A dismal U.S. jobs report. A European debt crisis for which there is no quick fix. Slowing growth in China.
There are a number of reasons to be cautious about the prospects for the global economic recovery.
It's against this background that U.S. Federal Reserve Chairman Ben Bernanke will step before Congress for his semi-annual testimony Wednesday. He will likely be barraged with questions about Friday's jobs report -- a report so across-the-board disappointing that JPMorgan economist Michael Feroli called it "worse than Spinal Tap's 'Shark Sandwich."'
The U.S. economy created just 18,000 jobs in June, much less than the 90,000 economists had expected.
A U.S. retail sales report may offer a little bit of hope Thursday if it shows Americans spent money left over from a recent retreat in gasoline prices on other items.
"We're in a situation where the data is noisy and choppy," said Michael Hanson, a senior economist at Bank of America.
"For a central banker, you're now in risk management mode: 'We want to be ready to calm the markets in case we get more bad data, but we don't want to jump the gun, either."'
Bernanke has argued that the biggest factors affecting growth in the first half of the year are temporary in nature: supply disruptions due to the Japanese earthquake, inclement weather and a surge in oil prices earlier this year.
He is expected to stick to that assessment.
"The weak jobs report does not rule out a second half recovery by any means. Employment is something of a lagging indicator," said Dean Maki, economist at Barclays Capital.
"It depends on consumer spending and we are focusing intently on retail sales as one of the first signals of how consumers are responding to the decline in gasoline prices."
In addition, U.S. industrial production and manufacturing data Friday may show the Japanese earthquake-induced supply chain disruptions to auto production and sales have eased somewhat.
Japan's central bank, which meets on July 11-12, will likely revise up its assessment of the economy next week as companies restore supply chains more quickly than expected. Factory output is seen returning to pre-quake levels in August. The BOJ is expected to hold off easing monetary policy further, though it will likely warn of lingering risks to the global economy.
NO QUICK FIXES
One of those risks is Europe's escalating debt crisis.
Euro zone finance ministers are set to meet Monday to discuss a second bailout package for Greece.
But given the absence of a decision on how private bondholders might participate in any Greek debt rollover, markets are skeptical of how much progress can be made at the Eurogroup meeting.
Markets want European policymakers to come up with longer-term solutions rather than one temporary fix after the other if they are to avoid a domino effect as financial markets pounce on other weak euro area countries.
Contagion is already evident from the growing risk premia on debt issued by Spain and Italy, which some analysts view as a warning signal. Lower-rated euro zone government bonds have faced increased pressure since Moody's cut Portugal's credit rating to junk last week.
"There is not expected to be much of a resolution, so all together there is a lot of asymmetric risk out there," said Mark McCormick, currency strategist at Brown Brothers Harriman.
China raised interest rates for the third time this year Wednesday as taming inflation remains a top priority even as the pace of growth in its vast economy slows.
Risky assets, particularly those with direct links to China's growth, sold off after the announcement on concerns the latest monetary tightening could choke an already sluggish global recovery.
On Wednesday, July 13, China will get a read on its second-quarter economic growth data and retail sales for June. Chinese consumer sentiment is expected to have been weighed down by surging inflation and high property prices.
"Unlike in Japan and the U.S., where we believe growth has slowed for temporary reasons, policy tightening in the euro area and China seems likely to yield a more persistent slowing in growth," Barclays' Maki wrote in a note to clients.
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