EMU Economic Indicators Preview (Week of 16 to 22 November 2009)

• German / EMU GDP (Q3): up
• German ZEW economic sentiment (November): slight rebound
• Output in the German producing sector (September): up
• EMU industrial production (September): unchanged

The Weekly Bottom Line

HIGHLIGHTS OF THE WEEK

• The Federal Reserve's Senior Loan Officer Survey shows a significant improvement from a year ago. On the flipside, credit remains tight and demand remains weak for most credit products except prime residential loans.
• U.S. imports advanced by 5.8% M/M in September, led by aircraft and crude oil purchases abroad. Meanwhile, exports climbed by a lesser 2.9% M/M, also led by aircraft sales. The resulting trade deficit widened to -$36.5 billion from -$30.8 billion a month prior.
• University of Michigan consumer confidence index for November disappoints, falling for a second month to 66.0 as expectations worsen. Markets were looking for a print of 71.0 near September's 70.6.
• Canadian dollar up over two cents in the week from 0.93 USD to 0.95.
• Housing starts continue to rebound, rising to 157,300 units with multiples leading the way.
• New home prices up for the third straight month, rising 0.5% M/M in September.
• Canadian merchandise trade deficit shrinks in September on stronger exports to Europe. Exports rise 3.4% M/M in constant dollar terms, while imports fell 0.6% M/M.

This Week's Market Outlook : Risk assets and the USD are at a critical juncture

Highlights

• Risk assets and the USD are at a critical juncture
• US retail sales on the radar
• MPC minutes could bring clarity to the issue of BoE QE
• Cable continues to find buyers on dips
• Key data and events to watch next week

The risk rally extended gains this past week as optimism over the global recovery beat out concerns that rising unemployment may lead to continued sluggishness. The USD, meanwhile, finished out roughly in the middle of the week's range after testing near to its recent lows against the EUR and other currencies. The optimists took heart from G20 nations vowing to maintain stimulus efforts until a more solid recovery was underway, while the USD took a drubbing after the IMF told us what we already know, that the USD is being used as a funding currency. Unfortunately for the bulls, the G20's pledge was largely hollow, as fiscal stimulus efforts in many countries are mostly winding down and initiatives to extend them seem fiscally unavailable. The early week rally in risky assets faltered mid-week, but managed to stage a minor comeback on Friday. In the process, recent highs in the S&P 500 were briefly surpassed, but they held on a weekly closing basis. Similarly in FX, recent USD lows were tested and recent highs in other currencies were tested and briefly surpassed in some cases, only to see the USD recover into the end of the week.

Weekly Market Wrap

US indices hit fresh 13-month highs this week and the DJIA managed to close above 10,250 as risk appetite flared up worldwide. Equities, gold and oil rose in tandem through the first half of the week, with crude testing $80 and gold making all-time highs above $1,120. With little US economic data on tap, markets were propelled by strength from Asia and Europe, especially reports of improving GDP performance in both regions. In China, PBoC vice governor Ma reiterated that China would be able to achieve 8% GDP growth this year, while continental Europe's biggest economies officially emerged from recession. An unexpected build in US crude and gasoline inventories data on Thursday took the wind out of crude in the latter part of the week, helped along by some firming in the US dollar. Potentially troubling results from two high-profile US data reports weren't able to stop equities on Friday. The September US trade deficit grew 18% sequentially, for the fastest rise in the series since early 1999. Traders preferred to concentrate on imports, which surged at the quickest monthly rate in nearly 15 years, although Goldman Sachs warned the data suggests a likely downward revision to Q3 GDP. Meanwhile the preliminary University of Michigan consumer sentiment index for November came in at 66.0, down from 70.6 in October and below expectations. For the week, the DJIA gained 2.5%, the S&P 500 climbed 2.3%, and the Nasdaq rose 2.6%.

Financial Markets Review : Sterling Stumbles over BoE Inflation Report

Financial market review - foreign exchange

In the G-10 currency space the pound produced a mid table performance this week. The pound rose against the low yielding currencies (US dollar, euro, Swiss franc and Japanese yen) whilst it lost ground against the commodity currencies (Norwegian krone, Australian, New Zealand and Canadian dollars) and the Swedish krona.

