3 Numbers To Watch: German IFO, China Shibor, U.S. Fed Speech

Monday’s calendar does not have much new macro data, with the German Ifo business climate index being the only important release. I'm therefore taking the opportunity to discuss two currently significant market drivers: China Shibor interbank interest rates and a speech by U.S. Federal Reserve board member Richard W. Fisher. In other events, Italy's former prime minister, Silvio Berlusconi, faces a verdict today in a prostitution trial which could impact the Italian bond market.

Germany June IFO Business Climate (08:00 GMT): The business climate is expected to show a reading of 105.9, almost unchanged from 105.7 in May. Last week’s Markit PMI statistics for June showed continued but slower contraction in Europe, and the outlook for the German manufacturing industry was unexpectedly weak due to lower number of new factory orders. The Ifo index will thus be of great interest to the markets.


Over the past two years, the Ifo indices have been trending down but have attempted to turn back up during the past six months or so. The improvements have been most notable in forward-looking components and sectors depending on capital flight-to-safety and easy monetary policy – namely, real estate and connected industries. Until the data indicates widespread improvements, I would fade the headline numbers and just look at the manufacturing industry’s current conditions and expectations. The press release with sectoral data and comments will be made available at 08:30 GMT on the CESifo’s website.

China Shibor interest rates: The tight conditions in the Chinese interbank markets are monitored closely, so a surprise guest star of the week could be Shibor (link has charts) - the Shanghai Interbank Offered Rate. If things calm down in China and speakers of the week from the Federal Reserve manage to soft-talk, we could see some stabilisation of asset prices.

Last week, the Chinese interbank markets were hit by a liquidity squeeze following the Federal Reserve’s taper-talk and the ensuing reluctance of China's central bank to provide additional liquidity to the banking system. Bloomberg noted that China’s deliberate attempts to slow the credit boom before it becomes unmanageable have led to tensions in other markets as well. Bloomberg also reported that investors are shy of taking emerging market risk, and several bond auctions failed as a result. The Chinese central bank stated on Sunday that it is prepared to ‘appropriately fine-tune’ its monetary policy—a promise of additional liquidity?

Most commentators seem to think that the idea behind the China’s monetary tightening is to squeeze the huge shadow banking sector. The U.S. financial crisis originated in the shadow banking sector, which had become larger than the traditional banking sector. Perhaps the Chinese have learned from these mistakes.

U.S. FOMC member Fishers speaks (16:30 GMT): After the Federal Reserve’s Open Market Committee (FOMC) spoke about eventual tapering of its asset purchase programmes last week, global bond and stock markets have been coming up weak. Together with the Chinese developments, the corrective price action has perhaps been more than the Fed wanted to see, and this week officials start talking in softer tones. The sole dissenting dove, Mr. Bullard, had already presented his case on Friday, so it will be interesting to hear Mr. Fisher’s talk on U.S. monetary policy. He is defined as a hawk, and just recently compared asset purchase programmes to monetary cocaine. There are two more Fed speeches slated for Thursday, and four on Friday.