Politics to trump economics While of course the markets will be watching the economic indicators as usual this week, the focus of attention will be on the crisis in Ukraine. Until recently the markets have been rather sanguine about the whole affair, assuming the Russian occupation of Crimea would be a largely one-off event. Now however the problems in Ukraine are forcing themselves upon the rest of the world and could become a more important, even defining, factor for the markets if the conflict continues to escalate. We need only look at the action last Thursday – USD up, JPY up, Treasuries and Bunds up, gold and oil up, and stocks and industrial metals down – to see what the impact on markets might be. We may be back to a “risk off” world, after all.
The crisis in Ukraine matters for the European economy at the margin. According to Berenberg Securities, German goods exports to Russia last year amounted to 1.3% of German GDP; exports to Ukraine added a further 0.2% to that. These exports are now collapsing; German exports to Russia fell 17% yoy in April, while exports to much smaller Ukraine plunged 43%. As the conflict has escalated since then, the data for the coming months is likely to be even worse. Fortunately, Germany is the strongest economy in the Eurozone, and most other Eurozone countries are less exposed than Germany, so this is probably not enough by itself to tip the fragile Eurozone recovery back into recession, but it certainly doesn’t help.
The toll on the Russian economy is likely to be much greater, however. Britain, Germany and France Sunday agreed they should be ready to announce a fresh round of sanctions at Tuesday’s meeting of the EU Foreign Affairs Council. As domestic uncertainty and capital flight add to the burden of sanctions and the costs of war, Russia’s already troubled economy could suffer a major blow. RUB and the Russian stock market are likely to be the major market losers.
Today: Monday’s calendar is relatively light. During the European day, Germany’s PPI rate is forecast to have declined 0.7% yoy in June, compared to -0.8% yoy in May. We also get Italy’s industrial orders for May. Neither release is a major market mover.
The only indicator from the US is the Chicago Fed national activity index, but no forecast is available.
There are no speakers scheduled Monday.
This week: The highlight of the week will be The Reserve Bank of New Zealand’s policy meeting on Thursday. We expect the Bank to increase its official cash rate by another 25bps to 3.50%. While the rate hike is widely expected, recent weaker than expected inflation data and the further decline of dairy prices may take some pressure off the RBNZ to raise rates in the following months. That’s what the focus of attention will be on. Governor Wheeler will hold a news conference following the Bank’s rate decision. On Wednesday the Bank of England releases the minutes of its latest policy meeting. Recent comments and speeches by MPC members, plus the minutes of recent meetings, indicate that at least some members have moved closer to a dissenting vote, but I doubt that it will come this month. With no outright dissent, the focus will be on the range of views on space capacity among MPC members and the debate about when to start raising rates.
Rest of the week: On Tuesday, the US CPI for June is anticipated to remain unchanged in pace at +2.1% yoy. Given that US average weekly wages rose by 2.0% yoy in June, this would make a second month in a row that real wages declined. Fed Chair Yellen has emphasized that wage rises below the rate of inflation hold risks to consumer spending. Existing home sales for June is also coming out Tuesday and the forecast is for the figure to rise, but last Thursday’s disappointing housing sector data may push the figure to a weaker level. In Australia, the nation’s Q2 CPI is forecast to have slowed +0.5% qoq, from +0.6% qoq. From Canada we get retail sales for May, and from Eurozone, the preliminary consumer confidence indicator for July. Thursday: Besides the RBNZ policy meeting, Thursday is PMI day. We have China’s preliminary HSBC manufacturing PMI for July as well as Japan’s preliminary manufacturing PMI for the same month along with the nation’s trade balance for June. During the European day we get Eurozone’s preliminary PMIs for July, just after the two largest countries of the bloc, Germany and France, release their figures for the same month. Later in the day, the US preliminary Markit manufacturing PMI will take center stage. There have been signs that the global economy is slowing; these PMIs will help to confirm or correct that impression. Finally on Friday, we get Japanese CPI, the German Ifo survey for July and the UK’s first estimate of GDP for Q2. From the US durable goods orders for June are coming out.