Economic & market briefing: the week ahead

At least in Europe, the German constitutional court ruling on Wednesday will be the main focus. Risks look to be significantly asymmetrical heading into the event: if the ESM laws are upheld, the event may well pass with only modest additional benefit for the Euro and risk sentiment generally. However, a ruling against the legislation would likely represent a major risk aversion and systemic stress event, with impact visible on charts for years to come.  We view a ruling against the treaty as very unlikely, although we wouldn’t be surprised to see more strings attached relating to parliamentary approval of future aid decisions.

Dutch elections are held on the same day, and there may be a prolonged period of coalition negotiations following the vote, and there may be some decline in support for austerity measures evident in the results. However, the Netherlands is one of few the surplus economies in Euroland, and it is currently funding itself at near-zero rates. As such, we see limited scope for this election to result in renewed sovereign stress.

Turning to the United States, the weak employment report last week makes it even more likely that the Fed will announce new quantitative easing measures as its meeting concludes on Thursday. This may reasonably take the form of an extension of forward guidance beyond 2014 and initiation of a new large-scale asset purchase programme, possibly open-ended in nature. Confirmation of new QE measures could be moderately negative for the US dollar, most notably against Japan’s Yen, but helpful for risk assets as should be the tide of data. Thus we’re US retail sales, expected by some to be unchanged at 0.8%mom on both the headline and core, vs. the more cautious consensus at 0.5%mom for both, whilst industrial production could be 0.6%mom vs. consensus of 0.1%mom. The market expect the preliminary University of Michigan September survey to be reported as 74.0, as against August’s 73.0 but this too could positively surprise. On the CPI front, this could be a slightly higher headline, but steady core at 0.2%mom.

Looking at the broader European picture, Switzerland’s SNB meet on Thursday and we should expect continued emphasis on deflation risks, CHF overvaluation, and, most importantly, its commitment to defending the EUR/CHF floor with “utmost determination.” We shouldn’t, against this backcloth, expect the SNB to make any material changes to inflation forecasts.  However, there is a possibility for the GDP growth forecast for the current year to be revised lower following the weak Q2 growth and the downward revisions to Q1 GDP estimates.

With an altogether different set of problems, the Hungarian parliament reconvenes today and the government willingness to comply with EU/IMF requirements will be tested.

For the UK, we are due the August employment report but this likely be somewhat muddled by the temporary boost from the Olympics and with so much else to focus on this week, markets are likely to overlook this release.

On the other side of the world, New Zealand’s Reserve Bank is widely expected to leave the cash rate unchanged at 2.5% on Thursday and keep its neutral guidance that rates remain appropriate.  The central bank will issue updated economic projections, and the market will pay close attention to the short-term interest rate projection and any currency related comments in the press conference. The recent delay in New Zealand’s efforts to privatize partially key government entities could push up government borrowing and threaten a rating downgrade. The challenges are truly global.

James Bevan is chief investment officer of CCLA, specialist fund manager for charities and the public sector. CCLA launched The Public Sector Deposit Fund in 2011 to meet the needs of local authorities and other public sector organisations. You can follow James on twitter @jamesbevan_ccla

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The Local Authority Treasurers’ Investment Forum September 25th, 2012, London Stock Exchange