Monday, November 2, 2009

Weekly Focus: Mood Swings

Global update

  • The rise in the oil price is a cause for concern as it jeopardises the sustainability of US recovery.
  • US data was mixed with disappointments in consumer confidence and new home sales while GDP for Q3 posted a positive surprise, rising 3.5% in Q3. Markets tend to change mood frequently at the moment with the prevailing mixed picture.
  • Credit constraints are about to thaw in Euroland. According to the ECB's lending survey banks plan to ease credit to businesses in Q4.
  • There are more signs that the German labour market is turning. Is unemployment really falling?
  • Norges Bank was first to hike among the central banks in Europe. But it will likely take a while before they are joined by their European colleagues.
  • Swedish confidence numbers delivered positive surprises.

Market movers ahead

  • A busy week ahead with US ISM and non-farm payrolls taking centre stage. We look for further improvement in both.
  • Central bank meetings from the Fed and the ECB will also be in the spotlight. We don't expect significant changes in signals.
  • Only few things on the Scandi agenda. Denmark releases currency reserves and retail sales. Sweden is set to post PMI data while Norway has its credit growth indicator and industrial production on schedule.

Global update

Rising oil price poses risk for US consumer

One of the risks to the sustainability of the US recovery comes from the oil market. As highlighted in Global Scenarios (alternative scenario 2) a strong rise in oil prices can add headwind for the US consumer who is already struggling with rising unemployment, falling wage growth, a decline in wealth, credit restraints and a high debt level. The bar is therefore high for a consumer recovery. In our main scenario, the initial growth recovery in the business sector is strong enough to turn the labour market and start job creation in early 2010. This should take some pressure off the consumer and pave the way for a recovery in private consumption to around 2%. However, if oil prices rise too strongly the gain in incomes from employment could be eroded by higher energy cost. This could trigger a deeper slowdown during 2010 than we currently anticipate and would probably shake financial markets and policy makers.

So where is the threshold for the oil price? It is hard to tell as the tolerance for increases also depends on how fast the recovery in labour market comes through. However, in our view a run-up in oil prices to around USD100 early next year would jeopardize sustainability. Our forecast for the oil price (WTI) is USD82 in coming months and for oil prices to stay broadly around this level in 2010. The current momentum in global production and the weaker USD have put upward pressure on prices. However, inventories are high and there is plenty of capacity to increase oil production if needed so oil prices should be kept in check in 2010 – see Commodities Monthly.

Mixed data in US, Euroland credit to be eased in Q4

The past week again offered a mixed picture on US data. Consumer confidence slipped back for the second month in a row raising some doubts in the markets on the sustainability of the recovery. It may be related to the recent run-up in gasoline prices and serves as a warning of the fragility in consumption. GDP growth, however, surprised to the upside as the US economy grew 3.5% in Q3. As this is clearly above trend growth (2.5%), it should soon translate into a rise in employment. Housing data continued to be mixed with upward surprises in existing home sales and house prices, while new home sales disappointed. In Euroland the most interesting piece of information came from the ECB lending survey that continues to show a decreasing rate of credit tightening and expectations of easing credit standards for businesses in Q4. German unemployment surprised by falling 26k in October suggesting the labour market is starting to improve. In Japan industrial production rose strongly again and production plans point higher still.

Central bank leaders versus laggards

Norges Bank raised rates as expected, being the first country in Europe to take back stimulus. It might take a while before it is followed by other central banks in Europe though, as further stimulus cannot be ruled out from BoE and we don't expect a hike from ECB until June next year. Comments from ECB hawk Axel Weber confirmed that the bar for rate hikes from the ECB is probably lower than it is for the Federal Reserve. Weber said that the ECB won't wait for the labour market to rebound to raise rates and that monetary policy must be ahead of the curve and not behind. The leaders in the global exit from stimulus either come from the growth centre of the world – Asia – or commodity producers (Australia, Norway) that benefit strongly from the rising need for commodities in Asia. In India the central bank is starting to sow the seeds for an increase in rates soon. In China we look for a resumption of the gradual appreciation of the Yuan in mid-2010 and lending quota are likely be to tightened gradually early next year. At the other end of the spectrum we have the laggards that are the US and Japan where we don't foresee rate increases until late 2010 and 2011, respectively.

Market movers ahead


  • It is a heavy week in the US with ISM, non-farm payrolls and the FOMC meeting on the agenda. We expect ISM to be heading higher although the regional PMIs released so far point to a roughly unchanged ISM this time around. Taking into account the signal from our ISM models, based on various financial and economic data, we expect the ISM to rise to 54. Jobless claims data have trended downwards in recent weeks and we expect that to be reflected in next week's employment report. We look for a decline of 120K in payrolls. Regarding the FOMC meeting, there have been various media reports suggesting a change to the “rates exceptionally low for an extended period” phrase. We think it is too early for such a change, as the communication from central FOMC members has not shifted tune yet.
  • Euroland: The ECB will keep the refinancing rate unchanged at the Governing Council meeting. We expect that the tone at the press conference will be slightly more positive (again). Trichet might hint that the ECB intends to begin to roll back unconventional measures next year, but we do not expect him to announce a master plan or even give an indication of a schedule for the auctions next year. German industrial orders for September will be an important indication of how strong growth will be in Q4. We expect an above-consensus increase.
  • In Asia focus will be on the release of manufacturing PMI across Asia. Industrial production data for September have so far been strong across Asia suggesting some acceleration in industrial activity in late Q3. In addition there could be some focus on the release of FX reserves for October for several Asian countries including South Korea, Taiwan, Thailand and the Philippines. These data will give some idea of Asian central banks' intervention in the FX markets in October.


  • In Denmark Nationalbanken releases currency reserve data. We expect it to be broadly unchanged.
  • It will be a quiet week in Sweden. Only number of interest will be PMI October. PMI has risen to a fairly high level already and it will be interesting to see if it can sustain the current level.
  • Norway will release data for the credit indicator, industrial production and PMI. We look for further improvement in industrial data, whereas the credit growth indicator is expected to decline to 5.7%.

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