The Week Ahead: Stocks, Commodities, Forex Key 5 Market Drivers August 23rd – 27th

 

LAST WEEK: Markets Drop For The Second Straight Week On Bad US Data, Downbeat EU Outlook

 

Successful PIIGS bond sales give markets and the Euro early boost, but positive effect nullified by a Der Spiegel report that Greek austerity is hurting growth more than it cuts debt, endangering Greek recovery and receipt of further EU aid

Euro gets support despite Greek woes from a Bloomberg report that China is diverting new foreign exchange flows into EU bonds away from US Treasury bonds

Most of the week’s move downward came Thursday, when two US economic calendar events gave further proof of the deteriorating state of the US economy

–First time jobless claims hit 500K for the first time since November 2009, indicating stagnant or negative jobs growth for the foreseeable future. While the numbers may have been skewed by seasonal factors such as auto-plant closings and openings as well as the firing of temporary census workers, the four week average has now climbed to 482K, a 9 month high, indicating that this is a structural rather than cyclical problem.

–Terrible Philly Fed manufacturing data shows declining manufacturing activity, suggesting that even manufacturing, the one bright spot in the US economy, might be declining. We await the Chicago PMI data a week from Tuesday to confirm whether or not this figure, normally not a market mover, is indicative of a broader industrial decline. If so, expect markets to price in even slower US growth.

ECRI Weekly Leading Index (WLI) continues to indicate a double dip recession coming. The Economic Cycle Research Institute (ECRI) posted negative growth for the eleventh consecutive week, coming in at -10.0, a slight improvement from last week’s -10.2. As we’ve noted before, the published index has never dropped to -10  without the onset of a recession. The deepest decline without a near-term recession was in the Crash of 1987, when the index slipped to -6.8. With the Federal Funds Rate already below zero, the Fed has limited remaining stimulus tools.

On Friday markets extended their losses despite a fairly empty economic calendar due to a dour outlook for the EU given by Bundesbank President, ECB Governing Council Member, and ECB Presidential candidate Axel Weber. Key points included:

–Brisk German growth was not sustainable in the current context of slowing worldwide growth

–The market is pricing in greater risk for sovereign debt in peripheral European countries, implying higher CDS spreads for their bonds and thus higher borrowing costs for these nations, further complicating their debt reduction plans

–a surprisingly dovish position for a reputed ECB hawk, as he advocated maintaining unlimited liquidity to banks past 2010, showing lack of confidence in the EU’s economic health

THIS WEEK: Looking For Updates On Slowing Growth, EU Crisis

 

1. A wave of revised Q2 GDP figures from the US, Germany, and UK. Normally these are not as important as the preliminary figures, but the rapidly deteriorating economic picture has added importance to these updates. For the US, a downward revision from 2.4% to 1.4% is widely anticipated, so the question is whether expectations will be exceeded or disappointed. The German report could also move markets. The initial reading was record high and key source of hope for the EU. With Greek and other PIIGS nations bond rates rising and PIIGS banks still dependent on the ECB for funding, markets remain very nervous about the EU. If the report undermines expectations of continued robust German growth, an already nervous mark, the EU sovereign debt and banking crisis could return to spring panic levels.

2. That remains the prime danger – another global slowdown that dooms EU austerity plans to failure, brings spiking borrowing costs and risk of imminent default by one or more nations, and threatens international banking liquidity and another market collapse.

3. Watch PIIGS nations’ sovereign CDS spreads. If they begin to ease the EUR/USD could attempt a bounce to around 1.3000.  If they continue widening, then we’re approaching another bout of EU crisis and lots more downside ahead.  

4.  Big US bond auction of $109 billion supply of coupon-bearing debt also worth watching, though more as a sign of how strong risk aversion has become rather than for signs of lack of demand (despite China’s supposed heightened interest in EU bonds).

5. Other Key Events

All

Jackson Hole Economic Summit

US

Tuesday: Existing Home Sales

Wednesday: July Durable Goods Orders, New Home Sales

Thursday: Initial Unemployment Claims

Friday: Q2 GDP Revised Estimate, Q2 Personal consumption, Bernanke Speaks at Jackson Hole

EU

Monday: August Composite, Mfg, and Services PMI, EZ Consumer Confidence, German Mfg, Services PMI

Tuesday: New Industrial Orders, German Final Q2 GDP

China

July Leading Index – time and date unclear

Updates on the real estate and construction bubble are impossible to anticipate but potentially significant

Disclosure: No Positions

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