Over the next week, the most important event in the eurozone will be the release of the business confidence indices for July in the eurozone (PMI indices) and in Germany (IFO index).
We do not expect any improvement in the short term for the business confidence indices as the debt crisis in the peripheral countries continue to worsen in the last weeks and the measures decided by the EU leaders during the June 29th summit where not enough to calm the tensions on the financial markets - as signaled by 10 year Spanish government bond yields spread vs the German Bund at the all time record high. For these reasons, we see the confidence indices remaining on low level, anticipating a negative economic outlook in H2 '12.
The PMI manufacturing index is expected to decline from 45.1 to 44.4 - the lowest since June '09 - and the PMI services, after the unexpected rebound in June from 46.7 to 47.1, is expected to come back to 46.7 as the continued worsening of the jobs markets will continue to negatively affect the internal demand in the eurozone economies. The PMI composite should decline from 46.4 to 45.9 - the lowest since June '09. At 45.9 the PMI composite will be on a value in line with a 0.6% contraction of eurozone GDP in Q3 '12.
The IFO business index should strengthen the view that the German economy will not be unaffected by the debt crisis in the peripheral countries. Our expectations are for the index to decline for the third consecutive month: from 105.3 to 103.8 - the lowest since March '10. Despite remaining on a value in line with a moderate rate of growth for the industrial production in Q3 (+3.4% y/y according the long term correlation between the index and industrial production), the index will signal that the economic activity in Germany may deteriorate fast in the months ahead amid the debt crisis in the peripheral countries and the softening of economic growth all around the world.
In line with the indications coming from the German IFO, also the business confidence indices due for release in Italy and France should fall, signaling a further weakening of economic activity in Q3 '12:
1) Our estimate is for the Italian business confidence index to decline to 87 in July after the unexpected rebound to 88.6 in June. The index will remain above 86.6 - the lowest since August '09 posted in April - but will continue to anticipate a strong contraction of industrial production (-9% y/y);
2) The French business confidence index should decline from 92 to 91 - the lowest since February '10 - signaling a further worsening of the industrial sector outlook going forward.
Negative indications are expected also from the Italian data on the retail sales for May and the consumer confidence index for July:
1) Having tumbled for two consecutive months (-0.8% m/m in March and -1.6% m/m in April), retail sales are expected to rebound by 1% m/m in May. The year-over-year change should improve from -3.5% y/y to -1.8% y/y.
2) The consumer confidence index fell to the historical low of 85.3 in June. Our expectations are for the recent down trend to continue in July: the index should decrease to 84.4 as the jobs market continue to worsen. The data should be a negative sign for the perspectives of consumer spending in H2 '12.
Also the outlook of German consumer spending is not brilliant. The GFK consumer confidence index should decline from 5.8 to 5.7 as the positive trend in the labour market has softened in Q2. The uncertainties on the future of the eurozone are also likely to take their toll on consumer morale. At 5.7 the index should anticipate a modest rate of growth for consumer spending in Q3.
Finally, the money supply data due for release over the next week should confirm that the LTRO operations implemented by the ECB in December '11 and February '12 avoided a major credit crunch but were not enough to favor a turnaround for the credit market. The M3 rate of growth is likely to remain unchanged at 2.9% y/y and credit to private resident in the Euro are should remain stable close to 0%.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
