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With the second half of the year just beginning, economists are questioning if the worst of the U.S. downturn is already over, or whether uncertainty about rising prices spells more gloom and doom for the American economy.

Thursday’s BLS nonfarm payrolls report for June showed the sixth month of consecutive declines in the U.S. economy, totalling 438k net losses this year and indicating further deterioration is to come. However, economists say it is not job losses that are the major concern heading into the third quarter, but rising prices.

While there is pressure for the Fed to combat inflation, the central bank remains constrained not only by broad-based, anemic growth, but by the fact that soaring energy prices are caused by increased global demand rather than by U.S. consumers.

Charmaine Buskas, senior economics strategist at TD Securities, said the first half of 2008 “didn’t see as much fallout as we would have expected,” noting that the downswing in jobs was much weaker than in previous downturns. She noted job losses have yet to exceed 88k per month, whereas previous downturns have reported monthly declines of more than 100k and even as many as 200k, which “suggests recent deterioration has been tame.”

Similarly, Ellen Zentner, U.S. macroeconomist at the Bank of Tokyo-Mitsubishi, said, “The point is: this is still nothing like previous recessions.”

Back in May, Zentner said the labour market remained “bullish” even as a general recession loomed. She called the labour market “soft but not horrible,” commenting that the U.S. is clearly in recession but with only mild job losses.

Following Thursday’s nonfarm employment report, which added 50k more losses in revised estimates for the previous two months and held the unemployment rate at 5.5%, Zentner said the story is still the same, noting that the widely-watched three-month moving average of job losses was worse in March than it is now.

She expects job losses to continue in the medium term, but the bigger concern going forward is inflation, which she expects to be “just nasty” in the third quarter.

Meanwhile, Buskas is looking for Q3 inflation to rise to 4.6%, up from an estimated 4.1% in Q2. She said oil prices should fall back by the end of the year as the economic slowdown in China should continue and thereby soften demand for energy, while speculative forces that have been driving up rising prices should come down.

But Dave Resler, chief economist at Nomura Securities, said “the persistent upward pressure on energy costs has necessitated discarding (the) optimistic assumption (that energy prices would see a reversal.)” As a result, he’s made “a major revision to the outlook,” in which he now expects CPI inflation to rise by an average 4.0% over the next six quarters, “including a surge to 6.3% in the third quarter of 2008.”

Resler’s forecasts, while gloomy, are based on oil prices remaining at “near recent levels, but below this week’s highs.” Yet, to some economists, even that expectation is too optimistic.

“If oil prices continue on trend, you’re talking about 10% headline inflation in Q3,” Zentner said.

Her reasoning is based on oil prices averaging $124 per barrel in the second quarter, compared to just under $98 in Q1. This represents a 27% gain in a single quarter. If prices rise at just half that pace in the third quarter, oil prices will average $140, she said, noting her own estimate is closer to $150.

“This isn’t being pessimistic; this is being realistic,” she added, forecasting that Q3 headline inflation will be between 7% and 10%, depending on energy prices.

Zentner said the global nature of rising energy prices puts the Fed in a difficult position seeing as how U.S. consumers aren’t driving up prices, so the usual reasons to hike rates are largely inapplicable.

“Usually when inflation is high, everything else in the economy is tight. We don’t have any of that right now. Margins are getting tighter and profits are falling,” she said. This puts producers in a difficult position, as an attempt to pass on their rising prices would likely result in much less demand seeing as how consumers’ discretionary spending is eaten up by rising food and energy costs.

“Typically, when the Fed is dealing with these issues they are dealing with a price-wage spiral,” but that’s not the case this time, Zentner said. “The labour market is slack, and getting slacker. There are no wage pressures - it’s not an employees’ market.”

The number of workers with pensions in Canada is growing but isn’t keeping pace with hiring. As the proportion of those with pensions versus those without is shrinking, Canadians are increasingly asking themselves how they can secure a comfortable retirement and how much they should save.

Statistics Canada’s most recent survey of registered pension plan (RPP) members showed a 1.4% increase in memberships compared to 2005. However, the statistical agency’s Labour Force Survey showed employment growth between those two years at 1.9%. Only 25.7% of private sector employees can lay claim to a pension while 83.2% of public sector employees have a pension. A year before, both private and public sectors had slightly larger percentages of workers covered by pensions.

The declining proportion of those with pensions has led some commentators to call for new government programs or expansions of existing programs to supplement retirement savings.

“The problem on the pensions front today is that public pensions replace only about 40% of the previous earnings of an average worker, and much less for those higher up the income ladder. Meanwhile, and this is a big problem, fewer and fewer workers are covered by workplace pensions, especially defined benefit plans which provide a secure and adequate replacement income in retirement,” wrote Andrew Jackson, national director of social and economic policy with the Canadian Labour Congress on the Progressive Economics Forum blog (www.progressive-economics.ca/). “Only about one in five workers in the private sector are now covered by a defined benefit pension plan, meaning that they have to save as individuals - mainly through RRSPs - to have any prospect of a secure retirement.”

But Jackson writes that the median assets of RRSPS of persons aged 55-65 sits at $60,000, and only “the prudent affluent” who max out their RRSP contributions.

“The fundamental fact remains that many workers in their 40s and 50s today and, especially, younger Canadians can expect a much less comfortable and secure retirement than those who are now in their 70s and 80s,” he wrote.

The amount necessary for someone to retire comfortably varies from person to person, although many experts would put that figure in the $500,000 to $1 million range, says Assante Wealth Management’s senior financial adviser David Phipps.

“Most people are so far behind, it’s not a question of what is the optimal amount of savings, it’s usually a question of whatever they do save they’re still short,” he said. “Most people are so far away the simple answer is to save as much as possible.”

Phipps cautioned that there is in fact no true generic answer for a retirement savings target as goals and lifestyles vary, and that people would be best to track their spending, identify their goals and seek out a financial adviser for help in planning.

