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Global Economy Near Tipping Point as Markets Eye FOMC Meeting

Global Economy Near Tipping Point as Markets Eye FOMC Meeting

2011-08-05 20:45:00
Christopher Vecchio, CFA, Senior Strategist
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The past week provided markets with volatility and volume unseen in some time as concerns over the state of the global economy resulted in a mass flight to safety, ultimately culminating in two central bank interventions and a sharp decline in global equity markets. The coming week provides no sign of relief on the horizon, with a string of critical data due in the second week of August, marked by inflation data, and the prominent Federal Open Market Committee rate decision on Tuesday.

Federal Open Market Committee Rate Decision (AUG 9): August 9 – 18:15 GMT

The Federal Open Market Committee rate decision on August 9is the most important event to keep an eye on next week. It is widely anticipated that the Fed Funds rate will be kept unchanged between 0.00 and 0.25 percent, but more interesting to watch will be Federal Reserve Chairman Ben Bernanke’s commentary addressing the economic slowdown and possible stimulus for growth, especially following the recent string of economic data in July as well as the equity crash late this week. Major areas for concern continue to include a weak job market and a recent stagnation in the manufacturing sector.

Nonfarm Payroll data has been disappointing since May, despite July’s print today, and the July ISM manufacturing index reading of 50.9 marked the slowest pace of expansion for the services sector since February 2010. GDP growth for the first quarter was revised downwards to an abysmal 0.4 percent. A measure of stimulus that has stirred much debate recently has been the possibility of QE3, even though Bernanke’s testimony at Congress in mid-July suggested otherwise. Any comments by Bernanke that hints towards a new round of quantitative easing will certainly be market moving, further sinking the Dollar and spurring a rally towards risk. Join a DailyFX analyst for live coverage of event!

• China New Yuan Loans (JUL): August 10 – --:-- GMT

According to a Bloomberg News survey, economists expect new loans in China to decrease to 550.0 billion for the month of July from 633.9 billion in June. A decrease in lending is generally an indication that economic growth is slowing, but this is expected and welcomed by the People’s Bank of China considering the central bank has been raising rates intermittently over the past year. Although the print for June easily beat economists forecast, weaker-than-expected manufacturing data released during the first week of August points to deceleration in loan growth: the HSBC manufacturing PMI was at 49.3 for July (a reading below 50 is generally indicative of contraction in that sector). If loan growth unexpectedly grew, look for the fourth rate hike for 2011 in the near future by the People’s Bank of China.

German Consumer Price Index (YoY) (JUL F): August 10 – 06:00 GMT

The German consumer price index climbed for the first time in six months in June, rising 0.1 percent to 2.4 percent, on a year-over-year basis. According to a Bloomberg News survey, the inflation indicator is expected to remain at 2.4 percent for the month of July. This number is slightly higher than the European Central Bank’s target inflation of “below but close to 2 percent” for the broader Euro-zone, though the German figure is equally important considering Germany is the currency bloc’s largest and most important economy. Higher energy prices have been the primary driver keeping inflation above the 2 percent mark but “lower food and seasonal food prices can be in part held responsible for the benign pan-German reading.”

Since Germany is the Eurozone’s strongest and largest economy, this reading is closely watched by the European Central Bank as a determinant of their monetary policy decisions. At their meeting on August 4th, the ECB held the key interest rate at 1.5 percent after raising it 25-basis points last month to contain inflationary pressures, with President Jean Claude-Trichet noting that the bank’s stance remains “accommodative,” leaving out the key “strong vigilance” phrase from his statement following the decision.

Bank of England Inflation Report: August 10 – 09:30 GMT

The Bank of England will release its quarterly inflation report on Wednesday. In the last report released in May, the bank’s forecast called for inflation to climb to 5 percent in 2011 and a tightening of the monetary policy to contain inflationary pressures. The consumer price index figure released in July revealed that inflation dropped to 4.2 percent, a relief as fears were rising that the British economy was stagnating. The global economic slowdown has certainly contributed to declining prices in the United Kingdom. With price pressures easing and the British economy crawling, Wednesday’s report will likely tell a different story about the forecast for monetary policy. If inflationary pressures continue to diminish, any interest rate hike will be pushed back until robust economic recovery occurs, likely dragging the Sterling lower. Join a DailyFX analyst for live coverage of event!

United States Advanced Retail Sales (JUL): August 12 – 12:30 GMT

According to a Bloomberg News survey, advanced retail sales are expected to have climbed by 0.5 percent in July. If the actual reading meets or beats expectations, this would be a significant improvement over the meager 0.1 percent rise in June. The June figure did top expectations, as economists forecasted a 0.1 percent drop in retail sales. Although a positive reading is welcomed, the increase would have to climb to higher levels for consecutive months in order to help the U.S. economy out of its current slump. Consumer confidence remains low and many consumers are pushing back on spending on increasing fears of a double dip recession. The level of retail sales will be closely watched as it can serve as a leading indicator of GDP growth, as it serves as a proxy to consumption, the largest component of the aggregate figure. Join a DailyFX analyst for live coverage of event!

See the DailyFX Calendar for a full list, timetable, and consensus forecasts for upcoming economic indicators.

Written by Christopher Vecchio, Currency Analyst

To contact the author of this report, please send inquiries to: cvecchio@dailyfx.com

Follow Christopher Vecchio on Twitter: @CVecchioFX

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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