1. Europe Drama Continues as Downgrades Feared
Late on Friday, Moody's downgraded Belgium's sovereign credit rating from 'Aa1′ to 'Aa3′ and Fitch Ratings placed several countries (Belgium, Spain, Italy, Slovenia, Ireland and Cyprus) on rating watch negative and while affirming France's 'AAA' credit rating, put the country's rating to negative.
The prospect of downgrades weighs heavily over the Euro as we start a new week and bearish positions - or short interest - on the currency rose to an all-time high. Therefore it will be important to see if the EUR continues to come under pressure after 2-sessions in which the EUR managed to pare some of its steeper losses following the failure of the EU Summit.
European finance ministers will meet to discuss raising an addition 200 billion in funds that would go to the IMF in an attempt to bolster the money available to stop the spread of contagion. Finance ministers will also be discussing implementation of the mechanics of the fiscal compact agreed to in the EU Summit. Will that be enough to bolster sentiment ahead of Christmas? It's doubtful, but any move higher in EUR crosses could cause some short covering ahead of the holidays.
ECB President Draghi speaks Monday and in macro data we look forward to Germany's IFO Business Climate index - a key leading indicator for the German economy. In an interview with the Financial Times, Mario Draghi warned of the dangers of a Euro-zone break-up.
From Financial Times: Mr Draghi said struggling eurozone countries that quit the currency bloc would face still greater economic pain. For remaining members, European Union law would have been broken and you never know how it ends really, he said.
Countries that left and devalued their currency would create a big inflation and fail to escape from structural reforms that would still have to be implemented but in a much weaker position, Mr Draghi told the Financial Times.
2. US Spending and Durable Goods Orders Data Eyed
In the US, the attention will focus on spending data, as the US releases its personal spending and income data.
The expectation is for a 0.3% increase in spending for the month of November, which would be an improvement on the 0.1% reading seen in October. Consumer spending makes up around 70% of the US economy, and while sales during Black Friday were strong, the rest of the month may have been weaker.
In any case, as we look at the retail sales data for November, we see a drop-off from the pace seen in the previous 2 months. One key problem is that spending has outpaced incomes, and so it may be difficult for consumers to keep spending unless wages go up. Then again, the labor market is seeing some tepid improvement as seen in falling jobless claims. Could the labor market be finally thawing? Any momentum in the US economy may still be undercut by deterioration in the European situation in the 1Q of 2012.
At the end of the week, we get a different look at demand - orders of durable goods. This is a leading indicator for the manufacturing sector. Here the expectation is also for a bounce back in the headline reading, to 2.2% in November from -0.5% in October, while core durable goods are expected to climb 0.5% after a 1.1% gain in October.
3. US Housing Sector To Show Improvement, But Still at Depressed Levels
While the US has seen a generally more positive data stream - on the labor and manufacturing front - last week, one sector that continues to remain depressed is housing. This week will bring some key data from that sector in the US including building permits and housing starts, existing home sales, and new home sales.
On Tuesday, we get a look at the construction sector as we get the latest reading on starts and building permits. Starts are forecast to pick up around 1.1% to 635K from 628K in October.
Sales of previously owned homes are expected to show a nice uptick, climbing at a 5.09 million annualized rate in November from 4.97 million in the prior month. However, the National Association of Realtors is expected to present some downward revision to their data going back several years, which may undercut any positive release. In any case, a level of 6 million is usually consistent with a healthy housing market.
New home sales are expected to show a 315K annualized rate in November, a 2.6% increase on October. Again, that is an improvement, but is still less than half the 700K that economists say indicates a healthy new housing market.
4. NZ GDP and Current Account - Keys for the Kiwi
New Zealand releases 2 important quarterly measures - GDP and current account - for the 3rd quarter. The economy grew a tepid 0.1% in the 2nd quarter, but is expected to bounce back with a stronger 0.6% reading in the 3rd quarter.
However, the current account data for the 3rd quarter is expected to show deterioration with a NZ$3.775 billion deficit forecast, about 4 times wider than the 2nd quarter's NZ$0.921 shortfall.
That may weigh on the kiwi as a worsening current account can cause credit rating downgrades for the country. In late September S&P cut New Zealand's long-term local currency rating to 'AA+' from 'AAA'.
5. Canada Macro Data - CPI, Retail Sales, and GDP
It's going to be an important week for macro data from Canada as we get 3 key releases - consumer prices, retail sales, and the monthly GDP reading. The Bank of Canada struck a slightly hawkish tone in their last meeting as the bank sees inflation a bit stronger than it expected.
On Tuesday we get the latest reading on consumer prices. The expectations is for modest increases in monthly terms for the headline (0.3%) and core (0.2%) readings.
As we can see from the chart to the right, annual headline consumer prices hit a peak of 3.5% earlier in the year but had retreated. If prices move back above the 3% level it can keep the BOC tilted towards the slightly hawkish position. Annual core prices however remain below the 2% level. The inflation data has the best chance to move the Canadian Dollar one way or the other.
In terms of retail sales, the data is a bit dated as its for the October period, but last week a measure of new motor vehicle sales saw a nice 3.3% increase for the month boding well for the retail sales report. Retail sales are expected to have climbed 0.4%, with core sales also up that amount.
GDP meanwhile, released by Canada on a monthly basis, is expected to show a 0.1% increase for October.