World Week Ahead: Focus shifts east to China

Monday 7th May 2012

Key data from China on inflation, retailing and factory output this week will help investors gauge whether the performance of the world's second-largest economy can help offset lingering worries about Europe and new ones about the US.

China's April trade report is due on May 10 while inflation, industrial output and retail sales are due the following day. The data could go a long way to helping determine if the government will take further steps to ease reserve requirements on banks and keep the economy from slowing too fast.

The reliance on China may prove premature.

“China still doesn’t have the domestic demand needed for organic growth,” Michael Gayed, chief investment strategist in New York at Pension Partners, told Bloomberg News.

And so as the week begins, Europe's malaise lingers.

There's concern that the May 6 elections in France and Greece might bring increased uncertainty about current commitments across the euro zone to already agreed austerity measures needed to meet European Union goals for budget deficit reductions. Local elections in Italy and Germany will provide an additional read on the situation.

"There's potential for uncertainty and instability in Europe," John Praveen, managing director of Prudential International Investment Advisors in Newark, New Jersey, told Reuters. "The market is pricing in extremely negative scenarios."

Over the weekend, EU Economic and Monetary Affairs Commissioner Olli Rehn indicated the bloc would show flexibility in enforcing its deficit rules as nations across the region struggle to bolster growth as they slash debt, according to Bloomberg.

The outlook for now remains clouded. The latest economic data on Europe and the US were disappointing, further heightening concern about the drag the euro zone's problems pose to the increasingly wobbly pace of global growth.

Indicators in the past week showed that euro zone unemployment rose to the highest level in 15 years, while Spain sank into another recession. Meanwhile, European Central Bank president Mario Draghi warned of further downside risks though kept the key interest rate on hold at 1 percent.

The coming days will bring the latest monthly readings on industrial production in Germany, France, Italy and Spain. That data may help determine whether Europe's Stoxx 600 Index can rebound from a 2.4 percent decline in the past five days.

On Friday, April's US payrolls data dashed hopes on Wall Street that signs of recent weakness in labour market statistics were anomalies. Stocks closed sharply lower ahead of the weekend.

“Employers are hiring, they’re just hiring at a very modest rate,” Jonas Prising, president of the Americas at Milwaukee-based Manpower Group, a provider of temporary workers, told Bloomberg. “The current growth rate of employment is probably consistent” with economic growth of 2 percent.

The US economy added 115,000 workers last month, falling well short of estimates of 160,000; it was the smallest increase in six months. The jobless rate unexpectedly dropped to a three-year low of 8.1 percent, as more people stopped looking for work.

"This shows just how painfully slowly the US economy is growing," Thanos Bardas, a portfolio manager at Neuberger Berman in Chicago, told Reuters.

This week investors will review US reports on wholesale trade, international trade, jobless claims, import and export prices, producer prices and consumer sentiment for clues to determine whether the world's largest economy is indeed slowing down, or still maintaining some degree of forward momentum.

On Thursday, Federal Reserve Chairman Ben Bernanke is scheduled to speak at an Annual Conference on Bank Structure and Competition, sponsored by the Chicago Fed.

Even corporate earnings have begun to lose some of their shine as the first-quarter results season reaches its end. US companies reporting this week include Walt Disney and Cisco.

Of the 415 companies in the S&P 500 index reporting results, 67.5 percent have exceeded estimates, according to Thomson Reuters data through Friday morning. That's down from the start of earnings season when more than 80 percent of companies were beating forecasts.

In the past five trading sessions, the Standard & Poor's 500 Index dropped 2.4 percent, the worst weekly performance yet of 2012, while the Dow Jones Industrial average shed 1.4 percent and the Nasdaq Composite Index fell 3.7 percent.

BusinessDesk.co.nz

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