Monday, November 16, 2009

Weekly Focus: German Locomotive at Full Steam

Global update
  • China took centre stage in the past week. Economic data showed an encouraging picture of a rebalancing of the recovery from public demand towards private demand and exports.
  • Pressure for Yuan appreciation is rising from many sides.
  • US credit is still being tightened but the pace is slowing down.
  • Euroland has left the recession with Germany taking the lead. More positive growth data is in the pipeline in the coming quarters, forcing ECB to revise up their growth forecasts.
  • The Danish budget for 2010 was expensive in our mind and on the border of what should be advised.
  • In Sweden, industrial production data was revised substantially to show that industrial production had bottomed a few months ago rather than continuing down.
Market movers ahead
  • US retail sales take centre stage next week. The US consumer is at the centre of the sustainability debate and hence the data will be important for sentiment surrounding the recovery. Also look out for speeches by Fed chairman Bernanke and vice president Kohn.
  • Euroland inflation data to show a further decline in core inflation.
  • Data on Q3 GDP in Japan should show another decent increase of 3.9% q/q.
  • Little news out of Scandi. Swedish data on house prices and unemployment are the main ones to watch.

Global update: Appreciating rebalancing

Chinese recovery is getting more balanced...
China stole the headlines this week with the flood of monthly data and rising pressure for appreciation of the Renminbi.

To start with the economic data it generally confirmed a picture of continued robust growth and a gradual rebalancing of the recovery. Private domestic demand and exports are substituting public demand as the main growth engines. The export engine has been turned on again with exports to both the US and Europe now recovering significantly. On the other hand, the impact from fiscal stimuli has started to wane as public investment in particular has slowed substantially. However, real estate investment appears to be resilient on the back of the recovering housing market. Retail sales was the biggest positive surprise in October, up 2% m/m, underlining that private consumption remains strong.

There is still a need for further rebalancing with private consumption playing an increasing role in the Chinese economy. However, this process will take some time as it requires social reforms which are being implemented over the coming years. But for the recovery to be sustainable the current rebalancing from mostly publicly driven demand to private demand and exports is a very positive sign.

... while pressure for yuan appreciation intensifies
Political pressure on China from within Asia has increased with the finance ministers from both Indonesia and Singapore calling for yuan appreciation, and the APEC finance ministers pledging to embrace flexible exchange rates. The People's Bank of China in its quarterly prepared the ground for a change in China's exchange rate policy. With China's exports recovering, the leadership is sounding more confident about growth, and with political pressure intensifying, we believe the conditions are ripe for a change in China's exchange rate policy. We still expect the gradual appreciation of the yuan to be resumed by mid-2010. However, the risk that it could start earlier has increased. A major one-off revaluation cannot be ruled out, while a complete float is highly unlikely.

Encouraging signs of labour market improvement
After the disappointing US payrolls report a week ago, focus continues to be on labour market data. It is absolutely paramount that the rising trend in unemployment globally is being halted if the current recovery is going to prove sustainable.

Fortunately we had some slightly encouraging news in this area during the week. In the US, the weekly jobless claims continued a path of decline as it fell to 12k to 502k last week. In the UK, unemployment in October was expected to rise by 20k but only rose 12.9k. This was the smallest rise in 17 months coming from monthly increases of 135k early in the year.

Exit strategies and rebalancing top the political agenda
Focus on the G20 meeting last week was on a time plan for measures to help rebalance the global economy and policy exits. According to this schedule, individual G20 countries will have to submit their economic plans by January 2010. On economic policy, it was agreed to maintain current stimuli to the global economy but that exit strategies should be prepared. IMF laid out seven principles for policy exit in a report prepared for the meeting.

Market movers ahead

  • The key economic data release in the US is retail sales for October. Last month saw some pay-back from the cash-for-clunkers boost. However, October auto unit sales data shows that auto sales have picked up again, returning to an underlying upward trend. Spending outside autos has also shown improvement lately and we expect this trend to have continued in October. On top of this, several FOMC members are due to speak with the most important being Bernanke and Kohn. The gradual journey towards the beginning of the phasing-out of extraordinary policy measures has started and Fed speakers might start to send some slightly less dovish signals in order to prepare markets for an eventual exit.
  • Very quiet in Euroland next week. Only data of interest is final inflation data which includes data on core inflation. This has trended down from 1.9% late last year to 1.2% in September and we look for a further decline to 1.0% in October.
  • In Asia focus will be on President Obama's visit to Asia that will include participation in the APEC summit this weekend and his first official visit to China on Monday and Tuesday. The US administration is using President Obama's Asian tour to increase the political pressure on China for letting the yuan appreciate. Hence, this will probably continue to dominate headlines in the coming week. Japan will release GDP growth for Q3 on Monday. We expect Japan GDP growth of 3.9% q/q AR to have remained the strongest among the G7 countries in Q3. The Bank of Japan has already published its plan for unwinding non-conventional easing, and hence there should be little news in connection with BoJ's monetary meeting on Friday.
  • Sweden: Data wise we are in for a rather slow week in Sweden. House prices are gaining more attention, since asset prices are a potential concern among policymakers. There will also be unemployment data, but that is not likely to move the market much.
  • No market movers in Denmark and Norway next week.

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