The week's top news in world financial markets from Maximus Capital

  • 2009-07-08
USA

Recent economic data was broadly consistent with the view that the economy will begin to grow in the third quarter. The data, however, has been uneven, providing plenty of grist for those who doubt recovery is imminent. Motor vehicle sales came in at an annualized 9.7 million in June, below May's reading but a bit above the average of the first five months of the year. The ISM Manufacturing index continued to rise in June, indicating an improving manufacturing sector, yet the new orders index fell to 49.2 from 51.1. The June employment report fits in with the mixed picture.

The report showed a 467,000 payroll decline, larger than that of May, but a more modest increase in the unemployment rate. It's worth noting that the trend toward smaller payroll declines remains in place; the average monthly drop in payrolls was 436,000 in the second quarter, down from 691,000 in the first quarter of the year. Even though job losses decreased notably, initial jobless claims changed little on average in the two quarters. This might seem counterintuitive because jobless claims are one of the timeliest indicators of labor market activity and claims have a clear inverse relationship with the change in payrolls.

However, the correlation is imperfect because the change in payrolls equals hiring less total job separations (layoffs and quits), and hiring is the most important driver of changes in payrolls. Unfortunately, there are few good real-time measures of hiring, leaving analysts to rely heavily on claims when forecasting monthly payroll changes.

Eurozone

Data from this week will provide important information on the position of the economy in the second quarter and into the third. In particular, very close attention should be paid to the May industrial output data and to forthcoming information on the auto sector in June. The prospects are for positive gains for German and French industrial output, but a setback for Italy (which recorded a surprising monthly gain in April). In turn, eurozone industrial output ought to have risen in May, which might represent the start of a gradual, but uneven, recovery in the eurozone economy.

An increase in May industrial output, if sustained in June, would provide a "base" for a positive expansion in the third quarter against the second quarter. Since 1992, eurozone real GDP expansion has been positive whenever industrial output has been positive (with some instances of slightly positive GDP despite negative industrial output). Meanwhile, recent information on auto registrations points to a solid gain on an adjusted basis in the second quarter against the first quarter.

Emerging Europe

Ukraine was among the last countries in the region to report first quarter growth last week. Markets were prepared for double-digit contraction, and Ukraine's -20 percent year on year decline was even somewhat better than expected. As Ukraine's GDP already declined sharply in the fourth quarter of last year, it belongs to a group of countries 's together with the Baltics 's that experienced consecutive GDP contractions in the fourth quarter of last year and the first quarter of this year.

This contrasts with a number of other countries that still had positive growth at the end of last year 's including Russia, Romania, Bulgaria and Poland. In addition, early last week Russia's Economy Minister predicted a GDP contraction of 8.5 percent in 2009 'smuch worse than the consensus and even more pessimistic than analysts' average -6.9 percent forecast. Last week's release of June's PMI (Purchasing Managers index) showed global PMI moving back slightly above the neutral 50 level for the first time since May 2008. In contrast, in emerging Europe PMI remained soundly below -50, showing only gradual increases. Similarly, industrial production (IP) data thus far have done little for hopes of a rebound. For example, this week's May IP data in the Czech Republic showed a decline of -21.7 percent year on year, almost no change from April's -22.1 percent 's only a marginal improvement.

As for CPI, Kazakhstan last week showed June inflation to have moderated further to 7.6 percent year on year, from 8.4 percent in May. In the same vein, this week's June CPI prints to show further disinflation in Russia (to 12.0 percent year on year versus 12.3 percent in May), the Czech Republic (1.0 percent year on year versus 1.3 percent in May) and Romania (5.6 percent year on year versus 6.0 percent in May)

***Written using materials from Bloomberg and Reuters Research