Overnight action: Moody’s Warns on Greek Default; France Says China Backs Lagarde as IMF Head; Sony Discovers More Data Breaches; Ash Cloud Grounds Flights
Watch for: New-home sales for April; Redbook retail sales
The Breakfast Briefing
Is the economy going through a momentary soft patch or is it something more?
The market isn’t quite sure, but a few more chips have gotten moved toward the “something more” camp in the past few days. While a lot of attention is focused on Greece, Portugal, Ireland and the manifold euro-zone fiscal problems, the real game is playing out in Asia, where questions about China’s growth are rising.
After a weak-ish purchasing managers report on Monday, Goldman Sachs, a famous China backer (think BRICs), cut its growth forecast for the Asian titan. While the squid trimmed its outlook for China, it remains “above consensus” in its views, according to a Dow Jones report overnight.
Regardless, China’s fight with inflation (mentioned in the Goldman note) does raise the prospect of a policy mistake — i.e., raising rates too much and forcing the economy into a hard landing, which is econospeak for recession. We’re still a long, long way from that, given that China is still growing at near 10%. But Goldman’s note, along with recent data, is likely to keep downward pressure on commodities and miners.
While China is a more important swing factor, the euro-zone issues keep festering and remain important, primarily from a contagion point of view. If the euro-zone woes remain confined to Greece, Ireland and Portugal, that’s a pretty manageable state of affairs. But if the trio of minnows infect bigger economies, like Spain or Italy, then the euro-zone situation swiftly gets much, much uglier. For now, Spain and Italy are hanging in there, but the ratings agencies have started nibbling around the edges. And if Greece does default, it could increase the prospect for contagion.
Moving back to the U.S., the soft patch vs. something worse debate will keep festering, especially since there’s not a ton of big economic news this week. New home sales come out today in what is a light data day. Even a super-strong report (not expected!) wouldn’t really move the needle. The home market is grinding it out and we’ve got some time before it is a source of happy news. (A complete list of economic news and Federal Reserve speaking engagements is lower in this post.)
On the earnings front, a few big names report, including Medtronic, Applied Materials and Cracker Barrel Old Country Store. Okay, Cracker Barrel isn’t a big name, but what a great name. (A fuller list of key earnings is lower in this post.)
Late today, AIG is supposed to price its big U.S government-centric stock offering. Looks like the government (that’s you and me, pal) will do okay on the sale, but it has a ton of shares that it will need to dribble out over the coming months.
As concerns mount about the economy and the direction of the stock market, here’s an interesting factoid: the dollar is having a great May. The buck is up 5.4% against the euro and 3.7% against the pound. It’s even mustered a better than 1% gain against the yen. That’s one more reason that commodities have been weaker. A stronger dollar tends to drive commodity prices lower, since a stronger buck means you need fewer of ‘em to buy the same amount of stuff, all other things being equal.
Last week, I said the market acted as though the default position was up. That’s certainly changed, with the Dow Jones Industrial Average shedding 1.8% in the last two sessions. Yesterday, just one of the Dow 30 managed a gain — McDonald’s.