It appears, the pound’s woes emanated from the Bank of England’s Quarterly Inflation Report, where it emerged that assuming implied market interest rates, inflation is forecast at 1.6% in two years time, well below the 2% target. This induced a sharp rally in short sterling interest rate futures contracts and left it under pressure. Additionally, Bank of England governor King reiterated that a weaker currency would help to rebalance the UK economy away from imports, towards exports. GBP/USD weakened by 1.4% following the Inflation Report.

Weekly Focus: German Locomotive at Full Steam

Global update

• China took centre stage in the past week. Economic data showed an encouraging picture of a rebalancing of the recovery from public demand towards private demand and exports.
• Pressure for Yuan appreciation is rising from many sides.
• US credit is still being tightened but the pace is slowing down.
• Euroland has left the recession with Germany taking the lead. More positive growth data is in the pipeline in the coming quarters, forcing ECB to revise up their growth forecasts.
• The Danish budget for 2010 was expensive in our mind and on the border of what should be advised.
• In Sweden, industrial production data was revised substantially to show that industrial production had bottomed a few months ago rather than continuing down.

Market movers ahead

• US retail sales take centre stage next week. The US consumer is at the centre of the sustainability debate and hence the data will be important for sentiment surrounding the recovery. Also look out for speeches by Fed chairman Bernanke and vice president Kohn.
• Euroland inflation data to show a further decline in core inflation.
• Data on Q3 GDP in Japan should show another decent increase of 3.9% q/q.
• Little news out of Scandi. Swedish data on house prices and unemployment are the main ones to watch.

EUR-USD: To Exit or Not to Exit, that is the Question

FX Briefing

Highlights

• Policymakers seek to reassure
• Eurozone growing again
• Start of exit strategy?

As far as US monetary policy is concerned, the answer to this question became fairly clear this week. The weak labour market data had already prompted speculation that an exit from the ultraloose monetary policy was still a long way off. This week, comments from several US policymakers confirmed this impression, pushing the dollar down further. EUR-USD rose to 1.5048, thus coming within a whisker of hitting a new 15-month high, but dropped again later to 1.49. The British pound also lost ground, after BoE governor Mervyn King had not ruled out additional quantitative measures. Cable fell by over 2.5 US cents temporarily to 1.6516, but strengthened again towards the end of the week to almost 1.67.

Weekly Economic and Financial Commentary

U.S. Review The Wages of Unemployment

• Both the composition and pace of the recovery raises core issues for any business strategy for the year ahead.
• Longer-term and high unemployment compounds the credit/workout risks for consumer and real estate debt.
• High unemployment keeps the Fed on hold and further distorts market pricing of risk both in the global carry trade and inflation premiums. Finally, high unemployment also creates political risk as policy makers introduce more programs that put a premium on quick band-aids and not long-term cures.

Unemployment Is High and Fed Funds Are Low, and You're Confused on Which Way to Go
Both the composition and pace of the recovery raises core issues for any business strategy for the year ahead. Straight line forecasting is out. A wide range of possibilities are in. Our November outlook reinforces the view that the pace of growth in 2010 will be below that of the first year of a typical economic recovery, and that the composition of growth will favor contributions from federal spending and inventory building with subpar performances from consumer spending and business investment.

Weekly Market Commentary

Overview Money market futures have clearly got the message that interest rates are likely to stay low for a very long time, most rallying to new contract highs – highest Dec09 Fed Funds future at 99.870. For those whose memories are shorter than ours we would like to point out that front month Euroyen futures traded between 99.850 and 99.950 from April 2001 to February 2006. Two-year Treasuries are trading close to record lows, yields on five-year paper dropping the most this week, and ten-year JGB’s reversing dramatically from 1.485% to 1.350%. Equity indices are hovering precariously at this year’s highs, Sweden and the Dow Jones Industrial Average inching to new ones for the year, and China’s ‘B’ share index (dollar denominated) soaring by 15% on renewed rumours of a merger with the bigger (and more expensive) ‘A’ share index. The US dollar lost ground against all currencies except the Brazilian real, whose Finance Minister said it was overvalued, with Sweden and Eastern Europe doing best. Most metals continue with a bid tone, spot Palladium rallying to $356.75 per ounce, highest since August 2008, and spot Gold to a new record $1122.85.