Events to Watch: ECB and US Employment As the Focus
We are going to have a busy week despite US' public holiday Friday. The ECB will meet Thursday but will likely keep its policy rate unchanged. On the 'non-standard' easing front, we expect more details on the purchase on covered bonds. Moreover, after allotted 442.2B euro 12-month loans last week, we would like to see if the central bank will clarify any shift in policy from monitoring short-term to long- term rates. Earlier in the week, inflation report in the Eurozone will likely show the first negative reading and trigger the ECB to keep interest rate low at an extended period of time.
Also on Thursday, the US labor department will release June's employment report. While unemployment rate should have on the rise, the pace probably moderated. We also anticipate better-than-expected non-farm payrolls data given stabilization in jobless claims in recent weeks.
Important economic data to be released this week include:
- US: S&P/Case-Shiller home price index, consumer confidence, ISM manufacturing, ADP employment, employment report, pending home sales, construction spending
- Eurozone: Eurozone HICP, retail sales, unemployment, finalized PMIs
- UK: Nationwide house price index, Halifax house price index, money supply, second estimates of 1Q09 GDP, PMI
- Japan: Preliminary industrial production, BOJ Tankan surveys
- Canada: Monthly GDP, industrial PPI
- Australia, Retail sales, building approvals, private sector credits, trade balance
- New Zealand: Trade balance, business confidence
Some of the more important events are discussed below.
June 30
Eurozone HICP - June: Flash reading on Eurozone's HICP is expected to have dipped in the red by falling to -0.2% yoy in June. Due to high base effect from the surge in food and energy prices in 2008, the headline reading will probably stay in the negative territory for 3 to 4 months. Energy price peaked in July 2008 and subsequent decline should alleviate the base effect and therefore CPI will have high chance to rise again by the end of the third quarter. Core CPI, on the other hand, should have eased gradually with the gauge excluding energy and unprocessed food sliding to +1.2% from +1.5% in May.
Canada Monthly GDP - April: GDP in Canada is anticipated to have fallen -0.1% in April, following a -0.3% drop in the previous month. Despite contraction, the pace has moderation from the first quarter.
In June's meeting, the BOC voiced out the threat of appreciation of Canadian dollar on economy, 'if the unprecedentedly rapid rise in the Canadian dollar (which reflects a combination of higher commodity prices and generalized weakness in the U.S. currency) proves persistent, it could fully offset these positive factors'. Since March, CAD has risen by +10% against the dollar and this represented partial recovery from its 35% decline since September 2007 to March 2009. Although currency appreciation may pose some negative impact on Canada's economic growth, demand and recovery outlook of its major counterpart, the United States, are the most critical as the US contributed more than 70% of Canada's exports which in turns represented around 30% of the nation's GDP.
July 1
Japan's Tankan Survey - Q2: We will probably see first increases in the index in 2Q09, suggesting the recession is bottoming out. The index for large manufacturers should have improved to -43 from -58 in 1Q09 while that for large non-manufactures probably rose to -26 from -31 in the previous quarter. Stabilization of global retail sales and the Japanese government's 2 trillion yen cash benefits should have stimulated consumptions and we expected machinery, auto and retail sectors to be the biggest beneficiary.
Australia Retail Sales - May: The Government's stimulus plan and the central bank's low interest rate policy have helped Australia technically avoided recession in 1Q09. This week, several data will be released showing how consumers react with the impact of government's cash handout diminished.
Retail sales should have risen modestly to +0.5% mom in June after rising +0.3% in April and +2.2% in March. Impact of cash handout, though only minimal, was still present while market sentiment has improvement with rise in stock market and better global economic outlook. However, rocket-high fuel price and surging unemployment rate remained overhangs.
US ISM Manufacturing - June: Overall index is expected to have continued improving, to 44 in June, from 42.8 a month ago. In May, the new order index, which surged to 51.1, suggested it would rise in June. Moreover, regional manufacturing surveys were generally encouraging. With exception of Empire State survey (which fall to -9.41 from -4.55), other data showed another month of improvement with the Philadelphia Fed index jumping to -2.2 and the Richmond Fed index staying at positive territory for the second month.
Continuing jobless claims have stabilized recently, signaling the employment index, which usually lags other component, will show improvement soon. The ISM manufacturing will probably rise above 50 in coming months, indicating expansion in the manufacturing sector.
July 2
ECB meeting - July: The ECB will leave the main refinancing rate at 1% for the second month and should maintain the current program of buying euro-denominated covered bonds unchanged. In the accompanying statement, we believe the central bank will state that current rates are 'appropriate' despite refusal to comment if that's the floor yet. We also await more details regarding the covered bond purchase program.
Moreover, forecasts on economic growth and inflation will more or less be the same as in the previous meeting. In June, Staff Projection came in lower than forecast. Mid-point forecast for 2009 GDP was revised down to -4.6% (between -5.1% and -4.1%) from -2.7% as projected in March. For 2010, GDP was anticipated to have contracted -0.3% (between -1% and +0.4%), compared with March's estimate of 0%. Concerning inflation, CPI was forecast to ease to +0.3% (between +0.1% and +0.5%) and +1% (between +0.61% and +1.4%) in 2009 and 2010, respectively.
Last week, the ECB allotted 442.2B euro in the first 12-month open market operations, the most it has even allocated in an auction, at current interest rates of 1%. All bids were filled and 1121 banks participated. Compared with 12-month Euribor (Thursday's close at 1.53%), the fixed rate at 1% is very low and will likely lead to further decline in overnight and long term money market rates.
ECB also allotted loans in the 3-month operations. However, the amount was only 6.4B euro. This move indicated that the central bank may want to lower long-term funding cost rather than the short-term. Going forward, ECB may focus on 12-month open market operations, together with purchase of covered bonds, as non-standard tools to revive the 16-nation region's economy. In this sense, we believe the probability for another rate cut in the second half of the year has greatly reduced.
The Eurozone probably entered negative headline inflation in June and we expect the ECB will keep interest rate at 1% for a protracted period of time.
US employment report - June: While consensus forecast the number of non-farm payrolls have declined -375K in June after a -345K drop in the prior month, we believed there may be pleasant surprise given the fall in jobless claims. Though initial jobless claims unexpectedly rose to 627K in the week ended June 20, the 4-week average has plummeted 42K from the peak. Moreover, continuing claims have shown stabilization recently as driven by increase in hire rate.
However, as continuing claims continued to stay as record high level, it's likely that unemployment rate would have risen further in June, though at a pace slower than previous months. The market anticipated unemployment has risen to 9.6% in June from 9.4% a month ago with the tendency of reaching 10% by the end of the year.
A huge decline in payrolls was probably found in the motor vehicle sector due to layoffs in Chrysler and GM. However, it's unclear if the respective 27K and over 10K job losses were counted in May or June. Therefore, we are not sure if a big drop in manufacturing employment would have been recorded this month.
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