Much of the risk tone facing world markets will be set by the US economy. For the most part this will only happen toward the end of the week not only because US markets are closed for Memorial Day on Monday but also because a series of key reports will be released on Friday that will help determine what kind of momentum the US economy has into the second quarter. The line-up starts slow with the Conference Board’s consumer confidence index on Tuesday and pending home sales on Wednesday, both of which are expected to be flat.
Consensus expects Q1 US GDP to be revised from 2.2% to 1.9% Thursday partly due to revised trade effects. On that same day, we’ll get a glimpse at the first of the top-tier labor market reports when the ADP private payrolls report arrives. That will be followed by the more complete nonfarm payrolls report and the household survey on Friday. On balance, we’re expecting another round of soft sub-200k prints as seasonal distortions continue to come off in a manner that offsets the upsides to job reports over the winter months. Friday actually offers a hat trick of reports that also includes consumer spending during the month of April that is expected to follow a decent nominal gain in retail sales higher, and the ISM manufacturing report. While the prior month’s ISM result surpassed expectations and went against the broad tone of regional manufacturing surveys, we’re expecting the usual correlations between ISM and gauges such as the recent disappointment in the Philly Fed index to be restored in such a manner as to put downside risk to ISM this time.
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European markets will pose two main forms of risk to global markets next week. One will be an Irish referendum on the European Fiscal Stability Treaty or the EU fiscal compact on Thursday. Ireland is the only country to hold such a vote within the 25 European nations that signed on to the fiscal pact, as Irish law requires such a referendum to be held on matters affecting sovereignty. The concern overhanging voters is that Ireland may be cut off from international financial aid if it rejects the treaty, and that is why there is a modest balance of opinion in recent polls that is in favor of a yes vote. That said, Ireland has two precedents for rejecting EU treaties (like the Lisbon Treaty in 2008), and another would be a further setback to German-led austerity efforts. A ’no’ vote, however, would not derail the fiscal compact because only twelve countries are needed to ratify it. The second main form of European risk comes through key updates on the German economy. Germany’s economy averted recession by expanding 0.5% q/q in Q1 following a small 0.2% decline in Q4. Retail sales are expected to come in flat for the April print, the unemployment rate is expected to hold around a post reunification low of 6.8%, and CPI is expected to be soft enough to justify a further ECB rate cut.
What we need to watch out for are news flows from Spain and Greece, as markets will be sensitive to these. It seems that at present investors have tunnel vision.