“Certainly the absence of a defined benefit pension plan ultimately means Canadians are now much more responsible than they used to be for their own financial well being,” he said, adding that firms have been moving away from defined benefits pensions for at least the last 15 years, fuelling the growth of the financial planning profession. He says companies are looking at defined pension plans as a huge potential liability given the lengthening lifespans of workers. “The whole transition away from defined benefit pension plans is not just a Canadian problem, its occurring throughout the western world,” he added.

He said a good rule of thumb for people who are able to do so is to max out their RRSP contribution each year.

But Ram Balakrishnan, a software engineer and self-described “average investor,” who pens the popular Canadian Capitalist blog (http://www.canadiancapitalist.com), said often people make a contribution to their RRSPs at the last minute in February in an effort to minimize their taxes, and aren’t able to lay their hands on sufficient money to maximize their contributions.

“It’s very difficult to find a huge chunk of cash just at the last minute,” he said, adding that people are better to set up a routine contribution with their bank and arrange to have their contribution taken off by their employer’s payroll department before taxes are applied so they can minimize the any over-payments and maximize the time their RRSP contributions garner interest. He said investors need to watch management expense ratios carefully to ensure they don’t eat into retirement investment returns and he advocated using index funds as a means of minimizing some of those costs.

Balakrishnan said he had worked as a full-time employee at a number of different firms and said a defined benefits pension is “almost unheard of.” He said he aims to save 8-10% of his gross salary and wants to retire by the time he is 55.

“It’s simply because of the cost. It’s just too expensive for these companies to offer defined benefit plans,” he said.

Phipps said those workers with a defined benefits pension would “almost certainly” be in a better financial position than those without, but that many younger workers simply can’t fathom the idea of staying with a firm for 35 years.

In his blog posting, Jackson advocated the expansion of CPP and OAS as a means of addressing the problem of retirement income replacement and dwindling availability of private-sector pensions. He also pointed to a C.D. Howe Institute-sponsored paper by Keith Ambachtsheer advocating a “Canada Supplementary Pension Plan” - a sort of national group RRSP.

“What is interesting is that at least some of the pension experts have begun to break ranks with the financial sector in order to advocate new, collective savings vehicles,” Jackson wrote. Collective savings vehicles have the advantage of realizing large economies of scale-spreading management fees across a large number of beneficiaries, Jackson said.

Phipps agreed that large plans do save members money on fees, but he added pension members should still save for a rainy day.

“When we talk about the privatization of health care, with the demographic changes that are happening in our society, I find it almost impossible to imagine a scenario where that doesn’t happen,” he said. “If you have extra money, you are going to be in a better scenario than those who don’t.”

However, Phipps cautioned that saving money isn’t always the best thing to do, particularly for someone with low income nearing retirement age who finds themselves still in debt. Paying down a $100,000 mortgage at age 60 and saving on interest might be a far better investment, he said, adding that getting a house paid for can be a big step toward retirement. However, he also said there are also non-monetary things people can do to secure their retirement, like improving their health.

“It sounds cutesy, but people can stop smoking and improve their diets,” he said. “Most people would rather be healthy and poor than sick and rich.”

After falling 0.5% month-over-month in March and by a further 0.8% in April, economists are expecting German industrial production to rebound 0.2% month-over-month in May.

Year-over-year, the consensus forecast is calling for the growth rate to slow to 3.2% after accelerating to 4.8% in April.

“Expecting a small gain” in German industrial production, Fortis Bank economist Nick Kounis forecasts the output indicator to rise 0.1%, month-over-month.

However, Kounis did stress that “this should be seen against the background of two weak months in March and April,” and that, due to a strong euro and weakening global demand, “(the small rebound) would still leave the sector on track for a gradual slowdown.”

UBS Limited economist Martin Lück is expecting a 0.5% rebound on a monthly basis for industrial output.

Like Kounis, Lück emphasized that his predicted rebound is “more or less due to technical reasons” and not to a re-strengthening on underlying growth.

“Two months (of decline) in a row should give some room for rebound,” Lück said.

However, Lück did point to the fact that many German companies had reported a high level of work backlog over the first quarter of 2008 that would take some time to complete.

“So, I think that industrial production will remain rather resilient for quite some time,” he said.

Next week will begin with a number of Federal Reserve speakers and see the release of housing data in both Canada and the U.S. on Wednesday. The relatively quiet week will culminate on Friday with Canada’s employment report for June, which is expected to be a key market focus.

Whereas June’s change in employment is anticipated to increase by 10k, following a previous increase of 8.4k, the unemployment rate is expected to hold steady at 6.1%.

Economists from Scotia Capital, however, are calling for an increase in the unemployment rate as well. “The impression that Canada’s labour market is holding up better than in the U.S. is generally true. As markets look forward to next Friday’s Canadian jobs report for June, however, it would be a mistake to ignore emerging pitfalls,” they wrote in a research note to clients.

“Canada’s buoyant housing market will continue to support construction employment, while public sector employment is expected to gain once again. Nonetheless, this will likely only lead to a gain of around 5,000 workers. As a result, we are expecting the unemployment rate to move up slightly to 6.2% in June.”

In the U.S., meanwhile, June’s University of Michigan consumer sentiment index is scheduled to be released. Economists are forecasting a preliminary reading of 55.5, down from May’s 56.4.

“There is little reason to suspect that confidence improved in July,” wrote Capital Economics’ Paul Ashworth. “The tax rebates have already been delivered and, otherwise, gasoline prices have continued to rise while labour market conditions deteriorated further. Once those rebates are spent, things could get even grimmer.”

Furthermore, Federal Reserve Chairman Ben Bernanke is set to speak twice during the week ahead. On Tuesday, he will speak at the Federal Deposit Insurance Corporation on the subject of “Mortgage Lending for Low- and Moderate Income Households”. On Thursday, along with U.S. Treasury Secretary Henry Paulson, he will testify at a House Financial Services Committee on a variety of topics, including financial regulation.

All times in EDT.

Saturday: U.S. Treasury Under Secretary for Domestic Finance Robert Steel and Treasury Under Secretary for International Affairs David McCormick are to speak at the Aspen Ideas Festival.

