Weekly Focus Encouraging economic data and strong earnings

Market Movers ahead

• Earnings season continues in the US. Will the reporting companies live up to the high expectations?

• The rescue package has not brought the improvement in Greek yields that one had hoped for. We would not be surprised to see Greece move forward with the loan facility being activated and discussions with IMF about help intensifying.

• US housing market data and durable goods orders. February data for the US housing market were quite weak, but weather effects might have been at play. We will be much wiser after the March data are released.

• PMI and Ifo in Euroland. We expect further improvements in both indices.

• Rate decision in Sweden on Tuesday.

• G-20 meeting with focus on the renminbi.

Global Update

• The earnings season is off to a strong start and companies have generally surprised on the upside. JPMorgan’s results were especially encouraging with positive credit news. Delinquencies were down sharply and the company signalled a better credit outlook. Small business loan demand is improving in strong contrast to the weak small business confidence seen this week.

• Greek debt fears remains very high despite the loan facility and Greek yields are surging. The T-bill auction was well in demand, but the rate was relatively high.

• Strong retail sales and low inflation numbers in the US.

Focus

• The surging commodity prices combined with the weakening of the euro threaten to push inflation in Euroland higher. This will be a challenge for the European Central Bank, ECB. Hawks in ECB are already talking about inflation pressure.

Market movers ahead

Global

• In the US, the data release calendar is light. Only one Fed speech is scheduled as the FOMC meeting at the end of the month gets closer. The most interesting numbers next week will be the housing market data covering March. Earlier this month, pending home sales showed a significant improvement, thus suggesting an upward potential for existing home sales. We expect to see an increase of 1.6% m/m. The housing market has been the soft spot in the recent economic recovery. Data for new home sales are also due to be published and we expect to see a small increase of 0.8% m/m. Furthermore, we will get data for durable goods orders for March. Recently the capex element has looked strong, suggesting that demand is picking up and that overall demand is returning to ‘normal’ levels again after being pent-up.

• Pretty much all the important Euroland confidence indicators are scheduled for release next week, i.e. ZEW, flash PMI and Ifo. Soft indicators are currently signalling a very strong rebound in Q2, not least in Germany. If confidence indicators rise further next week, this will be received positively by the markets although we are all waiting to see the strength materialise in hard data too. We think most indicators can rise further from already high levels.

• ZEW expectations, due to be released on Tuesday, have been at odds with other indicators, as they have been on a declining trend since October last year, caused partly by market concerns over Greece. We project that ZEW expectations have jumped upwards in April as market sentiment has improved and expectations of a correction in financial markets have somewhat diminished – partly as a result of strong macro data from both the US and Asia.

• Flash PMIs on Thursday are expected to show modest gains from high levels. German manufacturing PMI could post a particularly upbeat signal if it continues to climb from the current 60 level. The German manufacturing PMI order indices, which are at an all-time high, signal that this could indeed happen. Our model for the Ifo expectations index, to be released on Friday, is pointing strongly upwards, so we also expect a notable increase here.

• Finally Euroland industrial new orders are due on Friday. This might result in a disappointing end to an upbeat week. February was hampered by bad weather in Northern Europe, but following a 2% decline in January we nevertheless expect a 1.5% increase in February.

• We would not be surprised to see the Greek authorities activate the rescue package this weekend or next.

• A busy week is in prospect in the UK. The market is still taken up with the elections on 6 May, ‘fearing’ the hung parliament to which the opinion polls are currently pointing. If this is indeed the outcome, it could put a question mark over the chances of reining in the government budget in 2011 and so undermine the GBP. But there are also plenty of incoming data to focus on in the coming week. Inflation is expected to pass the key 3% mark again in March (consensus 3.2%), which means that the BoE’s governor will probably need to write another open letter to the chancellor explaining why inflation is more than 1pp off the 2% target. High inflation is beginning to become an issue and is drawing attention to the consequences of the UK’s current ultra-expansionary monetary policy. The minutes of the last BoE meeting, retail sales and labour market data will also attract attention.

• A possible Chinese revaluation will remain the main focus in Asia in next week. G20 finance ministers and central bank governors will meet in Washington on 22-23 April and, unlike last year, we think it will be very hard to keep the exchange rate off the agenda. Next week’s G20 meeting will be followed by the even more important summit between the US and China in late May and the heads of state G20 meeting in June. We think China will resume appreciation soon, because it does not want to become a target for global criticism at these meeting. Hence, we could see speculation of imminent revaluation intensify ahead of next week’s G20 meeting. However, our main scenario remains, i.e. that China will resume appreciation in mid-May ahead of the China-US summit in Beijing.

