Next Week

December 12, 2008

The three premier events next week happen early: Japan’s quarterly business survey (also known as the Tankan) at 23:50 GMT on Sunday, Euroland’s preliminary PMI readings for manufacturing, services, and the composite index due Tuesday at 09:00 GMT, and the FOMC interest rate announcement later on Tuesday at 18:15 GMT.

  • The Tankan is managed by the Bank of Japan and exerts considerable influence on the central bank’s assessment of the economy. The last survey did not capture the intensifying rupture of world money and stock markets, the sharp appreciation of the yen from 106 per dollar at that time, and rapid descent of Japan into a recession aggravated by those factors. My review of the third-quarter Tankan survey results can be re-read by clicking here. Consensus forecasts for the new survey are running at worse than -20 on the diffusion index for big manufacturers, around -10 for large non-manufacturers, and a negative figure for planned investment in fiscal 2008. These results and others are all substantially worse than participants in the third-quarter survey had been assuming.
  • At the very least, the FOMC will slash the Federal funds target in half to 0.5%. A cut to 0.25% is possible. The Fed already has engaged in several forms of quantitative easing, by which economists mean a focus on the quantity of money rather than targeting its cost, and a more comprehensive form of this shift is likely to be implemented in the first half of 2009. Quantitative easing is best thought of as the reverse of what the central bank imposed in 1979-82 to whip double-digit inflation. Markets are being told that the Fed will act with dispatch to remove the considerably loose monetary policy. Bank of Japan officials have been saying the same thing for years. Once an economy becomes accustomed to ultra-low interest rates, it is very difficult to raise them in big-sized increments without subjected asset markets and the economy to significant shock.
  • “Flash” PMI scores for Euroland, Germany, and France are being released earlier in the month than usual because of the Christmas holiday. Euroland’s scores will almost surely be lower than in November, when 42.5 was printed for services, 35.6 for manufacturing, and 38.9 on a composite basis. Forecasts differ mostly on how sharply they will deteriorate after the very sharp drop-offs in November.

At least six other central banks hold interest rate meetings. Norway’s Norges Bank probably will implement a cut of more than 100 basis points. The benchmark rate in the Czech Republic will decline at least 50 basis points, and Hong Kong’s Monetary Authority should at least match whatever the Fed does. It might even exceed the size of the Fed’s cut in light of intervention needed to keep the Hong Kong dollar from climbing above its fixed corridor against the U.S. dollar. The Bank of Japan is not expected to cut its 0.3% rate target, nor is a  rate change anticipated from Colombia’s central bank. I would not be shocked if there were a surprise cut in the Philippines, given the size of rate reductions this week in Taiwan and South Korea. China will be rounding out its slew of monthly data, including the release of industrial production and fixed investment. The increasingly alarmed tone of Chinese officials commenting on their economic outlook and reports of some increased social unrest create conditions for further interest rate relief soon, although a meeting at China’s central bank is not scheduled next week.

Besides the Tankan survey, Japan releases its Tertiary index and all-industry index next week. Both will have lower readings in October than the month before. The all-industry index, a supply-side monthly proxy for GDP, may fall by more than 1.5%.

Many economies in Europe will be reporting consumer price data next week. Inflation is receding at a commensurately rapid pace with economic activity. Germany also announces producer prices and the IFO index of business current conditions and expectations. French business sentiment and wage data are scheduled, assuming unions do not block the report.

Next week is a big one for British data. Releases will include consumer prices, unemployment, wages, retail sales, the CBI monthly survey of retailers, public finances, consumer sentiment, M4 and lending data, and business investment. The Bank of England minutes from earlier this month, when the benchmark rate was sliced to 2% from 3%, probably will not include an dissents. The Bank of England clearly fell behind the curve.

From the United States arrives the Treasury TIC figures for monthly capital flows, the more comprehensive Commerce Department quarterly report of the current account and all capital flows, industrial production, housing starts, consumer prices, leading indicators, the Empire State factory index, the Philly Fed index, and weekly jobless claims, chain store sales, and energy inventories.

Canada chimes in with the monthly manufacturing survey, retail sales, wholesale sales, net securities transactions, consumer prices, and wholesale turnover. From Australia, investors will get a chance to peruse minutes of the November central bank meeting and the latest data on trade and housing starts.

As always, currency market participants will keep a close eye on stock markets, especially how such react to whatever transpires in the discussions involving U.S. automakers.


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