12:30 US Treasury’s Steel, McCormick Speak at Aspen Institute Meeting

Sunday: There are no macroeconomic data releases or events scheduled in Canada or the U.S.

Monday: San Francisco Fed President Janet Yellen is scheduled to speak at an economics roundtable, on the subject of the U.S., at an event hosted by the University of California-San Diego. In Canada, building Permits are set to decrease 5.8% month-over-month in May following a previous 14.5% rise. Markets will also receive the Canadian second-quarter business outlook survey, which last came in at a reading of -1.96.

8:30 CA Building Permits (M/M) May Exp: -5.8% Prior: +14.5%
10:30 CA Business Outlook Future Sales Q2 Prior: -1.96
11:00 US Fed’s Yellen Speaks in San Diego on U.S. Economic Outlook
13:00 US Tsy to Sell USD24B 3-Month Bills
13:00 US Tsy to Sell USD23B 6-Month Bills

Tuesday: A couple of high-profile speakers take centre stage on Tuesday. Federal Reserve Chairman Ben Bernanke is set to speak in Arlington, Virginia at the Federal Deposit Insurance Corporation’s Mortgage Lending for Low- and Moderate Income Households forum. Richmond Fed President Jeffrey Lacker will speak to the National Economists Club in Washington D.C. on the U.S. economic outlook. In terms of data, U.S. pending home sales for May is expected to show a 2.5% decrease, down from a previous 6.3% increase.

8:00 US Bernanke Speaks at FDIC Forum on Financial Regulation
10:00 US Pending Home Sales (M/M) May Exp:-2.5% Prior: +6.3%
10:00 US Wholesale Inventories May Exp: +0.7% Prior: +1.3%
12:30 US Richmond Fed’s Lacker Speaks on Economic Outlook in Washington
13:00 US Tsy to Sell 4-Week Bills
15:00 US Consumer Credit May Exp: +$7.5B Prior: +$8.9B
15:00 US Paulson Speaks at FDIC in Virginia on Mortgage Lending
17:00 US ABC Consumer Confidence W/E 6-July Prior: -43
8-July US DOE Short-Term Crude Outlook July Prior: +126K
8-July US DOE Short-Term Ht Oil Outlook July Prior: +4.25K
9-July US DOE Short-Term Diesel Outlook July Prior: +4.32K
8-July US DOE Short-Term Mogas Outlook July Prior: +3.92K
9-July US DOE Short-Term Natural Gas Outlook July

Wednesday: Housing data on both sides of the border represent the key releases on Wednesday. Canadian housing starts in June are expected to increase 218k, down slightly from 221.3k. Weekly MBA mortgage applications in the U.S., along with Energy Information Administration inventory figures, are also scheduled for release.

7:00 US MBA Mortgage Applications W/E 4-July Prior: +3.6%
8:15 CA Housing Starts June Exp: +218.0K Prior: +221.3K
10:35 US DOE U.S. Crude Oil Inventories W/E 4-July Prior: -1982K
10:35 US DOE U.S. Gasoline Inventories W/E 4-July Prior: +2100K
10:35 US DOE U.S. Distillate Inventory W/E 4-July Prior: +1264K
10:35 US DOE U.S. Refinery Utilization W/E 4-July Prior: +0.63%
14:00 US Fed Staff Economist Parkinson Testifies on Derivatives

Thursday: The day is U.S.-centric with Bernanke and U.S. Treasury Secretary Henry Paulson set to speak on top of the release of weekly jobless claims figures. Fed Chairman Ben Bernanke and Paulson will testify at a House Financial Services Committee hearing on financial-market regulation, lending to investment banks and the Fed’s powers. San Francisco Fed President Janet Yellen and the Treasury’s special envoy for China, Alan Holmer, are each holding speeches themselves.

8:30 US Initial Jobless Claims W/E 5-July Exp: +395K Prior: +404K
8:30 US Continuing Claims W/E 28-June Exp: +3140K Prior: +3116K
10:00 US Bernanke, Paulson Testify on Markets Before House Committee
10:30 US EIA Natural Gas Storage Change W/E 4-July
13:00 US Tsy to Sell 10-Year TIPS
13:30 US ICSC Chain Store Sales (Y/Y) June Prior: +3.0%
15:30 US Fed’s Yellen Speaks in Portland at Community Luncheon
19:00 US Treasury’s Holmer Speaks in Minneapolis on U.S.-China Ties

Friday: On a busy day to end the week, the Canadian unemployment rate for June is expected to remain flat, while employment is expected to have increased by 10k. In the U.S., the University of Michigan consumer confidence preliminary reading for the same month will be released, expected to come in at 55.5, from 56.4.

7:00 CA Unemployment Rate June Exp: 6.1% Prior: 6.1%
7:00 CA Net Change in Employment June Exp: +10.0K Prior: +8.4K
8:30 CA International Merchandise Trade May Exp: +C$5.2 Prior: +C$5.1
8:30 CA New Housing Price Index (M/M) May Exp: +0.1% Prior: 0.0%
8:30 US Trade Balance May Exp: -$62.5B Prior: -$60.9B
8:30 US Import Price Index (M/M) June Exp: +2.0% Prior: +2.3%
8:30 US Import Price Index (Y/Y) June Exp: +18.6% Prior: +17.8%
10:00 US University of Michigan Confidence July Preliminary Exp: +55.5 Prior: +56.4
14:00 US Monthly Budget Statement June Exp: +$30.0B Prior: +$27.5B

One week after the European Central Bank announced a hike to interest rates, the spotlight will shift onto the Bank of England and its decision on Thursday.

Economists from UBS Investment Research share the consensus view that the Monetary Policy Committee will keep rates unchanged at 5.00%.

“The MPC will be setting policy rates in at a time when overall activity is slowing and inflation is rising. That is the benign version of the story,” they said. “The more extreme version is one in which a downward spiral of falling house prices and lending could develop along with a wage price spiral. These, of course, are tail risks, but the MPC’s job is, in large part, to set policy rates based on judgments about risks.”

