World Week Ahead: A Reminder that the Gravy Train Will One Day End

Last week ended with a market reaction that's become all too common in these times of monetary policy distortion, one in which good news is viewed as bad news for investors -- in this case, a positive U.S. labor market report. Friday's losses in both bonds and stocks -- bigger for the former than the latter --helped re-emphasize the impression of vulnerability that had arisen earlier in the week during a rout in European bond markets.

The bottom line is that financial markets, especially fixed-income markets, have been so pump-primed by quantitative easing from the world's biggest central banks that they are vulnerable to any sign that it might be pared back. Those signs can come in the form of European Central Bank President Mario Draghi expressing his apparent disregard for the risk of bond-market losses, as he did last week, or from more upbeat U.S. data that could hurry the Federal Reserve along in its bid to raise rates.

On both counts, markets were given a reminder last week that central banks' relentless creation of monetary liquidity will at some point come to an end. When that happens, the shakeout could be rather dramatic. To that end, some investors are already starting to reweight and re-price risk. Last week offered a warning that we could be in for some rocky times in the months ahead. It's probably a good thing, then, that the week ahead is a quiet one on the news front.

Here's the roundup of macroeconomic events around the world this week.

MONDAY

WORLD: Time N/A. Bank for International Settlements quarterly review.

Recent reports from the BIS have shed light on two troubling aspects of the global financial markets: a massive buildup of foreign currency debt, led by China, and at the same time, severe liquidity constraints in the secondary markets for trading that debt on account of banks' reluctance to make markets in them. This review could shed more light on those problems.

WORLD: Time N/A. G7 Summit concludes in the southern German alps.

The G7 is supposed to be more of a security forum than an economic policy forum these days, but it's worth wondering whether there'll be some talk about the disruption that occurred in global bond markets last week. With the Fed on track to raise rates these countries' governments could be worried about further volatility in markets going forward, as well as about divergences in exchange rates. For the most part, though, the focus will be on security concerns related to Russia and Ukraine.

CHINA: 9:30 p.m. EDT. (9:30 a.m. Tuesday, Beijing)

There is simply no inflation pressure in China. And with the yuan now quite likely significantly overvalued, there's also no upward price pressure coming through the import channel. Combined with a slower economy, the exchange rate is helping to foster deflationary pressures at home.

TUESDAY

JAPAN: 2 a.m. EDT. (3 p.m, Tokyo) May preliminary machine tool orders. [In April, tool orders were +12.1% on-month and +14.9% on-year.]

April was the second consecutive monthly gain for this early indicator of future capital expenditure. It suggested that the growth seen in the first quarter continued into the second.

EUROZONE: 5 a.m. EDT. (11 a.m, Brussels). 1Q GDP 2nd estimate. [Expected +0.4% on-quarter vs. +0.3% in 4Q; expected +1.0% on-year vs +0.9% in 4Q.]

The eurozone is gradually recovering, The second estimate of the first quarter GDP is likely to confirm this story.

AUSTRALIA: 10:50 p.m. (12:50 p.m., Brisbane). Reserve Bank of Australia Governor Glenn Stevens speech at the Economic Society of Australia (QLD)

After its last meeting, the RBA issued a statement that the market interpreted to be less dovish than expected, as it downplayed the prospect of another rate cut, which caused the Aussie dollar to rally. But the next day the retail sales data showed just how sickly the Australian economy is. That helped confirm the view of many that the RBA was just hedging its bets and is otherwise quite likely to cut rates again. Will Mr. Stevens give weight to either of those two interpretations?

WEDNESDAY

FRANCE: 2:45 a.m. (8:45 a.m., Paris). April industrial production index. [Expected +0.4% on-month vs. -0.3% in March.]

France, the troubled soul of the eurozone, is finally seeing some black ink in its numbers. If this data point comes in as people expect it will confirm the impression of a gradual recovery from a long-lasting slump.

NEW ZEALAND: 5 p.m. EDT. (9 a.m. Thursday, Auckland) Reserve Bank of New Zealand Monetary Policy Statement.

Months ago, the Reserve Bank of New Zealand had to stall its rate-hiking program as the New Zealand dollar rose and the economy slowed. It's unlikely to go back the other way and start cutting rates -- even with its Aussie counterpart still prepared to cut rates there -- but it's not likely to return to rate hike soon. Conclusion: economists expect no change in the cash rate, currently at 3.5%.

SOUTH KOREA: 9 p.m. EDT. (10 a.m., Seoul) Bank of Korea Monetary Policy Committee meeting and decision

Many believe the Bank of Korea should cut rates again. The South Korean economy is still very much hindered by China's slowdown.

THURSDAY

CHINA: 1:30 a.m. EDT. (1:30 p.m, Beijing.)

As always, the juxtaposition within this particular "data dump" helps to gauge how well China is transitioning from an investment-led economy (fixed assets investment) to a consumer-led economy (retail sales). The degree to which it succeeds in that difficult transition can be reflected in industrial production.

FRANCE: 2:45 a.m. EDT. (8:45 a.m., Paris) May consumer price index. [Expected +0.2% on-month vs. +0.1% in April; expected +0.3% on-year vs. +0.1% in April.]

As France's economy tentatively recovers, it will also pull itself away from the brink of deflation.

U.S.: 8:30 a.m. EDT.

An impressive result reported by auto companies for May has led economists to jack up their forecasts for the headline number. What's interesting is whether the forces that led people to buy cars en masse last month were also strong enough to get them to spend on other things, which we can gauge from the ex-auto result.

More signs of a tight labor market expected. This has been a consistent story for this indicator for months now.

FRIDAY

SPAIN: 3 a.m. EDT. (9 a.m., Madrid) May consumer price index. [Harmonized CPI expected -0.3% on-year, unchanged from in April.]

The long-lasting effect of Spain's painful adjustment to its previous financial crisis continues to show up in its consumer price statistics, which is manifest in the form of ongoing deflation.

EUROZONE: 5 a.m. EDT. (11 a.m., Brussels) April industrial production. [Expected +0.4% on-month vs. -0.3% in March; expected +0.9% on-year vs. +1.8% in March.]

After a disappointing March, improved German and other data suggest that industrial output rebounded in April, a result that would keep the idea of a eurozone economic recovery intact.

U.S.:

Rising energy prices, fed by a bounce in the price of oil, should help to bring the headline producer price numbers back into the black. But there is still no solid inflationary effect expected within the underlying core measure.

Last month's sharp drop in the sentiment index to a six-month low appeared to reflect a delayed--and perhaps headline-driven--response to the economic slowdown that had previously occurred during an exceptionally cold winter. That was matched by sluggish retail sales data. And yet spending on big-ticket items such as houses and cars are leaving a more upbeat impression of consumers becoming more willing to spend now that the weather has warmed up. We'll see which of those two stories the sentiment index ends up affirming.