Europe will carry much of the global tone this week, in two respects. First will be the risk of an election call in Greece as soon as this weekend. Under Greek election law in the absence of a majority outcome, each of the top three parties is given the opportunity to strike a coalition government. That seems untenable given a very rigid position that the far left party has carved out, including a promise to default on Greek debt, renounce support for the European/IMF bailout, and nationalize banks.
The second form of risk posed to markets by European developments will take the form of Q1 GDP growth across the euro zone. The risk here is whether or not several countries slip into technical recession. Expectations for Germany’s economy are muted with only 0.1% q/q annualized Q1 growth following a mild Q4 contraction. Similarly, the French economy is expected to post no growth in Q1 following a mild expansion in Q4. This is expected to be mirrored for the euro zone as a whole as Q1 GDP is expected to drop for the second consecutive quarter. The UK has already released Q1 GDP which showed the country slipping into technical recession, but next week’s BoE Inflation Report, trade and unemployment figures will be closely watched.
US markets could chip in and drive much of the global tone in two ways next week: through providing further color on the stimulus debate at the last FOMC meeting; and via first tier data. The FOMC minutes on Wednesday will shed further light on internal discussions at the FOMC meeting on April 24-25th.
The FOMC minutes will reinforce this overall bias that was unwilling to provide any further nod to further stimulus prospects. That disappointed markets which had wrongly anticipated that the Fed might provide just such a signal in contrast to what should be understood to be its tendency to wait to be convinced by a souring tone to growth, inflation and market risks before acting.
Data risk will be principally represented by Tuesday’s CPI report that should provide a further cooling of y/y pressures just as TIPS break-evens continue to march lower — thus providing the Fed with some comfort that its price stability mandate is under no clear threat. Tuesday will be the biggest day of the week for data risk since retail sales are also due out that day and are expected to put in a more subdued gain than the prior month’s impressive report.
The US conducts a ten-year TIPS reopening; this contract has materially richened since mid-March, shedding about 25bps in break-even yield partly because of reduced inflation expectations but also because TIPS benefit less from safe haven flows than nominal Treasuries — thus introducing a liquidity distortion to break-evens. The only Fed speaker on tap is St. Louis Fed President James Bullard (alternate 2012, voting 2013) who speaks on the US economy later in the week and who is a relative hawk opposed to further stimulus.
Asian markets should pose only modest risks to global markets next week. Chinese property prices top the list of risk factors and the April update is slated for release on Thursday. A broadening array of cities have been witnessing falling house prices as China’s housing markets cool down. RBA minutes from the May 1st meeting will be reviewed for signs of an ongoing easing bias and that could impact the AUD which has been among the weaker currency crosses against the USD via a 3½% drop since just before the May 1st RBA meeting. Japanese Q1 GDP is expected to post a healthy 0.9% non-annualized rise following the 0.2% contraction in Q4, thus enabling Japan to hopefully avoid a technical recession that threatens Europe.