They continued that,”In our view, the MPC will look through this near-term inflation threat and hold policy rates steady until the peak in inflation is behind us and the wage settlements round in Q1 has passed. We expect the next move to be down and for that to happen in May next year.”

As is usually the norm in the euro zone, the week following the European Central Bank’s rate decision tends to be somewhat quiet. And, with just German industrial production figures and the final revisions to the euro zone GDP figures for Q1 2008 as the most pertinent data releases expected in the five days starting July 7, it seems like the upcoming week will follow the same trend.

Ahead of the German industrial production data release scheduled for July 7, Fortis Bank economist Nick Kounis said he is expecting the output indicator to show a slight rebound and rise 0.1% on a monthly basis in May.

However, Kounis did stress that “this should be seen against the background of two weak months in March and April,” and that, due to a strong euro and weakening global demand, “(the small rebound) would still leave the sector on track for a gradual slowdown.”

While the revisions to the euro zone Q1 GDP figures may be interesting, Scotia Bank international economist Erik Nilsson said he doesn’t expect anything that would deviate greatly from the preliminary estimates.

However, “if the GDP number comes out and has a massive downward revision, that would make me sit up and take notice,” Nilsson said. “But I assume that the odds of that are pretty low.”

All times in EDT.

Saturday: While no data are expected for release on Saturday, European Central Bank President Jean-Claude Trichet is scheduled to deliver a keynote speech at a conference in Aix-en-Provence, France.

6:00 EU ECB’s Trichet Speaks at conference in Aix-en-Provence, France

Sunday: There are no macroeconomic releases or events scheduled in the UK or Europe.

Monday: The first bit of euro zone data will be the Sentix euro zone investor confidence indicator for July. Economists are expecting a decline in the indicator to 2.5 after unexpectedly rising to 5.2 in June.

Afterwards, German industrial production data for May will be released. The consensus forecast is calling for output to rebound and rise 0.2% in monthly terms following April’s 0.8% decline.

Year-over-year, industrial production is expected to increase 3.2% in May, down from the previous month’s 4.8% growth rate.

In the UK, industrial production figures are to be released as well, expected to show a 0.1% decrease month-over-month in May and a 0.8% decrease year-over-year.

Euro area finance ministers are also scheduled to meet on July 7.

4:30 GB Industrial Production (M/M) May Exp: -0.1% Prior: +0.2%
4:30 GB Industrial Production (Y/Y) May Exp: -0.8% Prior: +0.2%
4:30 GB Manufacturing Production (M/M) May Exp: 0.0% Prior: +0.1%
4:30 GB Manufacturing Production (Y/Y) May Exp: -0.1% Prior: +0.1%
4:30 EU Sentix Investor Confidence July Exp: +2.5 Prior: +5.2
6:00 DE Industrial Production (Y/Y) (NSA)(wda) May Exp: +3.2% Prior: +4.8%
6:00 DE Industrial Production (M/M) (SA) May Exp: +0.3% Prior: -0.8%
11:00 EU Euro-Area Finance Ministers Meet
19:01 GB NIESR GDP Estimate June Prior: +0.2%
7-July EU EU’s Kovacs Holds News Conference on Services VAT Proposal
7-10 July EU European Parliament Holds Four-Day Plenary Session
7-11 July GB HBOS Plc House Prices (SA) (M/M) June Exp: -1.0% Prior: -2.4%
7-11 July GB HBOS House Price 3 Months/Year June Exp: -5.9% Prior: -3.8%

Tuesday: No euro zone releases are on the docket for release on Tuesday. However, the euro zone finance ministers will continue their meeting from the previous today.

In terms of speakers, ECB Vice-President Lucas and European Commissioner for Economic and Financial Affairs Joaquin Almunia will speak in Brussels, Belgium.

In addition, the UK’s nationwide measure of consumer confidence for June is due out. A reading of 65 is expected, down from previously reached levels of 69.

3:30 EU EU Finance Ministers hold meeting
3:30 EU EU Court Rules on AC-Treuhand Challenge of a Cartel Decision
3:30 EU EU Court Rules on Cartel Challenges by Plasterboard Makers
4:30 GB DCLG UK House Prices (Y/Y) May Exp: +3.3% Prior: +4.9%
6:00 EU European Parliament votes on Nord Stream Environmental Impact
7:00 EU European Commission holds weekly meeting
8:50 EU ECB’s Papademos speaks in Brussels
19:01 GB Nationwide Consumer Confidence June Exp: +65 Prior: +69
8-July EU EU’s Almunia speaks at Committee in Brussels
8-July EU EU’s Reding attends an event in Switzerland
8-July EU EU’s Barroso Attends G-* Summit in Japan
7-10 July July EU European Parliament Holds Four-Day Plenary Session
7-11 July GB HBOS Plc House Prices (SA) (M/M) June Exp: -1.0% Prior: -2.4%
7-11 July GB HBOS House Price 3 Months/Year June Exp: -5.9% Prior: -3.8%

Wednesday: German trade balance and current account data are the first releases scheduled for Wednesday. The trade balance surplus is expected to fall €700 million to €18.0 billion from April to May, while the current account surplus is forecast to dip €2.0 billion to €12.5 billion over the same period.

The UK’s trade balance is also out on Wednesday, and the total figure is forecasted to come in at a deficit of £4200M, slightly up from April’s £4325M shortfall.

Final euro zone GDP estimates will also be announced on Wednesday. No revisions to the preliminary estimates are expected, however.

Regarding speakers, ECB President Jean-Claude Trichet will present the central bank’s annual report for 2007 to the European Parliament in Strasbourg, France, while ECB Executive Board member José Manuel González-Páramo will give the opening address at an event organized by Unidad Editorial in Madrid, Spain.

Additionally, ECB Governing Council member Mario Draghi will attend the ABI Annual Assembly in Rome, Italy.

