Mike Lenhoff - Chief Strategist
9 July 2012
If only the global economy wasn't losing so much momentum,
the euro's continuing depreciation would be a great
stimulus for the eurozone and the corporate sector.
Markets start the week with their focus on three areas at
least: corporate earnings in the US, China's GDP growth on
Friday and today's Eurogroup meeting, which is to take
forward the points agreed on banking integration at last
month's EU summit.
On earnings, the season starts with expectations having
been revised sharply downwards in recent weeks. Six
companies in the S&P 500 report this week, starting with
Alcoa tonight and ending with a few financials, JPMorgan
Chase and Wells Fargo.
As pointed out last week, consensus expectations for second
quarter earnings growth for the S&P 500 were 9.2 percent
back at the start of April, 8.8 percent at the start of
May, 7.4 percent at the start of June and now 5.8 percent
as the results season gets underway. Stripping out the
Financial sector, which will benefit from an easy
comparison with the second quarter of last year, Thomson
Reuters estimate that second quarter earnings growth for
the S&P 500 will be negative.
On China, CPI inflation for June came in overnight at 2.2
percent, a touch below expectations. Inflation is now well
below the target rate for 2012 of 4 percent. June's drop in
the headline figure was helped by a sharp fall in food
prices which are inflating at half the rate they were back
Not yet below target is GDP growth. The second quarter
figure due this Friday is expected to show growth of 7.8
percent but a Reuters' poll puts the consensus forecast at
7.6 percent, which is more or less in line with the 7.5
percent target rate for the year. What is below target is
China's money supply growth (M2 growth for June has yet to
be reported). Last week's cut in interest rates, including
the greater discounting of the benchmark lending rate that
is now allowed (banks can lend at 20 percent below the
benchmark rate compared to 10 percent before), is thus
aimed at boosting demand for credit and money supply growth
to something closer the 14 percent target for the year.
As China's Premier indicated over the weekend, the economy
still faces 'relatively huge (or 'relatively large',
depending on the source) downward pressure. His comment
that the Government will 'intensify fine-tuning policies'
suggests that more effort, both monetary and fiscal, will
be taken to ensure that the slowdown does not extend beyond
the soft landing the economy is now reaching.
On the Eurogroup's meeting later today, this is a follow-up
to the June summit so items on the agenda include banking
supervision, direct recapitalisation of banks and support
operations for stabilising bond markets among other things
including Greece and Cyprus.
Greece's Finance Minister will be bringing the Prime
Minister's message to the meeting. As Mr Samaras put it
over the weekend, Greece does not want '... to change the
targets of the bailout but that which is causing recession
and hampering (Greece) from attaining those goals'. A
worthy cause! But will it get a look in at today's meeting?
Markets will be greatly disappointed if today's and
tomorrow's efforts prove to be a talking shop. On the other
hand, as with June's summit, the outcome may surprise.
Just on last Friday's US employment figures, whatever might
be said of them - they weren't great, they weren't bad,
May's private sector payrolls were revised up, there was a
bit more wage growth and so on - the underlying trend, as
shown in the following chart, is likely to concern the
Fed's hawks as well as its doves. Perhaps not by enough to
prompt more monetary stimulus when the FOMC meets at the
end of this month, but by September, when the FOMC next
meets, QE3 could be on the cards.
At its June meeting, when Operation Twist was extended to
end of this year, the Fed's economic projections showed
that expectations for growth and inflation had been lowered
compared to April's numbers and that expectations for the
unemployment rate had been raised. The FOMC Minutes for
June, which are to be released on Wednesday, could thus
provide some indication of how ready the Fed is to
introduce more stimulus.
September's FOMC meeting will be accompanied by a fresh set
of economic projections. By then, two more sets of job
numbers will be available besides a lot more domestic and
international news. The Fed will also have had the full
results of the earnings season that starts this week and
will also have some pre-announcements on prospects for
third quarter earnings to go on. If it all points to a
further loss of momentum underlying the economy, the
likelihood is that the FOMC will deliver more stimulus.
Japan's sharp fall in machinery orders overnight was
something of a shocker, another example of the extent to
which the momentum behind Asia's interregional trade may be
giving way and the extent to which the loss of momentum
underlying the global economy is giving way. For equity
markets the worry is it also reflects the extent to which
that loss of momentum is now giving way for corporate
earnings. The black cloud of uncertainty is spreading. It
suggests that, along with other worries such as America's
'fiscal cliff', equity markets are likely to be kept under
wraps for a while longer. Hopefully, it won't mean that
Wall Street's channel of rising highs and lows breaks down.
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