Mike Lenhoff - Chief Strategist
Brewin Dolphin
Investment Research 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 in March.

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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