Weekly Focus: Fear is back

Market Movers ahead

• In the US the main event next week will be January retail sales. Indicators of core sales point to a decent increase in January. The headline is expected to be somewhat softer as autos and building materials will drag down overall sales.

 

• In Euroland we will get the flash estimate of Q4 GDP. We expect the numbers to highlight the disparity between member states with Spain and Greece reporting negative growth while Germany and France are growing at a pace close to trend. In the UK focus will be on the BoE’s inflation report.

 

• In Asia the Chinese New Year holiday season is approaching which makes economic releases difficult to interpret due to seasonal distortions. CPI should show a modest increase in January only to accelerate sharply in February.

 

• We expect the Swedish Riksbank to keep the repo rate and the future path unchanged at its policy meeting next week. In Norway focus will be on CPI.

 

 

Global Update

 

• Trichet gave some support to Greece at the ECB meeting, but used somewhat cryptic wording. German orders disappointed and it seems like German growth hit a soft patch late last year.

 

• The US ISM index for the manufacturing sector continued its ascent while developments outside this sector look more fragile. Especially the latest indications from the labour market have caused some worries.

 

• China’s two manufacturing PMIs were mixed in January, but overall industrial activity still appears strong as other Asian PMIs improved significantly.

 

 

Focus

 

• Hiring for the decennial US Census will give a temporary boost to employment and distort monthly payroll data. We look at the real economic effect from this boost and the outlook for underlying employment growth.

 

 

Market movers ahead

Global

• The main event in the US next week is January retail sales. It seems that some of the strength in late holiday shopping has carried into January and we are up for a decent retail sales report. Recent data suggests a gain in January sales and we look for a 0.6% m/m increase in core retail sales (i.e. excluding auto, building materials and gasoline). The headline is expected to be somewhat softer, up by 0.3% m/m, as weak car sales and a decline in building material sales add negatively to the equation.

 

• Euroland flash GDP for Q4 09 is due to be published on Friday. We anticipated a 0.6% q/q increase in our December global scenarios, but the actual reading could come out lower, as we saw signs of a soft spot in October-November. Industrial production indicates an even higher GDP growth rate, but other sectors continue to drag substantially down. National flash GDP figures are also due next week. On Thursday we expect to see that Spain remains in recession and Friday the same goes for Greece, while Germany could post above trend growth. France is projected to show growth around trend, while Italy could well disappoint with very modest growth or even a return to negative growth following impressive 0.6% growth in Q3. German trade figures on Tuesday and French trade figures on Wednesday, both for December, will give an indication on how strongly we exited 2009.

 

• In the UK BoE’s Inflation Report, due Thursday, is expected to show a less pessimistic growth profile for the economy and a higher inflation profile in the near term. The BoE will most likely repeat that it sees plenty of slack in the economy and that inflation will level off in by year-end. Risks to the latter is most likely to be seen on the upside though. We do not expect a large market reaction to the report but the outcome can be slightly higher rates and the pound a little stronger.

 

• In Asia the Chinese New Year holiday season is approaching and for China the first implication is that there is unlikely to be any major policy announcements in the coming weeks. This year the Chinese New Year is on February 14. The second implication is that there will be fewer economic releases and they will be difficult to interpret due to seasonal distortions. Because the Chinese New Year in 2009 was on January 26, economic activity in January this year will look stronger because of more working days. Because consumer prices usually increase during the Chinese New Year holiday season, we only expect y-o-y CPI-inflation to increase modestly to 2.2% in January from 1.9% in the previous month. However, inflation is expected to accelerate sharply to around 3% in February. Important data like industrial production and fixed asset investment for January will not be released until mid-March, when industrial production figures will be seen also. Hence, foreign trade data will be the only hard data for economic activity to be released in China until mid-March. We
expect new loans to have accelerated to around CNY1,500bn in January from just the previous month. However, Chinese banks usually frontload new loans and as seen in the chart it is still significantly less than in January last year, underlining credit growth is slowing but still strong in an historical context.

 

• In Japan we will mainly be looking forward to the Economic Watchers Survey (EWS) for January and Machinery Orders for December. It appears that confidence indicators has again started to improve and we expect another slight increase in EWS. Machinery orders should improve substantially in December, however, it will be mostly a payback on the sharp decline seen in the previous month.

