The European Union, as it has over the past months, will set much of the global risk tone next week as EU leaders gather in Belgium for the latest Summit. Spain faces a Monday deadline to submit a formal request for aid to the EFSF/ESM to recapitalize its banks. Key questions remain such as subordination of claims within the funding apparatus and whether credible capital plans will be presented.
The EcoFin Summit discussions will center on refinancing sovereign and bank capital requirements through some or all of the following options: the soon-to-be-enacted European Stability Mechanism, Eurobonds, a banking union, talk of a “growth pact”, an unappealing redemption fund proposal, or euro bills as an incremental step toward eventual Eurobonds. At issue is therefore whether more talk about needed long-run structural changes will appease markets that are impatiently seeking nearer-term solutions and thus the clear risk would be to repeat the pattern to date of disappointment coming out of major summits—especially in light of persistent German resistance to many of the proposals. Also, Germany’s lower house votes on the ESM and fiscal pact on Friday and is expected to pass the enacting legislation.
The eco calendar is fairly thin and focused upon German CPI and unemployment, Eurozone CPI, EC economic and industrial confidence, and UK and French GDP revisions. Italy auctions bonds on the heels of Spain’s successful auctions but in advance of the critical EU Summit which may put the auctions at greater risk of pre-Summit comments and volatility.
Japan issues its major monthly economic releases. Japanese industrial production is expected to post the sharpest month-over-month decline in over a year while the highest frequency inflation gauges for Tokyo are expected to post ongoing deflation in both headline and core prices excluding food and energy. Retail sales, total household spending, housing starts, and the jobless rate will round out the broad picture for the Japanese economy
This week’s US data risk will be mostly focused upon three reports. We think consumer confidence will take a step back as lower gasoline prices are offset by deteriorating jobs data and by weak equities up to the survey period. Durable goods are also likely to come in soft with few aircraft orders and a likely softer vehicle orders component. Personal spending isn’t shaping up well either given that we already know that retail sales slipped lower during May, although services spending may be more resilient. In all, the main releases may extend the tone of disappointing higher frequency reports on the health of the US economy in the lead-up to the following week when the big releases like ISM and nonfarm hit. Other releases next week include new home sales following a weak resale report, and pending home sales that may get a lift after the prior month’s sharp drop. There are no expected revisions to the final Q1 GDP figures.