Saturday, August 29, 2009

Weekly Focus: Growing Stronger

Global Update

  • There is growing evidence that the H2 rebound in global growth could be quite robust. We are starting to see upside risk to our current (above-consensus) global growth forecast.
  • The corporate sector is leading the recovery. Revisions of US and German GDP data point to an even sharper inventory cycle, and a record strong rise in ifo expectations point to strong momentum in the German recovery.
  • Capital goods orders are starting to turn globally as also witnessed by a sharp rise in US durable goods orders.
  • Finally global housing indicators are improving fast with increases in both prices and sales.

Market movers ahead

  • We are heading for the big week in terms of data. US ISM and non-farm payrolls will provide important news on the pace of recovery. We look for a further rise in ISM but could see slight disappointment in payrolls.
  • In Euroland the ECB meeting will be the main event. We don't expect any changes to policy measures but a slight upward revision to their growth forecasts is on the cards.
  • It looks like a landslide victory for DPJ in the Japanese election. Chinese PMI data and Japanese industrial production should show continued strength.
  • Danish Currency reserve data should show a further strong inflow in August.
  • The Riksbank meeting will be main event in Sweden. We don't think the Riksbank will be as hawkish as the market expects.

Global update: Growing stronger

Global growth back above trend already in H2

The global recovery is currently getting stronger for each day passing. Over the past week the positive flow of data from the global economy has continued. The takeaway from the recent data is not only that most major countries are by now are out of recession, they are also seeing quite strong growth rates. Indeed there are now convincing signs that global economy will be returning to above trend growth during H2.

Signs of life in capex

The corporate sector continues to lead the recovery in an effort to close the huge gap between production and demand that opened up during the crisis. Indeed the case for a strong rebound in production during H2 was underpinned further by the revised Q2 national account data out of the US and Germany. The details pointed to even more inventory depletion than initially estimated and in the US demand growth was revised higher.

This suggests than the production backlog is even larger than we thought. Indeed this is the story behind the continued rise in global manufacturing indicators. In August the German Ifo posted one of its biggest monthly gains, reaching levels that point to solid expansion in the coming three to six months (see Flash Comment – Euroland: Ifo moves at super speed). In Japan the industry continues to recover. Japanese PMI headed higher into expansionary territory and Japanese exports rose further.

The sharp turnaround in industrial production already seems to be rubbing off at capital expenditures (capex), which was hit by the same negative factor as the rest of the economy. Now these strains are easing and with production being ramped up fast, an early recoil in capex seems increasingly evident. In fact the orders data released for Euroland and the US this week suggest that the businesses have already started to expand equipment spending. This is important as an early cyclical recovery in capex could make it up for some of the missing strength in consumer spending.

A turn in the housing market

In the housing market the signs of a turnaround are also piling up. The turnover of new and existing homes in the US continued up in July making it increasingly evident that residential construction need to be ramped up to meeting demand for new homes.

Also the price indices continues to send positive signs. In the UK nationwide prices are up about 6% since February and in the US prices have now stabilised by all the different measures. Some price indices have even begun to move higher. If the UK is any guide, home prices in the US could turn positive in the coming months, although we believe this is more likely to come next year. Nevertheless, the strong headwinds from the housing market on the US economy is now subsiding and will turn into a modest tailwind over the coming quarters (see Research US: Gauging the potential from a turn in housing)

US consumers less depressed – perhaps due to clunkers

Importantly, the US consumer confidence index resumed its ascendency in August following a couple of setbacks in recent months. Whether it is a temporary effect from the cash-for-clunkers incentive programme, or a return to the original trend of improvement is still difficult to tell. Despite massive stimulus the US consumer spending so far only managed to stabilise when excluding cars. Our hope is that the strong recovery in the corporate sector will stabilise the labour market by year-end, which should provide a much needed boost to confidence and spending by then.

Market movers ahead


  • In the US positive news from the local business surveys suggests that another increase in the manufacturing ISM is on the cards for August. We see a risk that Friday's payrolls report could disappoint slightly. That said the trend will continue to be for a stabilisation in labour markets. Pending home sales for July will provide the freshest clue about the development in US housing markets. A continued rise would underpin the case for a turnaround in existing home sales. Finally, unit car sales will be in focus, as it will be interesting to see how much the cash-for-clunkers scheme has boosted August sales. Beside these key data events the FOMC minutes from the 12 August meeting will be important to follow.
  • The main event in Euroland will be the ECB meeting. It seems unlikely that ECB will make any changes to the policy stance, but an upward revision to its growth forecast seems inevitable. It will most likely be moderate though, for now as ECB has signalled a very cautious view on the recovery. German unemployment is also released but it is distorted at the moment by job sharing schemes and hence it is hard to interpret the underlying development in the labour market from these numbers.
  • In Asia focus will mainly be on the Lower House election in Japan on Sunday. It increasingly looks like a landslide victory for the opposition DPJ and the ruling LDP will be kicked out of power for only the second time since the end of the Second World War. Japan releases July industrial production, where we will pay attention to production plans for August and September to get an idea if the current strong growth can be maintained. In China NBS and CLSA manufacturing PMI released on Tuesday is expected to show continued improvement.


  • In Denmark the currency reserve is expected to show a further increase.
  • The one event of any importance in Sweden the upcoming week is the Riksbank policy meeting. Obviously there will be no change of the rate, but the Riksbank might revise its rate forecast path. Although it is possible, we deem it unlikely that any change will be as hawkish as the market's expectation. PMI will also be released and should give further clues to the strength of the recovery.
  • In Norway focus turns to retail sales. We expect a sharp rise of 4.2% m/m. Shopping malls have reported very strong sales in July. The credit indicator and PMI will also be released.

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