The Week Ahead

The week ahead will be eventful.  There will be something for everyone.  There is plenty of economic data.  There are a few central bank meetings and there of course will be a heavy dose of politics.

Politics is a good place to begin.  The Dutch government collapsed on Saturday as the Freedom Party withdrew its support for the minority government over the austerity that the EU is demanding.  Fitch recently warned that the Netherlands' triple-A rating would be at risk if it not pursue austerity.   An election is unlikely to be held for several months and the minority-cum-technocrat government will still have to draft a 2013 budget.  The impact of the greater policy uncertainty may not be so much on the euro as on Dutch assets in particular.  The Dutch will sell a very long-dated bond this week and as it has a natural constituency, the auction is unlikely to be disrupted.  

The initial market reaction to the first round of the French presidential election was muted.  That it will be Hollande vs Sarkozy in the final round is very much as expected.  While polls have consistently showed Hollande winning in the second round, the strong turnout for Le Pen would suggest an advantage to Sarkozy.  

This may mean that Sarkozy tacks to the right to secure Le Pen's supporters and not back to the center.  Hollande is more likely to move toward the center.  He has kept his distance from his more left rivals.  On balance, while cognizant that voter behavior in decisive round is different than the first, the most likely outcome is for Hollande to win.  Le Pen and other critical voices may see their payoff in the parliamentary elections in June.  

France holds a bill auction on Monday and the electoral outcome is unlikely to disrupt the sale.  At the same time, though the risk that the French premium over Germany continues to drift out.  In terms of government supply, it is the Italian bond auction at the end of the week that may draw the most attention.  Italy does bring other debt instruments to the market earlier, including a zero coupon and a inflation-linked bond, but they should not be a problem.   

The (conventional) BTP auction on April 27 will be monitored closely.  It is not simply that Italian bond yields are rising, but it is also the first auction since the Monti government admitted they could not meet this year's budget deficit target, though even the new one is lower than most countries in the euro zone.

The euro zone reports flash purchasing managers surveys to start the week.  The composite survey is likely to have stabilized below 50 and the underlying strength of the German economy should be evident, though it is not sufficiently strong to lift the entire region. 

More important than the flash PMI data which is unlikely to alter the general perception of the euro zone economy that is stagnating in aggregate, concealing the great divergence, will be the bank lending survey on Wednesday.  The key issue is whether the LTROs have stimulated private sector lending.  The most likely answer is no. 

On Wednesday, the UK will report its first estimate of Q1 GDP.  Estimates are mostly in the 0.2-0.3% range.  Since the middle of 2010, the UK has been expanding one quarter and contracting the next.  Since it contracted in Q4 11, Q1 12 should be a small expansion.  Has it avoid a recession?  It matters how that slippery word is defined.  Net-net the UK economy has essentially been stagnant for over a year.

The FOMC concludes its two day meeting on Wednesday.  Even though it is followed by a press conference and new forecasts, it is unlikely to indicate an important shift.  This is true for the economic assessment, where unemployment forecasts may be shaved a bit, if only to recognize what has happened.  

The US reports its preliminary estimate of Q1 GDP.  Aided by government outlays (military spending and less drag from state and local governments) and strong capital spending, US GDP likely expanded in the 2.25%-2.50% range.  Second quarter growth may slow a bit further.  It appears that output has risen faster than demand.  Output is being reined in a bit as Q1 folded into Q2.   

Demand itself may be slow following strong Q1 retail sales and labor market improvement appears to be stalling.  A four week average of weekly initial jobless claims during the April NFP survey week was a little higher than the March survey week.  This is also consistent with the recent seasonal (distortion) adjustment pattern of the jobs data and the softness of the regional Fed surveys.   

Moreover, there are two other US events that should be on your medium term radar screens.  First, given the questions asked by the Supreme Court justices, many observers views have shifted and now it seems (unscientific poll conducted at the like cocktail parties, soccer and baseball games) that the august body is now seen as likely to strike down parts of the national health care in June.  

Second, around mid-year there may be a significant shift in terms of unemployment compensation. with emergency program expiring for many and programs ceasing in some states that have seen improvement and whose unemployment rate is below the threshold.  

The BOJ meets on April 26-27.  There are widespread expectations that it increases its asset purchase fund by JPY5 trillion to JPY24trillion.  It is coming under strong political pressure, including reports that suggest some members of parliament are looking at ways that the BOJ can be forced to comply with demands for greater accommodation.   The BOJ may lengthen the time it will take it to implement the asset purchases and  some observers say there maybe an extension of a corporate loan facility as well.  

Meanwhile the economy data should strengthen ideas that the Japanese economy is returning to growth.  The rebound in exports and the reconstruction efforts suggests this.  So will the expected rebound in industrial production.  Core CPI may steady near zero.  

New Zealand's central bank meets on April 26 and now change in policy is expected.  There may be a dovish slant to the statement. The deterioration of Australia's terms of trade are suggestive of New Zealand, especially given the recent sharp drop in milk prices.  

Australia's Tuesday Q1 CPI report is seen as the last hurdle that needs to be overcome to clear the way for a rate cut next month.  A 25 bp cut appears fully discounted.  A soft inflation report may solidify expectations of a June cut as well.