3 Numbers to Watch: German IFO, China Shibor, US Fed speech
Monday’s calendar does not have much new macro data, with the German Ifo business climate index being the only important release. I'm therefore taking the opportunity to discuss two important market drivers at the moment—China Shibor interbank interest rates and a speech by US Federal Reserve board member Richard W. Fisher. In other events, Italy's former prime minister, Silvio Berlusconi, gets a verdict today in a prostitution trial which could have an impact on the Italian bond market.
Germany June IFO Business Climate (08:00 GMT): The business climate is expected to show a reading of 105.9, almost unchanged from 105.7 in May. Last week’s Markit PMI statistics for June showed continued but slower contraction in Europe, and the outlook for the German manufacturing industry was unexpectedly weak due to lower number of new factory orders. The Ifo index will thus be of great interest to the markets. See my remarks on the Markit PMI from last Thursday.
During the past two years the Ifo indices have been trending down, but have attempted to turn back up during the past six months or so. The improvements have been most notable in forward-looking components and sectors depending on capital flight-to-safety and easy monetary policy – namely, real estate and connected industries. Until there are widespread improvements in the data, I would fade the headline numbers and just look at the manufacturing industry’s current conditions and expectations. The press release with sectoral data and comments will be made available at 08:30 GMT on the CESifo’s website. My commentary on the May Ifo readings is here.
China Shibor interest rates: The tight conditions in the Chinese interbank markets are watched closely, so a surprise guest star of the week could be Shibor (link has charts) - the Shanghai Interbank Offered Rate. If things calm down in China and speakers of the week from the Federal Reserve manage to soft-talk, we could see some stabilisation of asset prices.
Last week the Chinese interbank markets were hit by a liquidity squeeze following the Federal Reserve’s taper-talk and the ensuing reluctance of China's central bank to provide additional liquidity to the banking system. Bloomberg noted that China’s deliberate attempts to slow the credit boom before it becomes unmanageable have led to tensions in other markets as well. Bloomberg also reported that investors are shy of taking emerging market risk and several bond auctions have failed as a result. The Chinese central bank stated on Sunday that it is prepared to ‘appropriately fine-tune’ its monetary policy—a promise of additional liquidity?
Most commentators seem to think that the idea behind the China’s monetary tightening is to squeeze the huge shadow banking sector. In the US the financial crisis originated in the shadow banking sector, which had become larger than the traditional banking sector, and perhaps the Chinese have learned from other's mistakes.
US FOMC member Fishers speaks (16:30 GMT): After the Federal Reserve’s Open Market Committee (FOMC) last week talked about eventual tapering of its asset purchase programmes, bond and stock markets have been weak globally. Combined with the Chinese developments, perhaps the corrective price action has been more than the Fed wanted to see, and this week officials start talking softer. The sole dissenting dove, Mr Bullard already presented his case on Friday, so it will be interesting to hear Mr Fisher’s talk on US monetary policy, as he is considered to be a hawk and just recently compared asset purchase programmes to monetary cocaine. There are two more Fed speeches on Thursday and four on Friday.
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