In the US, a relatively quiet week is in prospect. On Monday, data on factory orders is released together with the Employment Index. Economists tip a slight 0.4% lift in orders after a 1.9% decline in March.
On Tuesday, the ISM services index is issued. The good news is that the services sector is expanding (a reading above 50) and this is tipped to continue with a lift in the index in May from 53.5 to 53.9. Also weekly data on chain-store sales is released.
On Wednesday, the US Federal Reserve issues its Beige Book – a summary of economic conditions across all the Federal Reserve districts in the US. While only a qualitative survey, it will provide a sense of the momentum in different regions and sectors. Productivity data is issued the same day.
On Thursday, the US Federal Reserve chairman, Ben Bernanke, is due to testify on the economic outlook before the Joint Economic Committee. All investors want to know whether there will be more stimuli forthcoming – QE3 – and this may go some way to answering the question.
And, on Friday, the US data on exports and imports is released. The trade deficit is huge at just over US$50 billion, but it is not attracting attention as yet.
In China, the monthly economic data is due for release. And, say it isn’t so, but it is currently set down for release on Saturday. The data covers inflation, investment, production and retail sales.
Over the past few months, we asserted that the answer to almost every economic question was China. But that theory has been placed on hold – as opposed to being removed entirely – by Greece. A mere sniff of the possibility that mainstream Greek parties will win power on June 17 is enough to send shares, commodity prices and the Australian dollar higher. Opinion polls are taken regularly, just like here in Australia, so they will be closely watched over the next fortnight.
What are the chances of a rate cut on Tuesday? Current financial market pricing suggests that there is a 125% chance of a 25-basis-point (quarter of a per cent) rate cut. In other words, 25 basis points is totally factored in, but financial market participants believe there is a 25% chance that rates could be cut by 50 basis points. In essence, a 33.25 basis point rate cut is priced in.
The overnight indexed swap market expects the cash rate to be cut almost one percentage point by year end (six-month rate 2.875%). The implied yield on 90-day bank bills in December is similarly at 2.80%.
Craig James is the chief economist at CommSec.
