1. Focus on Italy and Greece, Periphery Yields
The main focus to start the week is on the political drama playing out in both Italy and Greece. As a result of pressure on the Italian Prime Minister we have seen Italian yields hit an euro-era record. This strain on Italy's borrowing costs and the uncertainty of the Italian government's hold on its majority will be a running theme during the week, though we have a very important test in terms of a vote on the 2010 budget coming up tomorrow. If that fails we will look to see if the government can secure enough votes to pass a vote of confidence on the austerity measures.
In Greece we await the name of the new prime minister that will help lead a caretaker unity government whose main goal will be to pass measures in the October 26 EU Summit agreement.
For more on this story see today's fundamental update: Politics in Italy and Greece Consume All the Oxygen
2. Europeans Fail to Convince G-20 Leaders to Lend a Hand
As we begin the week another key story is that global leaders at the G-20 summit over the weekend did not agree on increasing the resources available to the IMF. They were also not yet on board with a plan by the Europeans to leverage the EFSF by attracting outside capital (China) or by using the IMF.
What this means is that the Europeans are on their own when it comes to solving this crisis (for now), and the need to solidify their proposals around the leveraging of their bail out mechanism in order to get other global leaders to fork over their countries' cash.
European finance ministers meet tomorrow.
3. Trade Data on Tap from Key Economies
From the macro side of things we have trade balance data from the US, China, Germany, UK, Australia, and Canada on tap this week. It will be an opportunity for economists, investors, and traders to gauge the impact of the recent turmoil in financial markets on global trade.
Here's a breakdown of the forecasts and previous readings for each country
11/07/11 - Australia (September) - Forecast: A$3.00B, Previous: A$3.10B
11/08/11 - Germany (September) - Forecast: €12.9B, Previous: €13.8B
11/09/11 - UK (September) - Forecast: -£7.9B, Previous: -£7.8B
11/10/11 - China (October) - Forecast $26.3B, Previous: $14.5B
11/10/11 - USA (September) - Forecast -$ 46.1B, Previous: -$45.6
11/10/11 - Canada (September) - Forecast -C$0.5B, Previous: -C$0.6B
The data is expected to show Germany's trade surplus shrinking as exports are expected to cool while imports increase. The average reading for this year in Germany has been a seasonally adjusted €12 billion and so while we are expected to ease from the readings seen in August, we are looking for sharper than expected decline than what is expected to increase concerns about demand for Germany's goods. We saw a sharp drop in orders placed with Germany and a drop in industrial production as demand from euro-zone members has fallen.
In Australia and Canada we are expecting to see similar reading as we had in August. The main difference between these two commodity exporting nations is that Australia's trade balance is expected to remain positive while the expectation for Canada is for another month of trade deficit.
In China the expectation for October is for a strong bounce back in the trade data, with forecast of a surplus of $26.3 billion, compared to a $14.5 billion figure in September. While the turbulence in Europe as well as slower growth in the US should have an impact on China, the impact may not be as dramatic as it was at the height of the last financial crisis. This thesis comes from the new orders component of recent purchasing managers surveys which showed greater resilience in the manufacturing sector.
In the US expectation is for a small deterioration in the trade deficit, as both exports and imports slow in tandem.
4. NFP was Mixed, US Recovery Plods Along
Last Friday we got our latest reading on nonfarm payrolls and it should still have some lingering impact on the markets in today's session, and should set the tone for how the US economy is viewed as we move into the fourth quarter. The figure overall was a see-saw number in that the weaker headline reading of 80K jobs created, undershot forecast of a 95K increase, but it was balanced by an upward revision of 102K in the previous two months of data. Also the unemployment rate fell to 9%.
With the reading tells us is that the US economy, while certainly no longer heading for a double-dip recession in the near-term, plods along at a pace that is not strong enough to bring down the unemployment rate by a significant amount.
Following the FOMC decision last week, Fed Chairman Bernanke said that the central bank is prepared to take action which helped bolster expectations of quantitative easing 3 if economic data comes in weaker than expected over the next month or two.
Not too much from the macro side of things for the US this week, with the trade balance data described above considered the highlight. Other import indicators to monitor will be the weekly jobless claims as well as the Friday's preliminary reading of the University of Michigan consumer sentiment index.
5. Fed's Hawks Face Off vs Fed's Doves in Speeches This Week
While the fundamental calendar is sparse for the US, we do have plenty of Fed speeches to monitor this week.
On Tuesday the Fed's hawks - represented by FOMC members Plosser and Kocherlakota - will be giving speeches. While they did not dissent at last week's FOMC decision, it'll be important to note their perspectives for the economy and for the path of monetary policy going forward. A hawkish message from the 2 central bankers could create some pressure on equities if it lessens the expectation for a further round of stimulus.
After the Fed's hawks have their time in the sun at the beginning of the week, on Thursday the Fed's doves take center stage with speeches from the Chairman Bernanke, Fed Vice Chairman Yellen, and the Chicago Fed President Evans. The three central bankers will likely outline their view of the economy as well as path for monetary policy. Charles Evans was the only dissenting vote in the FOMC, as he voted to undertake more stimulative measures last week. Evans has proposed linking when the Fed would raise interest rates to conditional economic indicators such as inflation and unemployment.
Therefore if the expectation is that the hawks decrease expectations for quantitative easing at the beginning of the week that the Fed doves speaking on Thursday would increase those expectations.