2:00 DE Trade Balance May Exp: +17.3B Prior: +€18.7B
2:00 DE Current Account (€) May Exp: +12.5B Prior: +14.5B
2:00 DE Imports (SA) (M/M) May Exp: +1.0% Prior: -2.1% Revised: -2.3%
2:00 DE Exports (SA) (M/M) May Exp: +0.5% Prior: +1.2% Revised: +1.1%
2:45 FR 1st Quarter Costs of Construction
2:45 FR Trade Balance (€) May Exp: -4.0B Prior: -3.7B
3:00 EU ECB’s Trichet Presents Annual Report to European Parliament
3:15 EU ECB’s Gonzalez-Paramo speaks at Event in San Sebastian
3:30 EU EU Court Rules on Alitalia Appeal of EU State Aid Decision
4:00 IT Draghi, Tremonti Attend ABI Annual Assembly
4:00 EU Santander, Telefonica Heads Speak in Seminar in Santander
4:00 IT Popolare di Milano Holds Board Meeting
4:30 GB Visible Trade Balance May Exp: -£7400M Prior: -£7594M
4:30 GB Trade Balance Non EU May Exp: -£4100M Prior: -£4185M
4:30 GB Total Trade Balance May Exp: -£4200M Prior: -£4325M
5:00 EU Euro Zone GDP (SA) (Q/Q) Q1 Final Exp: +0.8% Prior: +0.8%
5:00 EU Euro Zone GDP (SA) (Y/Y) Q1 Final Exp: +2.2% Prior: +2.2%
5:00 EU Euro Zone Gross Fixed Capital (Q/Q) Q1 Final Exp: +1.6% Prior: +1.6%
5:00 EU Euro Zone Government Expend (Q/Q) Q1 Final Exp: +0.4% Prior: +0.4%
5:00 EU Euro Zone Household Cons (Q/Q) Q1 Final Exp: +0.2% Prior: +0.2%
5:00 EU Eurostat Publishes Euro-Area Gross Domestic Product
5:00 EU “NATO Briefs Press after Croatia, Albania Sign Entry Pacts”
5:30 GB BRC June Shop Price Index
6:00 EU European Parliament Votes on Capping Airline Emissions
6:00 EU European Parliament Votes on Natural-Gas Company Rules
9-July EU EU’s McCreevy Briefs Press on Internal Market Scoreboard
9-July EU EU’s Almunia Speaks at Event in Brussels
7-10 July EU European Parliament Holds Four-Day Plenary Session
7-11 July GB HBOS Plc House Prices (SA) (M/M) June Exp: -1.0% Prior: -2.4%
7-11 July GB HBOS House Price 3 Months/Year June Exp: -5.9% Prior: -3.8%

Thursday: The key event will be the Bank of England’s interest rate announcement; the consensus forecast being that the Monetary Policy Committee will opt to hold at 5.00%.

French industrial production data will be announced on Thursday. Expectations are for output to fall 0.6% month-over-month in May after rising 1.4% in April. In annualized terms, French industrial production growth will slow to 1.5%, down from April’s 3.2% growth rate.

Italian industrial production figures will also be released. The consensus is calling for a 0.6% decline in May month-over-month following April’s 0.7% gain. Year-over-year, industrial production in Italy is expected to have slipped 1.3% in weighted daily average terms. April had seen a rise of 2.0%.

Later on in the day, ECB Governing Council member John Hurley will give a speech in Dublin, Ireland, while ECB’s Trichet will speak in Munich, Germany.

2:45 FR Industrial Production (M/M) May Exp: -0.6% Prior: +1.4%
2:45 FR Industrial Production (Y/Y) May Exp: +1.5% Prior: +3.2%
2:45 FR Manufacturing Production (M/M) May Exp: -0.6% Prior: +1.7%
2:45 FR Manufacturing Production (Y/Y) May Exp: +1.6% Prior: +2.8%
3:00 FR Sarkozy Speaks at European Parliament in Strasbourg
3:30 EU EU Top Court Rules on Sony BMG Appeal Of Court Merger Veto
4:00 IT Industrial Production (SA) (M/M) May Exp: -0.65% Prior: +0.7%
4:00 IT Industrial Production (wda) (Y/Y) May Exp: -1.2% Prior: +2.0%
4:00 IT Industrial Production (NSA) (Y/Y) May Exp: -4.0% Prior: +8.0%
4:00 EU ECB Publishes Jul. Monthly Report (Text)
6:00 EU ECB’s Hurley Speaks at event in Dublin
6:30 FR France’s Sarkozy, EU’s Poettering at News Conference
7:00 GB BOE Announces Rates Exp: 5.00% Prior: 5.00%
13:45 EU ECB’s Trichet Speaks at Event in Munich
7-July EU EU’s Kroes Speaks at Conference in Berlin
7-10 July EU European Parliament Holds Four-Day Plenary Session
7-11 July GB HBOS Plc House Prices (SA) (M/M) June Exp: -1.0% Prior: -2.4%
7-11 July GB HBOS House Price 3 Months/Year June Exp: -5.9% Prior: -3.8%

Friday: The only data release expected on Friday is the German wholesale price index. Economist are expecting wholesale price inflation to accelerate to 9.0% in June year-over-year, from the 8.1% rate seen in May.

However, in monthly terms, the index growth rate is expected to slow to 1.0%, down from May’s 1.4% growth rate.

2:00 DE Wholesale price Index (Y/Y) June Exp: +8.9% Prior: +8.1%
2:00 DE Wholesale Price Index (M/M) June Exp: +0.9% Prior: +1.4%
11-July EU EU Hosts Donors Conference for Kosovo
11-July IT Bank of Italy Releases May Public Finance Supplement
7-11 July GB HBOS Plc House Prices (SA) (M/M) June Exp: -1.0% Prior: -2.4%
7-11 July GB HBOS House Price 3 Months/Year June Exp: -5.9% Prior: -3.8%

Despite a relatively slow start to the week, the economic action in the Asia-Pacific really picks up on Wednesday with Australian employment data and the Japanese corporate goods price index each set for release.

Calyon chief Japanese economist Susumu Kato expects a 5.1% year-over-year rise, from a previous 4.7% increase, to the corporate inflation indicator. He also believes that the increases won’t stop there.

