The European / IMF bail-out package for Ireland – announced one week ago – was somewhat smaller than expected at €85 bn and failed to calm market jitters spreading to other Euro zone periphery countries early in the week, most alarmingly to Spain and Italy. It was only with the ECB’s announcement that full allotment liquidity operations would continue through Q1 2011 and with a jump in ECB purchases of Portuguese government bonds on Thursday that stress in the Euro zone periphery abated somewhat.
United States labor market data were weaker than expected, with the unemployment rate jumping to 9.8%, even as the participation rate failed to rise from its very low level of 64.5%. The broadest measure of underemployment (U-6) remains stuck close to its peak level at 17.0%. After much market criticism of QE2, the weak state of the labor market in Friday’s data was seen as validating the Fed’s resumption of large scale asset purchases.
We published our global forecasts last week, as well as an initial batch of our top trades for 2011. The key feature of our forecast revisions is an upgrade to US growth to 2.7% in 2011 from 2.0% previously. This puts us slightly above consensus. On the back of this forecast revision, and with a view that the Fed will likely stay on hold through end-2012, our top trades have a decidedly pro-cyclical flavor. In FX, our top trade is short $/CNY via 2yr NDF.
Central bank meetings Central banks will be meeting this week in Australia, Brazil, Canada, New Zealand, South Korea and the UK. We expect all of these meetings to keep policy rates on hold. Perhaps the most interesting meeting will be Brazil, where the central bank last week announced several measures to tighten domestic liquidity, perhaps indicating a shift to a more hawkish stance. We will be watching carefully for the minutes of the meeting, which will be published next week. In addition, it is also worth noting that this will be Governor Henrique Meirelles’ last Copom meeting, before his successor Alexandre Tombini takes over in January.
Euro zone crisis Following last week’s turbulence on the periphery, this week’s key event will be the Irish parliament vote on the 2011 budget, which is scheduled for Dec 7. A failure to pass the budget could quickly exacerbate tensions across the Euro zone periphery, by highlighting the political costs of needed budget cuts.
Chile monthly indicator of economic activity (Oct) We expect this indicator to register growth of 6.0% yoy, above consensus of 5.8% yoy but down from 6.5% yoy in September.
Also interesting Taiwan CPI inflation for Nov, given our focus on food price inflation in EM
Australia central bank meeting We expect the RBA to stay on hold at 4.75%, in line with consensus. Bank bill futures are pricing essentially a zero probability of a rate hike as well. We think the RBA will be confident about tightening monetary policy again from March next year, as the data flow should improve from what we see as a mid-cycle slowdown going into 2011.
UK industrial production (Oct) We expect IP to expand 0.3% mom, in line with consensus, after an expansion of 0.4% mom in September.
Irish parliament votes on 2011 budget
Chile CPI (Nov) We expect CPI inflation of 2.5% yoy, in line with consensus and up from 2.0% yoy in October. Consensus expects CPI excluding perishables and fuel to be flat mom, after a -0.1% mom drop in October.
Chile trade balance (Nov) We expect a trade surplus of $980 mn, below consensus which is looking for a surplus of $1,311 mn. Either way, there will be a big jump from October’s surplus of $215 mn.
Canada central bank meeting In line with consensus we think the Bank of Canada will remain on hold. Indeed, even though we upgraded our Canada growth forecast this week, we continue to believe that the Bank of Canada will remain on hold throughout 2011, as it looks over its shoulder at the Fed’s QE2.
Also interesting Philippines CPI for Nov, given our focus on food price inflation in EM
Germany industrial production (Oct) We expect a strong print of 1.2% mom, slightly above consensus of 1.0% mom after a relatively weak reading of -0.8% mom in September.
Turkey industrial production (Oct) We expect a reading of 7.0% yoy, above consensus of 6.4% yoy, but down from 10.4% yoy in September.
Brazil IPCA inflation (Nov) Following the elevated reading for the IPCA-15, we expect IPCA inflation in November to be 0.92% mom, which is above consensus of 0.86% mom.
Brazil central bank meeting We expect the Copom to remain on hold at this meeting, in line with consensus. Last week’s reserve requirement hike and other measures could be seen as a shift to a more hawkish stance by the central bank, but whether or not this raises the probability of a hike this week depends on whether one sees this as a substitute or complement to a hike. Our economists think the latter and believe the probability of a rate hike has gone from something like 25% before last week’s measures to 45% now.
Australia employment report (Nov) We expect the unemployment rate to drop to 5.2% from 5.4% in October, in line with consensus, as we think the participation rate drops back from its higher level after last month’s jump. We think the strong trend of employment growth will continue. We are looking for +25k employment change, above consensus of +20k.
New Zealand central bank meeting In line with consensus, we expect the RBNZ to remain on hold this week.
South Korea central bank meeting We maintain our view of no rate hikes in the December and January Monetary Policy Committee meetings. We expect the next rate hike, 25 bps, to be in February 2011.
UK central bank meeting We expect the Bank of England to keep rates unchanged.
Brazil GDP (Q3) We are looking for growth of 0.5% qoq, above consensus of 0.4% qoq but below the strong pace of 1.2% qoq in Q2.
United States initial claims (Dec 4) Consensus expects initial claims of 425k, following 436k last week.
China trade balance (Nov) We expect November export growth to accelerate to 27.0% on a yoy basis, from 22.9% yoy in October. Meanwhile, we believe import growth will rise to 26.0% yoy, from 25.3% yoy in October. This implies net exports will likely stay at a high level of around US$25.0 bn, slightly lower than US$27.1 bn in October. Our estimate for the trade balance is thus above consensus ($21 bn).
Turkey GDP (Q3) Consensus expects growth of 6.5% yoy, down from 10.3% yoy in Q2.
United States trade balance (Oct) We expect the trade deficit to narrow to -$40.5 bn, against consensus which expects the trade deficit to remain unchanged from the September reading at -$44.0 bn.
United States U. of Michigan consumer confidence (Dec) Consensus expects this preliminary reading to be 72.5, up from 71.6 for the November reading.