• Monetary tightening in Asia and fear of its impact on global growth could be back in focus next week, when the Reserve Bank of India (RBI) meets on 20 April. Market consensus is that RBI will raise its leading interest rates by another 25bp following its inter-meeting 25bp interest rate hike in mid-March. We expect RBI to leave its leading interest rate unchanged, because recent inflation figures have been better than expected. However, we expect RBI to raise its reserve requirement ratio by 25bp to 6%.

Scandi

• An exciting week lies ahead in Denmark in terms of incoming data. Most important will be the house price data for Q1. We have already had figures from estate agents home suggesting that prices rose healthily in the first few months of the year, and we expect prices for single family dwellings to climb 2% from Q4 to Q1. Also due are consumer confidence figures for April: we predict an increase from -1 to 0.

• The main event in Sweden this week will undoubtedly be the Riksbank’s monetary policy announcement and the accompanying monetary policy update. We have grown ever more pessimistic over the past few weeks on Q1 growth, as retail sales, trade balance and service and industrial production have come in surprisingly low – even for forecasters as downbeat as ourselves. We continue, however, to foresee improvement going forward. And evidence in favour of such a proposition is indeed mounting, with continued high survey data and order data. Deliveries are up and the abovementioned weak trade balance is probably driven to quite a large extent by imports of necessary input materials as stocks have become depleted. This in turn is a strong indication of an imminent upturn in production.

• This should however not take away the fact that hard data has continued to be low and that the expected upward revisions to Q4 09 data has amounted to nothing – or even the opposite actually. The Riksbank and many other forecasters – ourselves included – thought that the weak Q4 outcome of growth would rebound in Q1 10, thus keeping the full-year growth forecasts for 2010 more or less intact. Should the actual outcome for Q1 10 GDP be as low as preliminary data currently suggests, we would need to see growth above 1% q/q for each of the remaining quarters in 2010 to motivate a forecast of 2.5-3.0% y/y, which is the current consensus forecast interval.

• Nonetheless, Swedish labour market data continue to come in on a strong note, at least as far as employment (and, albeit to a lesser extent, the unemployment rate) is concerned. Hours worked have, on the contrary, dropped more than what we and the Riksbank expected, meaning that average hours worked have continued to fall deep into the cyclical stabilisation phase.

• Inflation data is just above the Riksbank’s forecasts, and this deviation is more than explained by the spike in energy prices over the first few months of 2010. Controlling for energy, price pressures are somewhat lower than what the Riksbank expected. Looking forward, we have also received important information from the centralised wage negotiations and suffice to say that labour costs will not stir inflation for the next couple of years. Admittedly, the composition of wage increases between sectors could indeed have been more benign. Now, it seems as if the non-competitive sectors (commerce and some agreements within the construction industry) will see their wage growth (again) outpacing those of the competitive export sectors.

• All in all, data must be said to have come in on the low side of Riksbank forecasts. And this should imply a change of heart in both the timing of the first hike and the extent of hikes forecast. However, the Riksbank has stubbornly clung to labour market developments as the favoured indicator of monetary policy stance, and also claims to go from a crisis policy stance to a more normal policy when at a cyclical low: this gives the Riksbank quite a few degrees of freedom to hike. And despite the weak data, we suspect it will hike in September as previously communicated, and even a July hike is a clear possibility. The Riksbank board members want to hike, and, you’d better believe it, chances are they will.

• More and more data regarding Q1 growth is coming in, with February retail sales data and March PMI due this week. We expect retail sales to continue to develop well, but to indicate a gradually smaller contribution to growth. As for PMI, we see no reason to expect a dramatic change of the string of strong outcomes, but we are still somewhat puzzled by the large and growing discrepancies between weak ‘hard data’ such as industrial production and strong survey data for the equivalent measure.

• No significant data are due out of Norway during the week. Thursday brings Norges Bank’s Q1 lending survey, which may give us an idea of whether credit standards have been eased further after their relaxation in Q4, which was driven mainly by lower credit margins and reduced equity requirements. We also saw banks reporting growing demand for credit from industry, of which we have also seen signs in the credit data from Statistics Norway over the past couple of months. We expect the lending survey to show this trend continuing, which is essential for a turnaround in industrial activity...

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