 

 

Scandi

 

• Denmark: The week ahead is scheduled to see the release of current account and trade balance data for December. The monthly current account data generally showed healthy surpluses during 2009 and we also expect a healthy surplus for December, of roughly DKK5bn. The trade balance surplus will likely come in at about DKK6bn. The consumer and net retail price indices for January 2010 are also due out in the coming week. We expect the inflation rate for January 2010 to be 1.4% y/y.

 

• Sweden: The Riksbank is scheduled to publish its rate decision, together with its regular monetary policy report on 11 February at 09.30 CET. We expect the repo rate and the future repo rate path to be left unchanged, which in turn is expected to have only limited effects on the Swedish money market rates and EUR/SEK.

 

• Since the July 2009 meeting the Riksbank has raised its GDP forecast by almost 3pp while keeping the repo rate forecast entirely unchanged, implying the first 25 basis point rate hike in Q4 10. The explanation is that the better growth outlook has been balanced by an equally better inflation outlook (lower imported inflation, a stronger krona, lower rents) and the low level of resource utilisation in the Swedish economy.

 

• We are convinced that the Riksbank is not ready to signal faster repo rate hikes yet. That said we are likely to see some non-negligible revisions to its December economic forecasts. First, we expect the GDP forecast for 2009 (December, minus 4.3% y/y calendar adjusted) to be cut on the back of worse than expected monthly outcomes for net exports, private consumption and depressed industrial production readings. It looks as if Q4 GDP is likely to be significantly lower than the Riksbank’s 0.3% y/y forecast – perhaps as low as minus 1.5-2% y/y. Certainly this could also translate into reduced growth for 2010. Second, the Riksbank is expected to marginally upgrade its view on the labour market, raising its forecast for employment growth and reduce the unemployment rate. Meanwhile inflation has come in higher than the Riksbank had forecast – our inflation forecasts, CPI and CPIF, now run about
½pp above the Riksbank’s for the coming year. 2009 and 2010 average inflation is therefore expected to be revised up, but with a descending profile for CPIF it may choose to leave the two-year forecast more or less unchanged at 2%, arguing that the reasons for the deviation are mainly due to factors, which are temporary. Two-yea inflation expectations have risen to 2.4% (from 2.1%) among money market players and to 2.3% (from 2.2%) in five years. Although it’s above the target, we don’t believe this is causing much of a concern for the board members at this point. The Riksbank’s main focus is on low resource utilisation. In all, the board should have no difficulty producing an unchanged repo rate profile based on these revisions.

 

• In Norway all focus turns to inflation numbers for January. Core inflation is expected to decline from 2.4% y/y in December to 2.1% y/y in January. Core inflation is expected to fall 0.8% m/m due to an expected seasonal drop in clothing and shoe prices of 10%. Hence, the drop in the yearly rate is primarily due to a so-called baseeffect. But inflation trends underline that the stronger NOK and lower wage growth is expected to be reflected in consumer prices. Headline CPI could also attract attention. Due to the spike in electricity prices headline CPI is expected to fall just 0.1 % m/m and rise from 2% y/y to 2.3% y/y in January. The week also offers wage statistics for manufacturing. We believe it will show that wage growth has fallen. The event of the week could turn out to be the annual address by central bank governor on February 11. The central bank governor could warn the Norwegians of the risk of rising rates. Therefore, we see a risk that the market will see the speech as “hawkish”.

 

 

Global update

 

A lot of questions and very few answers

 

This week Greece announced austerity measures backed by the EU to prevent a public budget meltdown. We welcome this news and hope it will help calm tensions in Club Med sovereign debt markets. However, the markets remain shaky and this morning spreads shot out again. Can the Greeks deliver? And what about Portugal and Spain? Are their budget paths sustainable?

 

The Q4 09 earnings season has revealed impressive results. Over the second half of 2009, a V-shaped recovery materialised in corporate earnings. But much of this is due to cost cutting and with a soft top-line, the markets are now concerned with pricing. Is the earnings outlook really sustainable?

 

Global growth accelerated during Q4 09 and into early 2010. But so far much of the recovery in developed markets has been driven by a snap-back from the inventory cycle, while domestic demand remains relatively muted. Recent data has been sending softerthan - expected signals on the demand side, adding fuel to a renewed pessimism. Is the global recovery really sustainable?

