SCOREBOARD: French resistance

Markets look set to weather S&P's latest downgrades relatively well, with much of the move already priced in.

S&P’s downgrade of nine European nations (including France to AA , Italy BBB and Spain AA) rattled markets a bit on Friday night but all up I think markets were fairly resilient in the face of it (much of it probably priced), especially considering the flare-up in worries over Greece. That country is close to collapse according to some reports, the sticking point apparently the rate of interest and maturity any new bonds swapped into will take. Through it all, though, US swaps spreads didn’t do much at all, ditto CDS overall – so I’m thinking that we may not see too much of a reaction on EFP or basis and kiwi spreads are even in a bit so far this morning.

I’m sure this will all continue to be a key focus this week, and it will be very important to see investor demand at upcoming European debt auctions – France, Germany, Portugal and Spain are all set to issue debt this week. It actually kicks off tonight with a French bills auction, followed by a Spanish bills auction tomorrow. Germany then hopes to sell $4 billion of 2-year notes on the 18th, while the French and Spanish tap the market again on the 19th with several bond issues.

Against that backdrop, and noting that US markets are closed today for the Martin Luther King Day holiday, there are some fairly important economic data releases to contend with. Chinese GDP and industrial production tomorrow are expected to show growth of 8.7 per cent and 12.3 per cent respectively, which is certainly slower than what we’ve seen over recent times but is robust growth nonetheless. For the US, we see the Empire manufacturing survey (for January) tomorrow night, December industrial production on Wednesday night, alongside December producer prices. Then on Thursday we get US consumer prices (for December) which are expected to rise 0.1 per cent, with the annual rate expected to slip to 3.1 per cent from 3.4 per cent. Recall that I’m expecting a temporary moderation in inflation over the next couple of quarters given the drop in some commodity prices. For the US, this may be offset by an increase in some housing inflation numbers, especially owners’ equivalent rent. December housing starts, jobless claims and the January Philly Fed index are also out that night. Finally for Friday we see existing home sales for December. Don’t forget we see a number of US earnings reports this week as well. Data elsewhere that’s worth watching includes the German ZEW survey and UK CPI and retail sales.

In Australia there are a few bits and pieces worth noting over the next few days. Today for instance we see ANZ jobs ads, TD’s inflation gauge and new home loans data for November (at 1130 AEDT). Now since about March, we’ve seen a fairly decent rebound in the number of new loans, monthly growth has averaged about 2 per cent. For November, the consensus is for a rise of around 1.4 per cent, which if realised isn’t bad. Mortgage rates in Australia are quite low and the RBA’s 50bps rate cut should offer further support to loan growth over coming months.

Westpac’s consumer confidence survey (for January) is then due Wednesday morning (1030 AEDT) and currently, confidence is just below average – and that’s despite the RBA’s 50bps cuts over November and December. Global worries are a key feature here. Concerns over the global outlook are also expected to weigh heavily on the employment figures on Thursday (1130 AEDT). These are the December estimates and the consensus looks for a rise in employment of about 10,000, with the unemployment rate forecast to remain steady at 5.3 per cent (I’m pretty much the same). Recall that the third quarter national accounts showed very strong private demand in the quarter – the strongest in years – which should help support the labour market. Unfortunately, sentiment is shot and this will clearly weigh.

Other than that we get the trade price indexes on Friday, the first in a series of numbers that gives us a look into the Australian inflationary environment. The CPI is out next Wednesday (1130 AEDT) and I’ll write more about that over the next week. For now, trade prices give us some measure of what imported price pressures are doing, although they don’t tell us much about pass-through to retail prices. The consensus is that export prices will fall about 1 per cent, while import prices will rise about 0.5 per cent.

The Kiwis actually put out their fourth quarter CPI this Thursday at 0845 AEDT and the market looks for a 0.4 per cent rise for the quarter (I’m at 0.5 per cent), which should give an annual rate of 2.6 per cent, down sharply from 4.6 per cent year-on-year recorded in the third quarter, as the impact of the GST drops out.

Adam Carr is senior economist at ICAP Australia. See Business Spectator's glossary for definitions of technical terms used in SCOREBOARD articles.

Follow @AdamCarrEcon on Twitter.

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