Saturday, October 3, 2009

Weekly Focus: Under Pressure

Global Update

  • The ISM index disappointed badly this week. While we still believe the trend is up for the economy, it highlights that the direction is likely to be less straightforward, which shifts the burden of proof to the bulls on the economy.
  • On a more positive note, US consumer spending and vibrant home sales suggest underlying demand is on the mend.
  • Asia still sees robust growth although there are signs that China is slowing down from the breathtaking levels in the first half of 2009.
  • Unemployment is still rising in Euroland, but the pace is slowing down. ECB's 12-month auction pointed to improvement in the money market.
  • The Danish Nationalbanken has changed focus in the rate set-up and is reducing the deposit rate in order to come closer to a set-up that matches the ECB's.
  • Swedish retail sales disappointed.

Market movers ahead

  • A very quiet week ahead. Main event in the US is ISM non-manufacturing and a speech by Fed chairman Ben Bernanke.
  • In Europe central bank meetings in Euroland and UK are on the agenda on Thursday. We do not expect any new measures from either bank. Factory orders and industrial production in Germany also deserve some attention.
  • In Scandinavia inflation is in focus in Norway. Sweden will release industrial production and orders.

Global update: Burden of proof shifting

US industrial sector pauses while consumers spend

Financial markets were shaken this week by a disappointing decline in the US ISM index. It was not weak as such, as the new orders index still points to robust growth, but the direction was down and expectations had been for a much stronger reading. It sent a clear warning that the recovery cannot be taken for granted and it may be that the burden of proof between economic bulls and bears will be shifting for a while with the bears getting more ammunition. Anyway we should probably prepare for a bumpier road when it comes to data after many months of positive surprises. We still expect ISM to continue higher to 55-60 by year-end due to strong forces from the inventory cycle and improving demand, but after eight consecutive increases until September we will probably see a more uneven rise from here.

The disappointing industrial data happened alongside signs that US consumers are spending a bit more - also outside the temporary rise in auto sales due to the 'cash-forclunkers' incentive. A small decline in consumer confidence served as a reminder, though, that US consumers are still in a fragile state and it will be a battle to revive the US consumer on a sustainable growth path. For this to happen, a return of job growth is critical. Friday's payrolls report showing another job loss of 250k was a reminder that this is still uncertain.

During the past week we received further evidence that a bottoming in US housing is taking place. Most impressive was a 6.4% m/m rise in August, putting the total rise in pending home sales at 29% since it bottomed in February. House prices in August also rose further and stronger than in previous months giving some relief to the beaten-up US households.

On Thursday, the IMF responded to the past months' improving data by revising higher its global growth forecasts by around 0.5 percentage points for the global economy and now sees 3.1% growth in global output next year. Most notable was an upward revision of German growth of 0.9 percentage points in both 2009 and 2010.

Asia continues decent growth but also signs of cooling

In Asia data is still strong, although not as strong as in the first half of 2009. Japanese industrial production rose further and production plans point to further strong growth in the coming months, but growth rates are levelling off a bit in line with our expectations. The Tankan survey and PMI data also confirmed robust activity. Finally, exports in South Korea - the first country to report September data - showed a continued rise (see chart).

Central banks continue cautious tone - although more mixed

In Euroland the main event was the 12-month tender which pointed to some improvement in money markets. Demand was only EUR75.2bn whereas estimates had ranged between EUR100bn and EUR200bn. Comments from the ECB this week continued on a cautious note, signalling that it will be a while before exit strategies are brought to the table.

Comments from the Fed are becoming increasingly mixed with the hawks talking more about the need to raise rates earlier this time. But history tells us that you should mainly listen to Chairman Ben Bernanke and Vice Chairman Donald Kohn. Both of them sounded quite cautious and signalled that rates will be kept low for a very long time.

Market movers ahead


  • Next week will be very quiet in the US. ISM non-manufacturing will be released on Monday and we look for a rise to 50.5 as it is expected to catch up with the ISM manufacturing index (see chart). Service spending has also risen recently and the transport sector should benefit from rising production. Fed chairman Bernanke will speak Friday, which might be interesting after the ISM and payroll data. We expect him to sound cautious on the outlook.
  • In Euroland next week the ECB will hold the refinancing rate unchanged, it will not announce any new measures and it will also not begin to announce future rate hikes. Still the press conference might provide insight in how the ECB interprets this week's 12-month auction and we might get a few more hints about how long the ECB is willing to keep rates at record lows. German production is set to have increased in August (1.8 % m/m) while we expect a small setback in German orders (-0.4 % m/m) since July was artificially high due to a large military order.
  • There is a light calendar in Asia next week. In Japan focus will be on August machinery orders, which should give us an indication where domestic capital expenditures are heading. In addition the new DPJ coalition government is expected to announce new plans for assistance to small and medium-sized companies by the end of the week. These plans might include a debt moratorium. In Indonesia the central bank is expected to keep its leading interest rate unchanged at this week's monetary meeting. No major releases are planned in China.
  • In the FX market all eyes are on the G7 meeting during the weekend. The main issue is whether the strong euro (weak dollar) will be discussed. In fact we might not even see a statement this time after the G20 has become more important. All in all we doubt we will see a significant impact on the FX market.


  • Industrial orders and production are on the agenda in Sweden. It is likely to be more important than usual as production should soon start to rise following in the footsteps of rising orders and stronger PMI data.
  • In Norway attention turns to inflation that is expected to trend lower from August.

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