World week ahead: more weakness in China

Friday's May US payrolls report appears to have quieted, but not put to rest, the main focus of investors: when the US Federal Reserve will begin to temper its monthly bond-buying programme.

Initially this week, the focus has shifted to Asia, where there were signs of deepening weakness in China, fuelling concern about the slowdown in the world's second-largest economy which expanded 7.8 percent in 2012, the slowest pace since 1999. The government set a 7.5 percent growth target for 2013.

This past weekend a slew of reports showed that Chinese exports rose 1 percent in May from a year earlier, far short of expectations and the slowest pace of growth since July, while imports unexpectedly declined 0.3 percent.

Consumer inflation in China dropped to 2.1 percent in May, the lowest in three months, while producer prices declined 2.9 percent from a year earlier. Industrial output increased 9.2 percent in May from a year earlier, while retail sales rose 12.9 percent.

"We had expected an L-shaped economic recovery in China and that the growth would stabilise at around 7.9 percent," Jian Chang, China economist for Barclays in Hong Kong, told Reuters.

"Now industrial and other data showed slower growth rate in Q2 than in Q1," he said. "We now think China's growth will stabilise at around 7.6 percent [this year]. The possibility for the central bank to cut interest rates is now rising."

China is faltering at the same time that the US economy seems to have found a sustainable – albeit still challenging – recovery path.

On Friday, Wall Street enjoyed a relief rally after better-than-expected American jobs data. Payrolls climbed 175,000 in May from a revised 149,000 increase in April, while the unemployment rate rose to 7.6 percent, from 7.5 percent as more people felt encouraged to look for work.

The greenback also gained, strengthening against the euro and the yen. However, US Treasuries declined, pushing yields on the 10-year note up 10 basis points.

Economists predict the Fed will reduce bond buying to a monthly pace of $US65 billion at the October 29-30 meeting of the Federal Open Market Committee, according to the median estimate in a Bloomberg survey last week.

Of 48 economists who answered a Reuters poll on Friday about when they expect the Fed to cut back on the size of its debt purchases, 42 said by the end of 2013. Of those, 21 expect reduced purchases to be announced during the third quarter of the year, with 19 specifying the Fed's September policy meeting.

Last week, the Dow Jones Industrial Average rose 0.9 percent, while the Standard & Poor's 500 Index gained 0.8 percent and the Nasdaq Composite index increased 0.4 percent.

US economic data to be released this week includes May retail sales and weekly jobless claims on Thursday, and the preliminary reading on June consumer sentiment on Friday. Also due are May export and import prices on Thursday, with May industrial production and the May producer price index, both scheduled for Friday.

St Louis Fed Bank president James Bullard is scheduled to speak on the global outlook in Montreal on Monday.

Investors will also keep an eye on Apple's Worldwide Developers Conference starting on Monday as the company has used the event to announce new products. It is expected to unveil a music-streaming service.

Europe's Stoxx 600 Index's 1.3 percent gain on Friday curbed its weekly drop to 1.8 percent.

The latest data on the eurozone economy will come in the form of Germany's consumer price index as well as eurozone industrial production on Wednesday and the CPI, plus quarterly employment on Friday.

The European Central Bank told Reuters on Sunday that there was no limit on its bond-buying programme after Frankfurter Allgemeine Sonntagszeitung cited central bank sources as saying the ECB had set a limit of 524 billion euros on the Outright Monetary Transactions scheme.

The Bank of Japan starts a two-day policy meeting on Monday. Last week, the country's Topix index plunged 6.9 percent, while the yen jumped more than 3 percent against the US dollar in the final two days of the week.

(BusinessDesk)