Daily Economic Briefing: September 12, 2011

Global data summary

• Tensions continue to build in the EMU fiscal crisis. Investors are sensing a breaking point may be in the offing and, with little idea of what this will be or how it will play out, are moving quickly to the exit. In the event of a disorderly involuntary default, Greece would likely see economic activity plummet on a scale rarely seen. By comparison, both Argentina and Iceland saw GDP contract by roughly 15% surrounding their respective defaults but they also had the benefit of a currency that plunged between 50 and 70% as well as fiscal positions that were considerably better off than in Greece. As such, assuming post-default Greece remains in the euro area, a 15% decline in GDP would be a lower bound at best. Of course, the even bigger concern for the region—and the world— ;is the potential for contagion. Yields on Italian and Spanish government debt have surged and are up over 15bp just today, bringing the spread to bunds back to their early August highs before the ECB stepped in. Ring-fencing Greece will not be easy, and to do it, a rock-hard commitment by policymakers to backstop all other peripherals is needed.
• Macroeconomic data watching is painfully backward looking during these fast moving market events, but nonetheless provide an important anchor for the underlying state of affairs. Economic activity began to lift in July, with both global industrial production and retail sales volumes accelerating. All eyes are now on how the sharp break in business and consumer sentiment in August will affect spending behavior in the G-4. Retail sales data from the US (Wed) should highlight spending continued to expand last month but at a modest pace, while UK retail sales (Thu) are expected to have contracted. Highlighting the domestic demand divide between the G-4 and the EM, retail sales in Brazil (Tue) are projected to have jumped in July while last week’s retail sales report for China showed a solid gain in August.
• Perhaps more important will be the first survey readings for September. With the crisis in Europe intensifying and equity markets still selling off, it is hard to see much improvement in US consumer sentiment this month (Fri). All eyes will be in the Philly Fed survey (Thu), which plunged into recession territory last month. We expect some improvement but not a complete reversal, alongside a modest move up in the NY Fed survey (Thu).
• As reported over the weekend, Chinese trade growth picked up in August in year-ago terms but exports declined 1.8% on the month, largely reversing the 2.7% jump in July. The decline in shipments was broad-based with declines seen in exports to EM Asia, the Euro area, and US. On a more encouraging note, imports surged 6.2% last month, adding to the 0.9% gain in July. Coupled with last week’s reported 0.8% gain in August IP, the inventory adjustment that started earlier this year appears to be advancing.
• Inflation pressures are abating around the world as commodity price pressures ease. This is greenlighting monetary authorites to either ease further or slow the pace of normalization. As reported last Friday, inflation in China stepped down from its July peak. Reports out this week should underscore diminishing inflation risks in the US (Thu), UK (Wed), and Euro area (Thu).
• Alongside Brazil, India stands out with its overheating domestic demand conditions and rising inflation. Today’s soft headline IP number for July tempers concerns only slightly as the weakness largely reflected the volatile capital goods component. Excluding capital goods, IP contined to surge in July. Although activity is showing signs of decelerating in sequential terms—trade moderated in August—we still expect this week’s WPI report (Wed) to show inflation re-accelerated last month. In response, we expect the RBI to hike 25bp on Friday.

Global light vehicle sales up nicely in August