Sunday, September 20, 2009

Weekly Focus: There is Life

Global Update

  • US consumers are showing signs of life. The retail sales report for August showed much more underlying strength than expected.
  • Manufacturing and housing indicators continue to lead the way. UK house prices are increasing, US home building is turning and global industrial production continues to improve.
  • Some of the key ECB members have revealed concerns about a 'too late' withdrawal of policy measures, while the central Fed members continue to be very dovish.
  • We have revised our global growth forecasts slightly up and expect fast growth in the coming quarters.

Market movers ahead

  • The FOMC meeting is the main event next week. We believe that there will be only small changes in the statement. Rates hikes are still far off.
  • Euroland flash PMI and German IFO are set to rise further.
  • In Sweden confidence data and PPI will be in the spotlight. Confidence is likely to improve further in line with the global trend.
  • Norges Bank is set to confirm that hikes are drawing closer. An October hike cannot be ruled out.

Global update: There is life

Signs of life among US consumers

This week's most significant piece of news came from the US consumers. While August retail sales had been expected to show solid improvement because car sales had been boosted by the cash-for-clunkers programme, the report carried much more underlying strength than expected. Most core sectors outside autos showed substantial improvement. While one month of data doesn't make a trend, it is encouraging to see some signs of improvement in consumer data, which so far has been lagging behind. Indeed, the August data brings the official statistics more into line with the weekly retail sales data from the chain stores, which has been rising for months. With consumer confidence resuming its upward trend over recent months and signs of stabilisation in the job market, the odds for a sustained - albeit modest - recovery in consumer spending is improving.

Housing and manufacturing continue to pave the way

Housing and manufacturing data continue to lead the way. The housing markets in both the UK and the US, which were among the earliest to be hit before the crisis, continue to deliver goods news. In the UK, the RICS house price indicator reached 10.7%, which is usually consistent with around 10% growth rates in house prices. In the US, both surveys and 'hard' housing data continue to indicate that residential construction is turning the corner and that relatively solid home building activity will be visible already from late this year.

In addition, in US industry, 'hard' data is now backing up the very positive picture from the surveys. Recent data shows that US industrial production has increased by 1.8% over the past two months. This is the strongest two-month performance since November 1999 (excluding the temporary disturbances following the Katrina hurricane). For now it seems that there is much more strength in the pipeline in most western countries. For instance, both the German ZEW and the US Philadelphia Fed index continued up this week.

Our new global forecast anticipates a faster recovery

This week we published our new economic and financial forecasts. We have revised our profile for global growth slightly up and look for a fast recovery in the coming two to three quarters - even without much help from the consumer. The rebound will be driven by a snap-back in production to meet demand, monetary and fiscal stimuli and decreasing headwinds from the financial crisis.

In the medium term, the durability of the upturn of course depends on the ability of final demand - in particular consumer spending - to recover. We remain optimistic that the initial recovery will be strong enough to kick-start the labour market, which will be key for a self-sustained upturn. Furthermore, an early investment recovery and solid Asian demand is likely to make up for some of the lacking strength among western consumers.

Most developed world central banks will be waiting for more convincing signs of improvement in final demand before easing the foot on the pedal. Hence, we expect no rate hikes before the middle of next year. The ECB will probably be the first to act, while the Fed is expected to start no earlier than late 2010. Indeed, there already seems to be some diversity in signals sent by central members of the ECB and the Fed. This week Bernanke reiterated that interest rates will stay exceptionally low for an extended period. At the same time, the ECB's Stark presented his concerns about creating a new credit bubble if policy measures not are withdrawn in a timely fashion.

You can read more about the economic outlook in Global Scenarios, September 2009. Our financial views are presented on page 4.

Market movers ahead


  • The main event in the US next week will be the FOMC meeting on Wednesday evening. Speculation is already rampant following a report by Medley Global Advisers citing two anonymous FOMC members supporting raising rates at the meeting. Recent speeches clearly suggest divergent opinions within the committee on the timing of rate hikes and on the exit strategy. Nevertheless, we think it highly unlikely that any member will vote in favour of a rate hike next week. In general, we believe the statement will sound more positive on the growth outlook while maintaining current wording on inflation. The Fed could decide to fade out its purchases of agencies and MBS, a move which might be announced as early as next week. However, while we still think such a move premature, the FOMC could also choose to abandon its current easing bias in favour of a more neutral position.
  • The focus in Euroland will particularly be on flash PMI and new order figures (Wednesday), Ifo expectations (Thursday) and money and credit growth (data) (Friday. We anticipate further strong increases in both PMI and ifo with the latter up from 95.0 to 98.2 due to the expectations index.
  • We expect a quiet week in Asia. Japan will be closed between Monday and Wednesday and there are no major releases scheduled in China. The most interesting figures due are August foreign trade data for Japan on Thursday. So far August export data in Asia has been slightly disappointing with exports from China, South Korea and Thailand all down slightly compared to the previous month. Meanwhile, Japanese exports have been broadly flat.


  • In Sweden the focus will be on confidence indicators and PPI. We expect a further improvement in confidence consistent with the global trend.
  • In Norway Norges Bank is expected to confirm that interest rates will move up soon although it is unclear yet whether the bank will signal a rate hike as early as October.

Full Report in PDF

Danske Bank


This publication has been prepared by Danske Markets for information purposes only. It is not an offer or solicitation of any offer to purchase or sell any financial instrument. Whilst reasonable care has been taken to ensure that its contents are not untrue or misleading, no representation is made as to its accuracy or completeness and no liability is accepted for any loss arising from reliance on it. Danske Bank, its affiliates or staff, may perform services for, solicit business from, hold long or short positions in, or otherwise be interested in the investments (including derivatives), of any issuer mentioned herein. Danske Markets´ research analysts are not permitted to invest in securities under coverage in their research sector. This publication is not intended for private customers in the UK or any person in the US. Danske Markets is a division of Danske Bank A/S, which is regulated by FSA for the conduct of designated investment business in the UK and is a member of the London Stock Exchange.