Sunday, November 8, 2009

Weekly Focus: More Short-Term Strength

Global update
  • Global PMI increased to 55.7 in October indicating a further strengthening of global growth in the next couple of quarters.
  • Signs of a recovery in domestic demand are emerging, but the markets are still questioning the sustainability of the recovery in the developed countries.
  • BoE expanded asset purchases slightly less than expected and was slightly more optimistic in its rhetoric on the economy. BoE is not likely to deliver more QE.
  • ECB kept rates on hold and was slightly more hawkish than expected. Trichet signalled that the 12-month auction in December could be the last with full allotment.
  • Fed made no changes to its policy and continued to signal exceptionally low rates for an extended period.
Market movers ahead
  • In US focus is on Fed's Senior Loan Officer Opinion survey and Michigan Consumer confidence.
  • In Euroland Q3 GDP, IP and ZEW are on the agenda.
  • Asia will have a busy week, with most important indicators being published in China.
  • In Sweden CPI and industrial data are on the agenda.
  • In Norway CPI and PPI data as well as a couple of Gjedrem speeches will attract attention.

Global update

Still upbeat
Global leading indicators continue to look strong (see Global Business Cycle Monitor, October). Global PMI climbed further to 55.7, the highest level since June 2007, indicating global growth above trend. OECD leading indicators are also rising sharply pointing to more strength in coming 3-6 months. However, some of the very early indicators such as the order-inventory balances from the PMI statistics are starting to level off, which is in line with our expectation that global growth will level off after Q1 2010. On the positive side in the short term is also the sharp pick-up in US home sales. Although partly boosted by the tax credit for first-time buyers it will help to clear inventories fast.
Sustainability indicators also improving - although more mixed
PMI and leading indicators tell us something about the short-term growth picture, but do not say much about the sustainability of the pick-up. As we expect leading indicators to peak around March/April due to the dynamics of the inventory cycle, the market will increasingly look for signs that final demand growth picks up.
We believe we need to see US consumption growth around 2% in 2010 for growth to be sustained. For this to happen a) employment growth must pick up, b) oil prices must not rise too much and too fast (see last week's Weekly Focus) and c) the savings ratio must not rise too fast. During the past weeks we have seen some encouraging signs, although not all indicators support the sustainability case.
On the positive side we note the following:
  • US consumption growth excluding cars rose around 2% in Q3. Hence the improvement has not (as some suggest) been entirely due to the cash-for-clunkers scheme boosting car sales. It seems that the effect of the tax cuts during spring has come with a delay giving a boost to consumption in H2 2009.
  • Car sales in October rose stronger than expected to 10.45m vehicles up from 9.2m vehicles in September. Hence fears that car sales would fall back sharply after the cash-for-clunkers scheme ran out have so far been dismissed. On the contrary, the data suggest an improvement in the underlying trend.
  • Employment indicators are starting to improve. The ISM employment index posted a decent rise from 46.2 in September to 53.1 in October and the weekly jobless claims continue the downward trend falling to 512k this week. It peaked at 674k in March.
It has not all been positive, though.
  • Consumer confidence fell back in October and continues to be at a very low level. Although the correlation with private consumption is not very close, it still suggests that consumers are very vulnerable .
  • Oil prices have pushed higher to USD80 during the past month. As we wrote in Weekly Focus last week we are getting worried that the global growth pick-up fuels a self-destructive rise in oil prices leading to a renewed set back in US consumption early next year.
On balance we are still cautiously optimistic that the kick-start of the economy will trigger job growth and make the recovery sustainable. With risky assets having risen sharply this year this will become increasingly important.

Market movers ahead

  • US: The Q4 Senior Loan Officer Opinion Survey is the most important event, as it will provide information about the development in US credit conditions. Apart from that the preliminary Michigan survey for November is the only key figure of interest.
  • Euroland: Third quarter GDP figures out of Europe are expected to arrive at a solid 0.4% q/q, with France and Germany likely to outperform the Euroland composite. Industrial production data for October are expected to be solid with a 1.6% m/m progress in Germany and a 1.4% m/m reading in Euroland. ZEW will be the first important sentiment indicator for November. We look for a small decline to 54.4 from 56.0 driven partly by the setback in DAX.
  • In Asia China will be in focus next week, when most important economic data for October will be released. Chinese growth appears to be accelerating slightly again into Q4 on the back of both stronger exports and some improvement in manufacturing investments. Deflationary pressure continues to ease, but the year-on-year increase in consumer prices will remain in negative territory in October.
  • In Denmark the current account deficit for September, CPI for October and Q3 construction data are due next week.
  • There will be CPI and industrial data for October in Sweden, but neither is likely to have much market impact.
  • In Norway October CPI as well as a couple of Gjedrem speeches will attract attention. We look for underlying inflation to be unchanged at 2.4% in October.

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