“In our view, domestic corporate goods prices would hit the peak around at +6.0% YOY, and would not surge to over +10% as in the days of oil crises in the past. The more important point would be i)how much firms would be able to pass elevated production costs to product prices, and ii) to what extent consumers would be compensated for the surge in inflation by expected rise in wages,” he wrote. “Whatever the answers to those questions, those were what firms and consumers did not think about in the days of deflationary economy.”

He continued that, “From this respect, we hold our view that moderate degree of rising inflation rate would be better and stimulate the economy compared to the days of deflation when they could only hope for its ends without being able to do nothing against it. Compared to ‘wild price spiral’ during the oil crises, present level of inflation should be manageable over time.”

Capital Economics’ Alvin Pontoh suggests that other releases will be of greater importance to Japanese markets, but nonetheless agrees that inflation is a hot topic in the country.

“The June Economy Watchers’ Survey (Tuesday) and consumer confidence (Friday) are the highlights of the week,” he wrote in a note to clients. “Unfortunately, the continuing surge in headline inflation is the dominant concern and suggests that both surveys will soften a little further.”

In Australia, the macroeconomic highlight of the week will be the release of employment data for June. The unemployment rate is expected to remain flat at 4.3%, all the while, and the participation rate is expected to tick up to 65.3% from 65.2% in May.

“Next week’s employment data for June will be crucial in shaping policy expectations ahead of the August meeting. We expect to see jobs growth rebound to +25k,” economists from ANZ said, in spite of a consensus forecasted employment change increase of 10k.

All times in EDT.

Sunday: The Japanese official reserve asset figure for June will be released and Bank of Japan Governor Masaaki Shirakawa is set to speak at the BOJ’s quarterly branch managers’ meeting in Tokyo. The speech is to be followed by the release of the bank’s report on the regional economy.

19:30 AU AiG Performance of Construction Index June Prior: +36.9
19:50 JP Official Reserve Assets June Prior: +$997.0B
20:30 JP BOJ Governor Shirakawa speaks at Quarterly Branch Meeting
21:30 AU ANZ Job Advertisements (M/M) June Prior: -1.7%

Monday: Australian markets will receive foreign reserve figures for June and NAB business confidence and conditions results.

2:30 AU Foreign Reserves June Prior: A$35.3B
19:50 JP Japan Money Stock M3 Y/Y June Exp: +0.7% Prior: +0.7%
19:50 JP Japan Money Stock M2 Y/Y June Exp: +2.0% Prior: +2.0%
19:50 JP Bank Lending including Trusts(Y/Y) June Prior: +1.5%
19:50 JP Bank Lending Banks Adjust Y/Y June Exp: +2.2% Prior: +2.1%
19:50 JP Bank Lending Banks ex Trust Y% June Prior: +1.6%
21:30 AU NAB Business Confidence June Prior: -4
21:30 AU NAB Business Conditions June Prior: +7

Tuesday: Machine orders in Japan will be one macroeconomic highlight in the Asia-Pacific on Tuesday. Month-over-month, the indicator is expected to have increased 1.1% in May, down from a previous 5.5% increase. On an annualized basis, a 3.7% decrease is expected, down from a 0.5% increase. In Australia, Westpac consumer confidence for July is due out, last sliding 5.6%.

0:30 JP Bankruptcies (Y/Y) June Prior: -1.5%
1:00 JP Eco Watchers Survey: Current June Prior: +32.1
1:00 JP Eco Watchers Survey: Outlook June Prior: +35.1
19:50 JP Machine Orders (M/M) May Exp: +1.1% Prior: +5.5%
19:50 JP Machine Orders (Y/Y) May Exp: -3.7% Prior: +0.5%
20:30 AU Westpac Consumer Confidence July Prior: -5.6%
21:30 AU Home Loans May Exp: -2.0% Prior: -3.0%
21:30 AU Investment Lending May Prior: +1.4%
21:30 AU Value of Loans M/M May

Wednesday: Australian employment data will be a focus for markets. The unemployment rate for June is expected to remain flat at 4.3%. In Japan, aside from weekly investment data, June’s domestic CGPI figures will be released. A 0.6% month-over-month increase is expected, translating into a 5.3% year-over-year rise.

2:00 JP Machine Tool Orders (Y/Y) June Preliminary Prior: +1.4%
19:50 JP Foreign Buying Japan Bonds W/E 4-July Prior: -¥422.1B
19:50 JP Foreign Buying Japan Stocks W/E 4-July Prior: -¥516.3B
19:50 JP Japan Buying Foreign Stocks W/E 4-July Prior: +¥65.0B
19:50 JP Japan Buying Foreign Bonds W/E 4-July Prior: +¥496.9B
19:50 JP Domestic CGPI (M/M) June Exp: +0.6% Prior: +1.1%
19:50 JP Domestic CGPI (Y/Y) June Exp: +5.3% Prior: +4.7%
19:50 JP Current Account Total May Exp: +¥1934.8B Prior: +¥1380.9B
19:50 JP Adjusted Current Account Total May Exp: +¥1943.0B Prior: +¥1510.7B
19:50 JP Trade Balance - BOP Basis May Exp: +¥500.0B Prior: +¥634.7B
21:00 AU Consumer Inflation Expectation July Prior: +5.9%
21:30 AU Employment Change June Exp: +10.0K Prior: -19.7K
21:30 AU Unemployment Rate June Exp: 4.3% Prior: 4.3%
21:30 AU Participation Rate June Exp: 65.3% Prior: 65.2%

Thursday: There are no macroeconomic data releases or events scheduled in Japan or Australia.

Friday: Final Japanese industrial production for May will be released, last coming in with a month-over-month increase of 2.9% and a 1.2% year-over-year rise. Japanese markets will also receive consumer confidence readings for June. The headline index is expected to decrease to a level of 33.0 from 34.1. The households subcomponent last came in at 33.9.

