The coming week is thin on data in the Euro area. Industrial production in France and the Euro area should be up in May, in light too of positive numbers from Germany. Inflation in June should confirm that prices have peaked, suggesting a very gradual downtrend in the coming months..…
The coming week is packed with data and events in the United States. All the inflation indices should be affected by the fall in the oil price, with month-on-month corrections in the headline measures; the CPI and PPI core indices should on the other hand continue on the recent trend of gains close to +0.2% mom. Industrial production in June should be driven by the upturn in auto sector activity and the Empire should return to positive territory in July. The minutes of the June FOMC meeting and Bernanke’s testimony to Congress should confirm the pause in monetary policy and the view of a temporary slowdown, without any hints at the possibility of QE3
Monday 11 July
France. Industrial production is expected to be up 0.2% mom in May, after the contraction of -0.3% mom seen in April. Manufacturing sector output should be unchanged on the back of the closure of Toyota factories due to the effects of the earthquake. In quarter-on-quarter terms, industrial production would be down -0.9% qoq in 2Q11, signalling a sharper correction than is consistent with the PMI data.
Tuesday 12 July
France. The CPI should be unchanged month-on-month in June, on both the national and the harmonised index, after +0.1% mom in May. Trend inflation should remain unchanged at 2% yoy on the national index. The monthly figure should reflect corrections in energy, food and manufactured goods, vs. modest increases in services.
The trade balance should show a modest widening of the deficit to USD 44.5Bn in May, after the substantial narrowing seen in April (to USD 43.7Bn). Exports should show growth in capital goods in light of the aircraft orders and durable goods deliveries. Export prices rose 0.2% mom in May, far less than in the previous months (+1.3% mom avg. between January and April). Imports should be up sharply, driven by the resumption of auto and parts production in Japan. Oil imports should also show robust growth in volume terms, offset only in part by the fall in prices.
The Fed publishes the minutes of the 21-22 June meeting, one day earlier than usual so as to allow publication of the Report on Monetary Policy for testimony to the House Financial Services Committee on 13 July. Bernanke’s press conference has already provided much of the information on the monetary policy path in the short term: the FOMC has decided to introduce a pause during which the monetary policy stance will remain unchanged thanks to the reinvestment of maturing securities. The committee may assess various uncertainties in this period: impact of the end of the QE2 programme on the markets, European debt crisis, increase in the USA’s legal debt limit, and the short-lived or more extended economic slowdown. The FOMC has already outlined the likely sequence of exit strategy steps, although for now this has been pushed further back in time. The minutes will probably not provide any new information, not least because Bernanke’s testimony the following day will be more upto- date in light of the macroeconomic data published since then.
Wednesday 13 July
Euro area industrial production should be up 0.3% mom in May, after +0.4% mom in April. Assuming no change in June, the quarter-on-quarter movement based on the May forecasts would be a modest 0.2% qoq, after +1.2% qoq in 1Q11. The figures for the core countries should drive the acceleration in output in May. The May production indices were mixed, with a contraction in Italy and a very large increase in Germany, while a small increase is expected in France. The signals from the output component of the PMI indices are for the expansion to slow but not to contract, as was seen in the decline in the actual output figures in March and April in several countries.
Import prices should be down -0.6% mom in June, the first correction since June 2010. The fall in prices should be due to the downturn in the oil price. Ex oil, the growth in import prices should be more moderate than the +0.4% mom recorded in May. Upward pressures remain in food and industry; the effect on prices of the supply issues due to the Japanese earthquake should last for several months.
Bernanke presents the Monetary Policy Report during his six-monthly testimony to the House Financial Services Committee. The testimony should reiterate what Bernanke said at the press conference following the June FOMC meeting. The view of the recovery is characterised by concern over the “frustrating” sluggishness of the unemployment rate and the persistently high level of long-term unemployment. However, Bernanke should repeat that most of the recent slowdown was likely due to transitory factors. Some of the testimony may be dedicated to the fiscal problems: on this front Bernanke should repeat the customary mantra: the fiscal path is unsustainable, and Congress should offer a viable plan of action, staggered over time so as not to upset such a fragile recovery. Bernanke is also expected to flag up with insistence the risks to the economy and the markets from failure to raise the legal debt limit.
