Sunday, May 17, 2009

Weekly Focus: Consumer Jitters

Global update

  • The past week provided mixed signals. The US retail sales report was the major disappointment as it declined for the second month in a row despite positive signals from weekly sales. The disappointment led to losses in equity markets and lower bond yields.
  • Chinese investment growth rose further to the strongest level in five years reinforcing the impression that the Chinese economy is turning strongly at the moment.
  • Euroland GDP fell more than expected in Q1 with Germany as the weak spot. A likely sharp reduction in inventories provides a better base for production growth going forward, though. The UK received more positive news on housing and retail sales.
  • Exports in Denmark have continued their rapid decline in March. In Sweden the latest indicators point to a very sharp contraction in Q1 GDP and capacity utilisation has fallen substantially.

Market movers ahead

  • US housing data take centre stage in the coming week with the release of NAHB housing index and housing starts. Regional PMI indices will give more input to judge have fast ISM is recovering
  • In Euroland Flash PMI and German ZEW are main events. We look for further improvements in both.
  • Very quiet week in Scandi. Only mover is Norwegian GDP where we expect a lower decline than Norges Bank.

Global update: Consumer jitters

US retail sales spoiling the fun

The key news over the past week was the disappointing retail sales report from the US. Core retail sales fell for the second month in a row, casting some doubt over the picture of a recovering economy. After growth in private consumption in Q1 of around 2% q/q annualised, it now seems likely that consumption will be flat in Q2. The decline in retail sales was a bit surprising after weekly retail sales had pointed to a sharp rebound in April (see chart). Since the first release of retail sales is often revised quite strongly, one should probably be cautious about drawing too strong conclusions.

Nevertheless, this was just what the market needed for a further round of profit-taking after the strong bull run in equity markets. With the picture a bit more blurred regarding the recovery, it also seems fair to price a bit more uncertainty into the markets. However, we still believe the recovery in the coming quarters is on track with the substantial amount of stimulus kicking in, very lean inventories and an improving export picture as Asia has started to turn strongly. This should give further upside to equities once the short-term profit-taking has run its course.

Strong Chinese data on investment

The past week delivered further evidence of the Chinese recovery. Investment spending rose from 30.5% in March to 34.0% in April. The Chinese authorities have launched a wide range of investment projects and lending standards have been eased substantially. More positive signs are also emerging in the Chinese housing market and car sales have continued higher recently.

The recovery in Asia is having positive spill-over effects through several channels. First of all the rise in imports is benefiting exports to China which will move from freefall to strong increases. Another channel is through commodity prices which are benefiting commodity exporters through higher prices. Hence activity in Asia is indirectly quite important for activity in both Russia and Latin America due to the commodity exposure of these regions. As an example Brazil's exports to China have risen sharply recently and are now at a higher level than Brazil's exports to the US.

More positive housing indicators in the UK - but weak Euro GDP

On the housing front, the past week delivered a few more encouraging signs. In the UK the RICS survey was again stronger than expected and in particular the leading indices of "New buyer enquiries" and "Newly agreed sales" rose further to the highest level in 10 years. On a positive note, in the UK the BRC retail sales monitor also rose strongly, supporting the picture from both hard data and other retail surveys. On the more negative side, Euroland Q1 GDP numbers showed a decline of 2.5% q/q, highlighting that the economic crisis continued all the way through the first quarter. Euroland industrial production data showed a further decline in March of around 2%. We expect production to bottom soon as leading indicators point to improvement in the pipeline, but given the weak starting point in Q2 it is most likely that we will see another quite negative reading in Q2 GDP. ECB members are delivering very mixed signals at the moment, highlighting the division within the ECB council. Both Nowotny and Kranjec said they expected the ECB to increase the initial amount of EUR60bn for purchasing bonds whereas Weber said the EUR60bn was a maximum. We do not expect the ECB to increase the amount but the very different signals clearly add uncertainty over the call on ECB.

Credit crunch is easing

Despite the past week's retreat in risk appetite, there are rising signs that overall financial conditions are easing. The ability to raise money through financial markets has thus improved considerably. According to the data tracker, Dealogic, May is already the busiest month ever for sales by companies of additional shares raising capital. More than USD13bn of high-yield have been sold in April and investment-grade bond sales are seeing the best year since Dealogic began tracking this in 1995.