0:30 JP Industrial Production (M/M) May Final Prior: +2.9%
0:30 JP Industrial Production (Y/Y) May Final Prior: +1.2%
0:30 JP Capacity Utilization (M/M) May Final Prior: -0.7%
1:00 JP Consumer Confidence June Exp: +33.0 Prior: +34.1
1:00 JP Consumer Confidence Households June Prior: +33.9
21:30 AU CBA/HIA House Affordability Q2 Prior: +103.1

On the July 4 holiday in the U.S., the Canadian dollar was trading markedly lower against the U.S. dollar after dropping 0.0037 just past 12 p.m. EDT. The Canadian dollar is down 0.0022 cents to 0.9802 USD.

Canadian markets were unmoved by an upside surprise to the Ivey PMI index for June, which surged to a reading of 69.6 despite calls for a decline to 62.3 from the previous month’s reading of 62.5. The CAD/USD was left relatively unaffected upon the release of the data.

TD senior economics strategist Charmaine Buskas took note of the Ivey increase, saying it was in part related to increased energy prices.

“It seems that purchasing managers are having some inventory accumulation problems, as the inventory index rose to 61.9 from 55.2 in May,” she wrote.
“These inventories will eventually have to be liquidated in coming months. Lastly, the prices paid index rose to 84.1 in June, which is an all-time high. This is consistent with what we have been seeing in other PMI indices from around the world. Canadian manufacturing is not immune to the rise in oil and other commodities.”

WTI crude oil is down $1.44 to $143.85. Nymex crude had neared Thursday’s all-time high of $145.85 per barrel, reaching a session high of $145.68 early in the morning, before dropping $1.70 at 4 a.m. It reached a session low of $143.70 at 11:23 a.m. EDT.

RBC Capital Markets senior currency strategist David Watt acknowledged a decreased correlation in the Canadian dollar with the price of crude oil, saying that was bound to change.

“Canada is projected to have the largest addition to non-OPEC production in 2008-2013, while production in Norway, the UK and Mexico is set to drop. Thus, the [International Energy Agency]’s concern about oil’s medium-term fundamentals is particularly CAD relevant, as it will coincide with an expected increase in Canada’s unconventional oil sands production from 3m b/d to 4m b/d,” he wrote in a client note. “Alberta’s oil sands will by then dominate oil production, crude oil and total exports, and CAD. That is when CAD’s true petro-currency status will become fully entrenched, if Canada can seize the opportunity.”

Yields on two-year Canadian government bonds are down 2.7 bps to 3.19%, with five-year yields down 3.9 bps to 3.41%, 10-year yields down 4.0 bps to 3.71% and 30-year yields down 1.8 bps to 4.05%.

The Canadian 10-year note is yielding 27 bps less than the U.S. 10-year note.

In Germany, returns on two-year German bonds are down 4.0 bps to 4.41%, with five-year yields down 6.8 bps to 4.46%, 10-year yields down 6.1 bps to 4.50% and 30-year yields down 0.5 bps to 4.80%.

Yields on UK two-year bonds are down 6.5 bps to 4.99%, with five-year yields down 6.3 bps to 4.96%, 10-year yields down 7.3 bps to 4.96% and 30-year yields down 4.9 bps to 4.60%.

Toronto’s S&P/TSX composite index closed down 133 points to 14010.

European stock markets closed in negative territory with the Eurostoxx down 36 points to 2838, the UK FTSE 100 down 64 points to 5413 and the German DAX down 82 points to 6272.

U.S. markets are closed but electronic trading in equity futures were still open with contracts on the Dow Jones Industrial Average closing down 52 points to 11236, the S&P 500 down 9 points to 1256 and the Nasdaq down 7 points to 1816.

The Canadian dollar is down 0.2040 to 104.6460 against the yen. The U.S. dollar is up 0.0230 to 106.7580 against the yen and the Dollar Index is down 0.021 to 72.721.

The euro is down 0.0004 to 1.5699 against the U.S. dollar, up 0.0031 to 1.6017 against the Canadian dollar, up 0.0003 to 0.7920 against the pound sterling and is lower by 0.02 to 167.58 against the yen. The pound sterling is down 0.0012 to 1.9821 against the U.S. dollar and up 0.0034 to 2.0223 against the Canadian dollar.

All data taken at 3:45 p.m. EDT.

With the foreign exchange market one of the few still open on Independence Day in the U.S., the USD was making gains against the Canadian dollar.

The Canadian dollar was down 0.0021 to 0.9804 against the U.S. dollar, despite the release of a better-than-expected Ivey Purchasing Managers’ Index north of the border. The index rocketed up to a 69.6 reading in June from the May figure of 62.5, confounding economists’ expectations of a pullback to 62.3.

Above opening levels for the clear majority of the Friday session, and having done little with the 10 a.m. PMI release, the CAD/USD dropped 0.0037 sharply to 0.9810 at noon, en route to eventual session lows of 0.9802. The drop was more a cause of USD strength, as the U.S. dollar index gained 0.184 points to 72.810 at the same time.

“CAD had a choppy day yesterday, but it was due to big moves in the U.S. dollar and the Euro rather than domestic conditions. Despite the fact that crude oil hit yet another record high yesterday, USD/CAD pushed up past 1.02 during the day as the USD gained against the Euro, helped along by Trichet’s lack of hawkish talk and a nonfarm payrolls report that wasn’t as bad as was feared. EUR/CAD is now trading around 1.5950, after topping 1.61 earlier this week,” wrote TD Securities currency strategist Jacqui Douglas, prior to the release of the Canadian data.

The euro was meanwhile up 0.0027 to 1.6013 against the Canadian dollar, despite the EUR/USD sustaining a similar drop at noon as well. Nymex crude oil had neared Thursday’s all-time high of $145.85 per barrel early in the morning, reaching $145.68. Most recently, however, crude was range bound, trading down $1.29 to $144.00.

RBC Capital Markets senior currency strategist David Watt took note that the correlation between the Canadian dollar and crude oil prices hasn’t been very strong recently. While that wasn’t so much the case on Friday (oil dropped $0.50 to $143.84 at noon), oil did fall $1.70 to $143.95 over the period of two hours early in the morning only to be met by 0.0032 CAD/USD gains over that same time frame.