 

The market seems to have more questions than answers at the moment. This is usually not a good thing. Fear has returned. Can we have some answers, please! US credit tightening has ceased…now spend!

 

The ISM manufacturing index for January surprised by its strength. The 58.4 reading topped all forecasts and indicates an acceleration in manufacturing production to 10-12% AR growth rates. While this would normally be accompanied by 5-6% GDP growth, this time is likely to be different, as the service and construction sectors are still struggling and small businesses face tough conditions. For instance, the ISM non-manufacturing improved incrementally in January, rising to 50.5.

 

The quarterly Senior Loan Officer Opinion Survey showed that credit standards were tightened to a much lesser extent over the past three months and even eased for some categories. The net fraction of banks that reported weaker demand for business loans continued to decline while comparable readings on demand for loans to households were mixed. The survey confirms that credit supply has become less of a restriction on growth and that the recent contraction in credit growth is as much a reflection of declining demand as of a lack of supply.

 

While the credit survey from the Fed indicates increased willingness by banks to lend to consumers, spending seems to have had a soft start to the year. The December spending data showed a slowdown. Still the labour market remains key for a revival in consumption. On this note the recent stall in the claims data is concerning. On a final note, a stabilisation in pending home sales in December after a very negative November lent some support to the housing market outlook after the negative kick-back effect from the first-time-home-buyer credit.

 

Fear and fatigue hits Euroland

 

Against our expectation and the consensus expectation German factory orders declined 2.3% m/m during December 2009. Domestic orders declined 1.4% m/m, while foreign orders saw a drop of 3.2% m/m. We had expected to see a rise of 0.8% m/m during the month, as the IFO expectation index and the new orders component of the PMI surveys had suggested a positive development in factory orders during December 2009. Further, given the current momentum in the Chinese and US economies, we had expected positive growth in factory orders. The data indicate that Q4 German GDP expansion is likely to be smaller than seen during Q3 09. Hence a soft growth patch seems to have hit Germany in Q4 09 and early 2010. The data increase the uncertainty about the growth outlook, but we note that these data are highly volatile on a monthly basis. As long as most indicators are still improving, we expect growth to soon be back on track.

 

The ECB meeting and press conference on Thursday did not really provide any new information on the ECB’s views on growth and inflation, nor did we get any new information on the exit strategy. Mr Trichet emphasised that in the euro area you have exante help, and conditionality is also ex-ante. He did not give any promise on ex-post help. He did, however, emphasise that the euro area is not overburdened and he brought attention to the euro area average budget deficit at 6% of GDP, which could be seen as a cryptic way of saying that Greece should not be seen isolated and that the country will notbe left on its own. On Greece, Mr Trichet also noted that he is confident that the country will do what is needed to reach the goals it has set itself. He emphasised that expenditure reform is important. Mr Trichet could have given more support to Greece at this meeting, but it was pretty much as expected.

 

No more quantitative easing from Bank of England

 

BoE announced earlier in the week that it is keeping the base rate unchanged at 0.5% for now and is pausing its asset purchase programme, currently standing at GBP200bn. This decision was widely expected by analysts. The market reaction was muted, but we regard the decision as pivotal for the pound going forward: a neutral BoE ending quantitative easing will not harm the pound further. We think the next obvious move is a rate hike when the UK recovers further and additional monetary stimulus is no longer required – most likely in Q4.

 

 

Asia still leading the pack

 

While China’s two manufacturing PMIs were mixed in January with the official NBS PMI declining slightly and the HSBC/Markit PMI improving, the overall picture for industrial activity still appears strong with manufacturing PMIs for Asia outside China improving significantly across the board. In line with recent strong industrial production and foreign trade data for December, it suggests industrial activity in Asia is again accelerating following some slowdown in Q4 09. The political climate between China and the US deteriorated further in the past week, when China announced it will possibly penalise US arms manufacturers including Boeing for the US’s recent supplies of military equipment for Taiwan. With the US mid-term election looming later this year, it underlines that, compared with 2009, this year will be much more challenging for the political relationship between the US and China.