Thursday 14 July
The ECB publishes its monthly bulletin.
Italy. The CPI is expected to be up 0.1% mom (3% yoy) in June on the harmonised and the national index (2.7% yoy). June should mark the high for inflation on both indices, but the path over the coming months will be basically stable. Energy should show its second straight contraction in June (-0.3% mom) after -0.1% mom in May, interrupting the series of robust gains stretching back to November 2010. The core index should slow, showing an expected movement of 1.6% yoy in June, after averaging 2% yoy since the start of 2011.
The Euro area CPI for June should confirm the flash estimate, showing no change month-onmonth and 2.7% yoy. The core index should confirm the movement of 1.5% yoy seen in May. Our forecast is for May to mark the inflation high, at 2.8% yoy, with expectations of 2.7% yoy in July, followed by a very gradual cooling of prices thereafter.
The PPI is expected to be down -0.1% mom in June. The core index should be up 0.2% mom, in line with the recent trend. The headline index will be impacted by the fall in petrol prices, after months of steep increases (+49.7% yoy), while food should stabilise after falling heavily in May (-1.4% mom). The auto sector might show upward pressures in light of the problems deriving from the Japanese earthquake.
Retail sales should once again be weak, falling by an estimated -0.2% mom in June, due I part to the contraction in prices, while the movement ex auto should be zero (in nominal terms). Petrol sales should show a contraction due to the fall in forecourt prices in May (-4.1% mom).
Auto sales fell by -3% mom in June, after plunging in April (-10.5% mom); activity in the sector continues to be affected by the effects of the Japanese earthquake, but the indications from producers signal expectations of a recovery as of July. The effect of the fall in volumes should be tempered by quite substantial price hikes due to a shortage of inventories and the resulting removal of the incentives from the prices charged by dealers. The weakness of sales might also be exacerbated by another temporary factor: in California the state congress has not extended the sales tax hike that was introduced previously, and a shift in sales from June to July is therefore likely to take advantage of better price terms, notably for durable goods. The June data should confirm the marked slowdown expected in consumption in 2Q11, although this should be followed by a re-acceleration in the summer.
Friday 15 July
The CPI is expected to be down -0.1% mom in June; the core CPI, on the other hand, should be up 0.2% mom. The headline index will be impacted by the fall in petrol prices (-4.1% mom). Ex food and energy, the index should continue along the recent trend, rising by 0.2% mom (average increase YTD: 0.2% mom, May movement: +0.3% mom). The items expected to contribute to the May movement are the same that drove up the core dynamic in recent months. Shelter should continue with monthly increases of 0.1% mom, though with upside risks stemming from the expected acceleration in rents: “rental of primary residence” (weight 5.925% within CPI) should soon show month-on-month movements well in excess of the 0.1% mom of recent months. Notional rents too (weight 24.905%) might show a more robust trend. The contribution of both new and second-hand cars should be significant thanks to vigorous demand and supply-side shortages post-earthquake. Apparel rose sharply in May (+1.2% mom): in June the movement should be more moderate, although the trend remains upward in the wake of the weak dollar, rising prices of cotton and goods produced in emerging countries, and a general improvement in business pricing power. The data should confirm the gradual uptrend in core prices, with a movement of 1.6% yoy vs. 1.5% yoy in May, back at the January 2010 levels.
The NY Fed Empire index should climb into positive territory in July at 10.3, after plunging to – 7.8 in June. An unusual gap has opened up between ISM and Empire since the start of 2010: the long-term relationship between the two variables would suggest a level of 17.4 for the Empire, but the recent behaviour of the two series is consistent with a far more modest gain. The index should in any case return to positive territory: the Beige Book reported expansion in June, albeit “at a somewhat diminished pace”, which is not consistent with the level of -7.8 recorded in June.
Industrial production is expected to be up 0.6% mom in June thanks to the expected growth in auto/parts sector output, reflecting the start of normalisation of activity among Japanese automakers. Utilities should also make a positive contribution to overall output thanks to higher than usual temperatures in June. Capacity utilisation should rise to 77.7%.
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