“Elevated oil prices prompted us to dampen our cyclical USD/CAD bullishness into year-end, but more remarkable has been the overall lacklustre response of CAD to substantial oil price gains,” he wrote in a research note.

“However, as global economic growth rebounds after a slowdown in 2008 and 2009, CAD’s petro-currency status is set to return, potentially with a vengeance, providing strong underlying support for CAD in the medium-term”

Overall, the Canadian dollar was showing broad-based weakness to go along with Friday’s USD rally. The loonie was down 0.208 points to 104.6320 against the yen and down 0.0056 to 1.0174 against the Australian dollar. The pound sterling was up 0.0035 to 2.0224 against the Canadian dollar.

CAD/USD down 0.0021 to 0.9804.
EUR/CAD up 0.0027 to 1.6013.
CAD/JPY down 0.21 points to 104.63.
GBP/CAD up 0.0035 to 2.0224.
CAD/AUD down 0.0056 to 1.0174.

All data taken at 2:40 a.m. EDT.

Tensions soared in Georgia’s rebel region of South Ossetia on Friday after separatists said two people were killed by intense shelling and threatened to retaliate with heavy weapons.

Russia accused Tbilisi of carrying out an ‘act of aggression’ against South Ossetia and the Organisation for Security and Cooperation in Europe (OSCE) expressed concern over the fighting — the heaviest in the volatile region so far this year.

Irina Gagloyeva, a spokeswoman for South Ossetia’s separatist government, said Georgian forces launched a large-scale attack on the region overnight, firing from three directions with mortars, grenade launchers and small arms.

Two people were killed and at least 10 wounded, the separatists said.

‘If the shelling resumes, South Ossetia will respond with heavy weaponry,’ Gagloyeva said.

After initially announcing a general mobilisation of residents following the fighting, rebel officials later backed away from the move.

‘There is no need for a general mobilisation. We have the forces and means necessary to deal with the illegal presence of armed formations on the territory of South Ossetia and on its borders,’ South Ossetian leader Eduard Kokoity said in comments posted on the rebel website.

Tensions have mounted in recent months over South Ossetia and another rebel region in ex-Soviet Georgia, Abkhazia, after Russia announced it was establishing formal ties with the separatists.

Backed by Moscow, the two regions have had de facto independence since breaking away from Tbilisi’s control during wars in the early 1990s.

Georgia denied it had initiated the attack, saying its forces reacted after Georgian villages came under fire.

‘Georgian forces only opened fire in response,’ interior ministry spokesman Shota Utiashvili told AFP. He said there were no reports of casualties in Georgian-controlled areas.

‘These attacks are a continuation of the aggressive acts that started yesterday with the attack on Dmitry Sanakoyev,’ he said, in reference to a pro-Georgian official who was targeted by a roadside bomb on Thursday.

Sanakoyev escaped uninjured, but three of his bodyguards were wounded.

Russia’s foreign ministry said in a statement that ‘Tbilisi’s actions represented an overt act of aggression against South Ossetia,’ while Foreign Minister Sergei Lavrov urged Georgia to sign a non-aggression pact with the separatists.

‘We are seriously concerned by the latest events in South Ossetia…. We must persuade Tbilisi to sign a legally binding document guaranteeing non-aggression,’ the Interfax news agency quoted Lavrov as saying during a visit to Turkmenistan.

The OSCE, which monitors a ceasefire in South Ossetia, expressed ‘profound concern’ over the fighting and a series of explosions earlier this week in Abkhazia.

The incidents ‘are worrying signs of growing tension,’ the OSCE’s chairman, Finnish Foreign Minister Alexander Stubb, said in a statement.

On Thursday, the separatists had blamed Georgian special forces for a bomb that killed a South Ossetian police chief outside his home.

Abkhazia’s de facto foreign minister, Sergei Shamba, said his region was prepared to assist South Ossetia and had sent troops to Abkhazia’s border with the rest of Georgia following the fighting.

‘If provocations do not end or military action intensifies, we won’t just sit there,’ he told Russia’s RIA-Novosti news agency.

Fighting in South Ossetia, a patchwork of Ossetian and Georgian settlements in the mountainous north of the country, generally intensifies during the summer months.

Tbilisi accuses Russia of seeking to annex South Ossetia and Abkhazia and derail its efforts to join the NATO military alliance. Russia in turn accuses Georgia of preparing to take back the breakaway regions by force.

Abkhazia closed its border with the rest of Georgia earlier this week after 10 people were wounded in a string of explosions the rebels blamed on Tbilisi.

With the continued weakness seen in German factory orders data on Friday, economists said they expect the manufacturing sector to follow suit, in turn leading the German economy to a slowdown.

According to the Bundesbank, German factory orders fell 0.9% month-over-month in May, deepening the 1.7% fall recorded in April. However, economists had expected a slight recovery of a 0.8% gain for the month that would have halted the deteriorating trend in orders that began in early 2008.

While German factory orders suffered from weakening domestic demand - domestic orders declined 2.7% in May after rising 0.3% in the previous month -foreign orders recovered slightly, rising 0.8% in May following April’s 3.7% fall.

Without adjusting for calendar effects, factory orders fell 2.0% in June. Economists had expected orders to rise 2.0% following April’s 15.2% gain, which was revised up from 15.0%.

With May’s fall marking the sixth month in a row where German factory orders declined, Natixis euro zone economist Costa Brunner noted an alarming trend for both German industry and the economy.

“This applies in particular for foreign orders from euro zone’s trading partners as well as orders for the German capital goods producing sector; both have lost ground within the last few months,” Brunner said.

“It is clear that the boom in the manufacturing sector is over,” Commerzbank analyst Matthias Rubisch said in a research note to clients, adding that the six-month trend pointed to a slowdown in the whole sector.

“Given globally deteriorating conditions, no more than a stagnation of manufacturing output can be expected for the rest of the year,” Rubisch said.

Thus, as the manufacturing sector was the principal source of strength for the German economy over the past few years, Rubisch concluded that only modest growth levels in the country would be expected.

No significant market reaction was noted upon the release of German factory order data.