 

Scandi update

Denmark: Retail sales limping along, but consumption making strides

 

Retail sales continue to paint a disappointing picture of Danish private consumption, climbing just 0.4% in December, adjusted for inflation and seasonal variations. This was a surprisingly small increase given that Dankort card purchases in the same month were up by no less than 4.2%. These new figures therefore suggest far less positive Christmas trading, although they are still an improvement on December 2008. Retail sales were previously a good indicator of overall private consumption, but over the past couple of years they have been much more negative than private consumption as a whole. In Q3 last year, for example, which is the last period for which we have data, private consumption rose while retail sales fell. One explanation for this growing disparity may be that the retail data are underestimating the shift from one type of retailer to another, such as from the high street to the Internet, even though these retailers too are, in principle, covered by the figures. Retail sales data have also been subject to substantial revisions up to 18 months after publication.

 

 

Sweden: Don't bargain for fish that is still in the water

 

We have not had too much to do in terms of analysing domestic macro events over the past week. PMI data and a few boring Riksbank speeches were all that the nation mustered. The speeches, by Ingves and Nyberg, had no policy implications, and the PMI continues to be remarkably strong given the outcome of hard data – production, orders etc. But to be honest, what surprises us the most is that Swedish financial markets (especially when compared to international developments) continue to interpret the PMI as if it was a level indicator rather than the expansion index it really is. It is indeed necessary, or at least probable, for PMI (and other expansion indices) to start rising above the cut-off level for a return to growth. But that is not the same thing as the production levels of summer 2008 returning any time soon. PMI is – at least in our opinion – not an argument for an earlier or swifter hiking cycle from the Riksbank.

 

Norway: Norges Bank sets steady course

 

As expected, Norges Bank made no change to its interest rates during the week – the executive board did not even discuss the possibility of raising them. The report on developments since the previous rate-setting meeting was also largely as we expected, with the bank now acknowledging that global growth is stronger than previously anticipated, and that the export industry has therefore been performing better than expected. On the other hand, the bank noted that oil investment may be somewhat lower than previously projected.

 

The reason why Norges Bank was nevertheless seen as relatively dovish is probably that the “exchange rate vs house price” dilemma was clearly won by the former. Governor Svein Gjedrem has repeatedly expressed concern about the rapid rise in house prices, but this did not even rate a mention. On the other hand, the bank was explicit about the exchange rate: “Should the krone appreciate considerably more than projected, the key policy rate may be increased to a lesser extent or later than envisaged in October.” At the press conference after the meeting, Gjedrem repeated that there is a 50/50 chance of a rate increase at either the March or the May meeting. We have not made any changes to our forecast and still expect a hike at the March meeting, with the policy rate ending the year at 3.25%.

 

We have not had too much to do in terms of analysing domestic macro events over the past week. PMI data and a few boring Riksbank speeches were all that the nation mustered. The speeches, by Ingves and Nyberg, had no policy implications, and the PMI continues to be remarkably strong given the outcome of hard data – production, orders etc. But to be honest, what surprises us the most is that Swedish financial markets (especially when compared to international developments) continue to interpret the PMI as if it was a level indicator rather than the expansion index it really is. It is indeed necessary, or at least probable, for PMI (and other expansion indices) to start rising above the cut-off level for a return to growth. But that is not the same thing as the production levels of summer 2008 returning any time soon. PMI is – at least in our opinion – not an argument for an earlier or swifter hiking cycle from the Riksbank.

 

 

Norway: Norges Bank sets steady course

 

As expected, Norges Bank made no change to its interest rates during the week – the executive board did not even discuss the possibility of raising them. The report on developments since the previous rate-setting meeting was also largely as we expected, with the bank now acknowledging that global growth is stronger than previously anticipated, and that the export industry has therefore been performing better than expected. On the other hand, the bank noted that oil investment may be somewhat lower than previously projected.

 

The reason why Norges Bank was nevertheless seen as relatively dovish is probably that the “exchange rate vs house price” dilemma was clearly won by the former. Governor Svein Gjedrem has repeatedly expressed concern about the rapid rise in house prices, but this did not even rate a mention. On the other hand, the bank was explicit about the exchange rate: “Should the krone appreciate considerably more than projected, the key policy rate may be increased to a lesser extent or later than envisaged in October.” At the press conference after the meeting, Gjedrem repeated that there is a 50/50 chance of a rate increase at either the March or the May meeting. We have not made any changes to our forecast and still expect a  at 3.25%