2012. The survey could outline a modest correction of the output component, due to temporary plant shutdowns, while highlighting a recovery in orders from 48.5 in June.
– The consumer confidence index released by the Conference Board should be steady at 62 in July. There are no good news able to lift household spirits and the survey should show persisting low levels for both the coincident and expectations components.
Euro area
– The second reading of the July manufacturing PMI should confirm the flash estimate, which saw the index drop by one point to 44.1 from 45.1 in June. It remains to be seen whether the sharp drops of both the German index (to 43.3 from 45) and the French (to 43.6 from 45.2) are confirmed. We expect a decline to 44.4 from 44.6 in Italy.
– The manufacturing sector ISM in July is forecast to rise to 50.5 from 49.7 in June. July regional surveys were less negative than in June, and point to a modest recovery, for the national index as well. The picture of the economy is not compatible with a contraction of the manufacturing sector, although activity is close to being almost stagnant, slowed by pressures tied to fiscal uncertainty and to weakening global demand. The auto sector would represent a drag on data in July, but not to the point of pushing the outlook index far below 50.
– Construction spending is expected to have increased by 0.4% m/m in June. The increase in spending should be fuelled once again by private construction, also supported by the recent stabilisation of home prices. The change expected in June should be more contained than in May (+0.9% m/m), and again larger in the residential segment than in the non-residential. In the public construction sector, the correction under way since the beginning of the year is expected to continue.
– The FOMC meeting on 31 July-1st August is expected to introduce new stimulus. Considering that at this meeting the Fed will not have much more hard data available to it than in June, the FOMC may postpone the bulk of its intervention through QE3 until mid-September, when the revised macroeconomic projections will be published, and an extra two months’ worth of data will be available on the labour market and the real economy. In August the Committee could start adding stimulus through communication, pushing back the expected date of the first fed funds rate hike: up to June, the indicated date was “at least late 2014”, and could now be postponed to mid/late 2015. The other options open to the Fed (in addition to communication and QE) are the rate on excess reserve and credit easing programmes. The FOMC could provide indications of openness to actively support lending to households, through liquidity programmes and, subsequently, MBS purchases. For the time being, we set the probability of QE3 at 80%, with a 60% probability of an announcement being made un September, as opposed to 40% in August. As regards communication, the probability of an announcement in August is 80% in our view; the overall probability of a credit easing programme is in line with that assigned to QE3, but the chances of an announcement in August are higher (60%).
– Motor vehicle sales in July are estimated stable at 14 million ann., on a par with the June figure. Data should confirm that the trend of auto sales is stabilising, in line with the expectations of car manufacturer for 2012, which average around 14.3 million.
Thursday 2 August
Euro area
– The August meeting should have been an interlocutory one for the ECB’s Governing Council, in waiting to assess the effects of the rate cuts decided in July, but market conditions risk prompting a change in plan from the Frankfurt institution. At this point, anything is possible.
The latest statements seem to signal the arrival of further non-conventional measures, rather than a new interest rate cut (which cannot be ruled out, but could be postponed in waiting to assess the effects of the July decision, on deposits especially). The ECB could be “forced” to reactivate the SMP in the course of the month or in September should the dangerous escalation under way on the markets continue. More openings on Draghi’s part on the ECB’s willingness to use all the tools at its disposal to preserve the euro are likely (and welcome); Draghi could also hint at discussion at the European level on the possibility of giving the ESM a banking licence.
– Producer prices are expected to have dropped by -0.4% m/m in June, after contracting by half a point in May. The year-on-year PPI would therefore slow to 1.9% from 2.3%. Survey data point to a significant easing of pressures upstream of the production chain.
Euro area
– The second reading of the July services and composite PMI should confirm the preliminary estimates of 46.4 for the composite, and 47.6 for services. The PMI level is compatible with negative GDP growth between the spring and the summer.
– Retail sales could slow to 0.3% m/m in June after a 0.6% m/m rise in May. This would not prevent a negative rate in the Q2 2012, of -0.9% q/q based on our estimates, after a broadly stable trend in the first three months of the year. The trend of consumer confidence is still failing to raise hopes of a recovery in retail sales.
– The July employment report is not expected to bring particular changes to the trend observed in recent months. New non-farm payrolls should come in at 90k, only marginally higher than in June (80k) and higher than the average for the past months (75k). Labour market indicators are not pointing to radical changes in the slack-absorption path: the drop in new jobless claims recorded early in July is probably temporary, and tied to the volatility of auto plant shut-down dates; the employment component of sector surveys remains in expansive territory, but is showing no sign of an acceleration. The unemployment rate is estimated at 8.2%, in line with the two previous months, and the participation rate should stabilise at May-June levels (63.8%). Hourly wages should increase by 0.1% m/m, confirming the very weak trend of labour income.
– The non-manufacturing sector ISM is forecast to drop to 51.5 in July from 52.1 in June. The composite index has been declining virtually uninterruptedly since peaking at 57.3 in February, and is now on levels last seen in the autumn of 2010. The survey should be affected by weak retail sales, which had increased in June. In June, 12 subsectors out of 19 marked showed an expansion, and five contracted. We stick to our forecast of a modest increase in activity, compatible with an overall growth of the economy of around 2%, marking a slight reacceleration compared to a generally disappointing second quarter of the year.
Appendix
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