Market movers ahead


  • In the US the coming two weeks will see a lot of new data on the housing market, starting with the NAHB index on Monday, where we look for another gain. Home sales have stabilised at a low level in recent months and April data on New and Existing home sales will show whether an improvement has begun. Three out of four of the house price indices we track have shown improvement and we will get a new round of data on all four of them over the coming weeks. Turning to the manufacturing sector, we expect the ISM index to continue higher over the coming months and look for the stream of regional PMI indices released over the coming two weeks to confirm this view. New information on the Fed's thinking could be revealed next week when the FOMC minutes are released on Wednesday. Focus will be on the committee's discussion on quantitative easing and exit strategies.
  • In Euroland the main release will be Flash PMI on Thursday where we look for a further increase. The balance between orders and inventories has risen strongly recently. This is a very good leading indicator for overall activity and thus points to improvement ahead. The German ZEW index is also due to be released. This index has also risen quite strongly recently and we look for a slight further increase in May.
  • In Asia Japanese GDP for Q1 will be the main release and is likely to be another horrible figure. We expect GDP to plunge 3.7% q/q and if we are right in our forecast for Japan the economy will have contracted by around 8% during the past year. However, it is important not to be blinded by these very negative GDP numbers. Currently the main message from Japan is that confidence indicators and production plans are rebounding even more strongly than in Europe and the US. Industrial production is likely to increase significantly during the summer and GDP growth is likely to accelerate significantly above trend from Q3 (around 4% q/q AR). Pressure on the Bank of Japan to introduce new quantitative easing measures is less and the monetary meetings will probably become more predictable and less eventful. The most interesting aspect of this week's monetary meeting is probably to what degree the BoJ acknowledges the signs of improvement in the Japanese economy


  • A very quiet week ahead of us in Sweden. The only key figure out is number of employees which is unlikely to move the markets. Next important release will be GDP on 29 May.
  • In Norway GDP data for Q1 will give more insight into how severe the economic crisis was in the beginning of 2009. We look for a decline of 0.7% q/q - a slightly bigger decline than consensus of -0.5% but not as bad as Norges Bank has in its forecast from the Monetary Policy Report where it looks for -1.1% q/q in Q1.

Financial views


  • We continue to have a positive view on equities in the medium term. However, the "easy" part of the gains is behind us and the road from here will be more bumpy. The market will need confirmation that the recovery is real and more drivers have to join in, including a further stabilisation in US housing, further healing of credit markets and improvement in earnings expectations.

Fixed income

  • Global: Bond yields are expected to rise on a three- to six-month horizon based on improving macro conditions, rise in risk appetite and heavy supply. US to underperform Euroland in sell-off.
  • Intra-Euro: We have just taken profit on our overweight in peripherals (Italy, Greece and Spain) versus Germany and now stand sidelined. On longer maturities we still prefer France and Finland to Germany.
  • Scandi: We are underweight long Danish government bonds versus Finland in the 10Y area, but overweight in the 2Y area and overweight Swedish government bonds versus Germany in the 5Y area. We recommend overweight of Norwegian govies versus Germany in 10y segment. We have changed from an underweight to neutral on Danish mortgages versus government bonds in all segments (callable, Capped Floaters and non-callable) except for one- to two-year non-callable mortgage bonds where we still overweight mortgages.


  • Lately, credit has performed strongly both within cash and CDS. We remain overweight as we believe the market is still pricing in a too severe default scenario even though default rates are currently rising sharply. In this respect we note that the recent rally has somewhat reduced the headroom in terms of default compensation - especially within high yield - and the liquidity premium has also been reduced as a consequence of the improved conditions in the money market.
  • In our view, the most prudent way to build up an overweight position is via the primary market where new issuance remains very well bid indicating that new money continues to be allocated to the asset class. At some stage, however, we caution that the wrong name at the wrong price at the wrong time could put a damper on the current strong sentiment.

FX outlook

  • EUR/USD is set to drift lower on the back of expected movements in relative interest and the relationship between US and Euroland in the business cycle. EUR/GBP is heading down as sterling is supported by positive economic data. USD/JPY will probably break above 100 in the near term. Carry can keep on performing while defensive currencies will face additional headwind. High correlation to equities is expected to fade.
  • Despite their recent rally, the Swedish krona and Norwegian krone both have potential left against the euro. Improvement in risk sentiment and economic prospects favour the Scandies. The Danish krone is attractive (e.g. against Swiss franc) due to sound carry.


  • Base metals like copper and zinc performed strongly last month fuelled by heavy Chinese buying and global growth optimism. Oil prices have not managed to break above USD60/barrel.
  • However, we argue that short term the risk of a correction is significant. In our view the market is neglecting near-term weakness like weak oil demand and huge stocks in base metals. However, looking six months forward we expect a new leg up in prices when the different market balances are expected to tighten for real.

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