Monday, November 30, 2009

Weekly Focus: Sweet Data, Sour Markets

Global update
  • News about the Dubai debt problems and the devaluation in Vietnam have shaken markets.
  • Thin trading and year-end position squaring are amplifying the reaction.
  • US data increases the confidence in a sustained recovery on positive news on spending and job markets.
  • German ifo and Euroland PMI continued up indicating above-trend growth into next year. Further signs of recovery broadening to the service sector.
  • Strong Japanese exports and the third consecutive decline in unemployment indicate that the recovery is becoming more self propelling.
Market movers ahead
  • Global PMIs will be released next week. Improvement will continue but be slower and more widespread.
  • In US the labour market report is expected to show a deceleration in job losses.
  • ECB meeting with focus on exit strategies and new staff growth projections.
  • In China focus will be on the Economic Work Conference.
  • In Norway retail sales, credit indictor and PMI are on the agenda.
  • In Sweden focus will be on Riksbank communication.
  • New global forecasts from Danske Bank.

Global update: Sweet data, sour markets

A Greek tragedy in Dubai
During the past week incoming data has with few exceptions revealed progress in the economic recovery in almost every region of the globe. Even so, risk appetite has taken a hit over the past few days. News about Dubai and Greek debt problems and the devaluation in Vietnam during the week seems to have shaken the markets. This has - at least temporarily - brought back investors from the liquidity-Nirvana.

While the Greek trouble is a well-known fact and has been rumbling for a long time, the debt problems out of the Dubai building societies have been as striking as lightning from a blue sky. The debt problems have in particular hit emerging markets, but are also weighing on credit spreads as some of the big Western banks may have money involved. Until more clarity about any potential casualties has emerged, this is likely to be a market theme (see Flash Comment: EMEA: Dubai concerns weigh on markets).

Although the timing took the markets by surprise, Vietnam's devaluation is really not a big surprise and it was already reflected in the considerable gap between the official exchange rate and the black market exchange rate. Vietnam's real problem is overheating. Stimulus has been overdone and Vietnam now needs to tighten monetary and fiscal policy considerably, and by itself a devaluation is certainly not a solution to this problem.
Beneath this week's event is the fact that markets are getting thinner and easier to scare ahead of year-end. Equity trading volumes have been declining over recent weeks and investors are moving money into safer short-term fixed income markets or cash to lock in profits and dress balance sheets. Moreover, the risky asset markets are still scrutinising over-sustainability of the recovery and much has already been priced in. In the current environment, one should not be surprised to see bumpy trading towards year-end. Data provides confidence in a sustained recovery.

The good news this week is that the incoming data has increased our confidence that the recovery will be sustained.

In the US, data shows that consumer demand is continuing to improve - also outside cars. Another sign of this is the improvement in home sales over this year, where almost half of the decline has been taken back.
But this was not the only good news for the US consumer. The recent data revealed an upward revision of the personal savings rate of about a percentage point to 4.4% as income growth in Q2 and Q3 was stronger than initially estimated. This implies that households have completed more of the adjustment than initially anticipated and the downside risk to the recovery from an abrupt increase in the savings rate has diminished. Finally, the US labour market is now showing very promising signs of stabilisation with claims data moving rapidly lower (see US section).

In Europe, the German ifo and flash PMI improved further to levels that indicate growth above trend in Q4 and Q1. Indeed, the continued improvement in the service PMIs suggests that the positive dynamics are getting a broader traction.

In Asia, Japan delivered good news. Very strong export data suggests that global industry and trade continue to recover. Furthermore, the Japanese unemployment rate declined for a third month, indicating that the recovery has now become self-propelling.

Finally, GDP data out of Norway and Sweden shows that both economies are out of recession.

Market movers ahead

  • We generally look for positive surprises for the market in next week's US data. The most important event is the employment report for November. Claims data signal that job stabilisation is drawing closer and we look for a positive surprise with job losses of some 50,000 and the unemployment rate edging back down to 10.1%. The ISM data for November is set to be interesting as well. Local surveys have been mixed and we look for a flat reading in the manufacturing index. The non-manufacturing index is set to catch up indicating a broadening of the recovery. Finally, Chicago PMI, pending home sales, vehicle sales and jobless claims will be interesting.
  • In Euroland the ECB Governing Council meeting is by far the most interesting event next week. Not only are we set to get new ECB staff projections and information on whether the ECB will add a spread at the December 12-month auction and Jean- Claude Trichet has promised to give further details on the exit strategy. A spread at the December auction seems unlikely. The market will react negatively if a spread is added as it is not generally anticipated. We believe the ECB will continue with one-, three- and six-month auctions, but discontinue with the 12-month auctions.
  • In Asia the focus this week is expected to be on the release of manufacturing PMIs across Asia. Overall we expect manufacturing PMIs to continue to improve, although the pace of the improvement is slowing and we could see a peak in the coming months suggesting industrial activity will lose some momentum in early-2010. In China the government is expected to commence its important Economic Work Conference next week, where the priorities for economic policy next year will be set. We will be looking for signs on how the government balances growth and inflation risks and of course if it has anything to say about exchange rate policy.
  • In Norway retail sales, credit indictor and PMI takes centre stage. We still believe the Norwegian PMI will stay below 50 underlining that the Norwegian manufacturing sector is still struggling despite the rest of the economy booming.
  • In Sweden macro data in the upcoming week is not likely to rock the market. Rather, focus will be put on the Riksbank's communication. There are two speeches scheduled and we may get some further information as to the prospects for a less lax policy going forward.

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Danske Bank
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