Sunday, October 11, 2009

Weekly Focus: Mixed Data, Broader Recovery

Global update

  • Global manufacturing production data was more mixed, but did on balance improve. With regard to orders, data point to improvement in most areas.
  • The service PMI improved consistently indicating a broader-based recovery in developed countries.
  • In the US improving US claims and chain store sales data added some optimism about the state of the consumer.
  • In the UK the lift-off in house prices continues. This will probably keep the BoE from launching further easing measures.
  • The ECB and the BoE kept policy measures unchanged. Signs of increasing optimism were seen from Jean-Claude Trichet at the press conference.

Market movers ahead

  • In Sweden the main event is September CPI.
  • US retail sales are expected to be dragged into the red by a negative payback from the “clunkers” programme, but the report is expected to show underlying improvement.
  • Germany ZEW and regional US indicators are expected to indicate further optimism.
  • FOMC minutes will provide interesting detail about FOMC thinking and updated economic projections.
  • Speeches from the Fed's Kohn and Dudley and a speech by the ECB's Trichet will be important events.
  • Euroland and US inflation data will take a back seat.
  • In Asia, the Bank of Japan is expected to keep its target rate unchanged, but quantitative easing (QE) measures could be cut back.

Global update:

Manufacturing mixed, service improves

This week the flow of data from global manufacturing turned more mixed adding to the lukewarm message from the US manufacturing ISM last week. While German orders continued to rise, manufacturing production in the UK and Sweden disappointed badly. Also in Denmark the tentative signs of stabilisation failed to sustain, with a renewed setback in production.

Although this is disappointing we believe that hard data will show a turnaround during Q4. Order data, which usually are a couple of months ahead, have either stabilised or are on the rebound in most countries. We believe that the manufacturing recovery has more legs and that the global PMI will continue up for the remainder of the year. That said, the road is likely to be somewhat more bumpy from here.

While manufacturing did not meet expectations, there was good news from the service sector, with the PMI/ISM surveys surprising consistently on the upside. In Germany, France, the UK and the US the service sector is now back in expansion mode. Further weekly claims and chain store sales data provided good news suggesting that the recovery is now becoming more broadly based globally. Indeed this provides a more robust backdrop for the global economy when the boost from stimulus and inventories fades, in turn reducing the risk of a double-dip setback.

Lift-off in UK house prices continues

UK house prices from Halifax showed a further decent increase in September. In line with other UK house price measures this provided further evidence that UK housing continues to recover. The rise in house prices has come as a surprise, but it is becoming harder to discount as noise as more data and survey point in the same direction. The very low interest rates and short mortgage funding in UK are most likely the main drivers behind this development. If this continues it will be an important signal for BoE not to accommodate monetary policy any further.

Central banks keep the pedal down

The monetary policy meetings in ECB and BoE this week brought very little news. BoE did not change its policy rate nor its asset purchase target. Ahead of the meeting there had been some speculation that BoE would lower its discount rate, but it decided not to. However, the central bank seems to remain biased toward further easing. We do not know much about the decision, and will have to wait until the minutes are published on 21 October for more details.

The ECB left its policy unchanged and turned slightly more positive on growth. Although downside risk remains Trichet also noted several upside risks to the economic outlook, but has no concern about inflation. There was no specific information on the exit strategy. We continue to expect that the 12-month tender in December will be the last with unlimited allotment and that it will come with a spread on the refi rate.

The divide between the central members (the Board and New York Fed) and some of the local Fed presidents continues. While some of the local Fed presidents have expressed concerns about a too late and too slow exit, the central members remain concerned about deflation risks. With the majority in the FOMC belonging to the latter group, the hawkish comments from the local Fed presidents should be taken with a grain of salt.

Generally this week's news on monetary policy suggests that rate hikes from the major Western central banks remain something for the remote future.

Market movers ahead


  • Following the continuous flow of Fed speeches in the US over the recent weeks, it will be interesting to read the FOMC minutes. These are likely to reflect the widely divergent views within the FOMC. Next week will also see speeches by two of the more important FOMC members, NY Fed president Dudley and vice chairman Kohn. On the data front, the most important release is retail sales. The headline will be dragged down by a pay-back in auto sales, but data for chain-store sales suggest that last month's improvement in underlying private consumption extended into September. Finally, the first regional PMI indexes for October are due. These will be watched more closely than usual following the disappointment in September's ISM.
  • In Euroland the ZEW will be of main interest to the markets. We look for a small rise from the already high levels. Euroland industrial production and final inflation numbers are also on the agenda but unlikely to move markets unless they deviate strongly from consensus.
  • In Asia main focus will be on the Bank of Japan(BoJ) monetary meeting on Tuesday and Wednesday. There has been some speculation in the press that BoJ might announce the termination of its purchase of commercial paper and corporate bonds. In China main focus will on foreign trade data for September on Wednesday and Foreign Exchange reserves and bank lending, both to be released sometime during the week


  • In Sweden focus will be on the crisis in Latvia. Will it comply with the loan agreement and is its non-recourse loan law proposal seriously intended? These are questions that the market need answers to. As far as macro data are concerned we will see CPI and house price data for September.
  • There are no market movers due in Norway or Denmark.

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