Week Ahead

The Eurozone sovereign debt crisis remains in focus, with Eurozone finance ministers meeting on Sunday to discuss the next steps for Greece. All clear, for the time being. The Greek government had its implementation law approved on Friday with a majority of 155 to 136 in its second voting round. After the double parliamentary vote, the disbursement of the fifth tranche of the original €110bn package will have no obstacles and will be almost certainly deliberated on Sunday July 3rd by the Eurogroup and on Tuesday July 5th by the IMF. Now that the short term liquidity issue has been solved, all efforts will be put on the finalisation of the “private sector involvement” aspect of the new bailout package. With press reports ‘hinting’ at progresses both on Banks’ (and other institutional investors) commitment to maintain exposure to Greece and on that of a possible clearance from rating agencies that the options would not be considered an event of default, we might not be far from a conclusion, possibly by July 11th. After the "yes" vote in Greek parliament on the austerity package, the Eurozone and the IMF will almost certainly agree to paying the fifth tranche of the Greek bailout package.

A nail biting week for many as rioting in Athens failed to prevent Papandreou’s ruling party passing yet more austerity measures in order to get another €12bn handout this month. At this point peripheral Eurozone debt retreated from new record spreads over Bunds: 10-year Ireland 996 bps, Portugal 913, Spain 287, Italy 217 and Belgium 133. Stock markets rallied strongly, Spain’s Ibex leading the way(+5.80%), in the vain belief that things had been ‘fixed’ and that the single currency would not implode just yet. This same way of thinking saw the SEK strengthen after being hit hard in June and the CHF retreat from its strongest ever at 0.8276. GBP weakened against many, taking it to records against the AUD 1.4880, NZD 1.9255) and CHF 1.3255 while against the Euro it touched £0.9084 (or €1.1000) the weakest its been since March 2010. Benchmark UK, US and German benchmark yields backed up, many retracing about 38% of the decline in yields that had been going on over the last 6 to 11 weeks, Euribor futures losing 20 to 30 bps, front Eurodollar and Short Sterling contracts unfazed.

Payrolls and the ISM manufacturing index will be the US highlights. Both are likely to add to worries about the “soft patch” turning into something more prolonged and deeper. The regional PMIs have largely disappointed and suggest a further fall in the ISM, while the weak macro data over the past couple of months is unlikely to have prompted firms to accelerate job hiring. Nonetheless, lower energy costs, falling mortgage rates and rebounding equities may help stabilise the situation and prompt improving numbers as we progress through Q3.

Recent economic indicators have been impacted by Japan’s earthquake/tsunami/nuclear accident, none more so than Japan itself where IP dropped by 5.9% in the year to May. No surprise that Q2’s Tankan Survey was downbeat or that Retail Sales fell 1.3% y/y to May, Large Retailers by -2.4%. Vehicle Production picked up a tad in May so that instead of running at –60.1% as it did in April, the decline shrank to –30.9%. Logistics bottlenecks are probably causing Japan’s CPI excluding fresh food to rise to +0.6% Y/Y, an unexpected relief to the authorities who have been battling deflation for years.

Turkish inflation in June is likely to be a credibility test for the CBT’s current policy stance. We expect an increase in annual inflation to 7.4% against market consensus of a drop from 7.2% to 7.0%. in May. Food prices remain a key source of volatility with the approach of Ramadan and Bayram in August likely to make the picture more uncertain.

In the Czech Republic, we expect headline inflation to have increased slightly from 2.0% to 2.1% y/y, being curbed by moderating y/y growth in fuel prices. A positive working-day effect should be reflected in accelerating export growth, industrial output and retail sales.

In Brazil, inflation trends should moderate in June and July, maintaining a monthly rate not far from zero. However, this is just temporary. As the central bank recently indicated, unless the tightening cycle is extended further, headline inflation will not converge to the target until early 2013. We expect the bank to hike twice more in this cycle. The outcome of PMI data should support our view that Chinese growth concerns will keep the State Council from approving further PBoC policy rate hikes this year.