World Week Ahead: Economic reality check

Monday 18th August 2014

Data to be released in the US and Europe in the days ahead will go a long way to determining whether the threat to global growth will prove transitory, and give investors a green light to push stock prices ever higher.

Last week offered evidence that the American consumer may be somewhat less confident than previously believed as both retail sales and consumer confidence fell short of expectations. Even so, the positive flip side of that coin was that it bolstered hope the Fed will hold off on increasing its target interest rate.

On Friday a report showed that the Thomson Reuters/University of Michigan preliminary sentiment index dropped to 79.2, the lowest since November. And disappointing earnings from retailers including Wal-Mart and Kohl’s underscored those data.

Home Depot, Target and Lowe’s are among companies scheduled to report their latest quarterly this week.

Federal Reserve “Chair [Janet] Yellen specifically cited pessimism over household income as one of the headwinds that’s impacting the US economy right now, and these figures would seem to underscore her point,” Dana Saporta, director of US economic research at Credit Suisse in New York, told Bloomberg News.

For additional clues on the outlook for rates, investors will pour over minutes of the latest US Federal Reserve meeting in July, which will be released on Wednesday. As well, comments by policymakers at the Fed’s annual Jackson Hole, Wyoming global central bank gathering will be scrutinised more closely than ever.

Investors will also eye reports on the housing market index, due Monday, housing starts, due Tuesday, and existing home sales, due Thursday, to get a better handle on one the key areas of the US economy that has struggled to recover.

Other reports set for release in the coming days include the consumer price index, due Tuesday, and then weekly jobless claims, the preliminary PMI manufacturing index, the Philadelphia Fed survey, and leading indicators, due Thursday.

Last week, the Dow Jones Industrial Average added 0.66 percent, the Standard & Poor’s 500 Index increased 1.22 percent, while the Nasdaq Composite Index climbed 2.15 percent.

So far this season, about three-quarters of S&P 500 companies have surpassed earnings expectations.

Meanwhile, there is sufficient uncertainty about the global economic outlook to strengthen the appeal of US Treasuries. Thirty-year bonds advanced last week, pushing yields 10 basis points lower to 3.13 percent.

German 10-year bonds also rallied, with yields falling to a record low below 1 percent in part after data showed its economy contracted in the latest quarter, an ominous sign for Europe’s powerhouse.

On commodity markets, the price of oil jumped on Friday amid intensifying tension between Russia and the Ukraine. Front-month October Brent crude gained US$1.46 to settle at US$103.53 a barrel, narrowing its decline for the week to 1.7 percent, according to Reuters.

"The market is keeping an eye out for any geopolitical tensions," Carl Larry, chief executive officer at consultancy Oil Outlooks in Houston, told Reuters.

In Europe, the Stoxx 600 rallied 1.9 percent last week, as did the UK’s FTSE 100 Index. Here, the region’s top three economies, not just Germany, showed that their individual recoveries are not assured and the euro-zone economy itself unexpectedly stalled in the second quarter.

The disappointing growth data, however, has renewed hope that the European Central Bank will pull out extra measures to help stoke the area’s economic engine though it seems unlikely to do so anytime soon.

The latest data on the euro zone will arrive in the form of the trade balance, due Monday, current account, due Tuesday, German producer prices, due Wednesday, euro-zone manufacturing, services, and consumer confidence, due Thursday,

Minutes from the latest Bank of England meeting will be released on Wednesday.(BusinessDesk)

BusinessDesk.co.nz

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