Sunday, December 6, 2009

Weekly Focus: Goodbye Dubai - Hello X-mas

Market movers ahead
  • US retail sales will be the mover of the week. We expect a negative surprise.
  • German factory orders and industrial production should confirm that the recovery in Germany is continuing at a strong pace.
  • Chinese production data will look strong on the surface.
  • Central bank meetings in the UK, Switzerland and Canada should not contain major surprises.
  • In Sweden industrial production and inflation is set to rise.
Global Update
  • The Dubai crisis has faded, but it has sent a warning to financial markets that event risk is still there.
  • Global PMI still points to robust growth in the short term, but some indicators suggest global growth will peak in Q1 2010.
  • US jobless claims fell steeply, pointing to US job growth around the corner.
  • ECB is heading for the exit underpinning our view that it will hike ahead of Fed this time.
  • Bank of Japan is trying to draw a line in the sand for JPY.
  • Global growth is likely to remain strong in the near term, but will moderate from Q2 and onwards. We give a summary of our new global forecasts presented in Global Scenarios last week.
  • Competitiveness in Denmark has deteriorated badly, rendering it difficult for the country to benefit from the global recovery.

Market movers ahead

Global movers
  • US consumers will be in focus in the coming week and the main event will be retail sales data. The strength of private consumption in the US has surprised on the upside in recent months. Data received so far is pointing to another increase in retail sales in November but mainly driven by strong auto sales and a rise in nominal gasoline sales. Core retail sales outside auto, food, energy and building materials on the contrary look set for a decline. Disappointing data on chain store sales suggests that strong sales on Black Friday were not enough to offset weakness leading up to the Thanksgiving holiday. Later in the week the first December reading of the University of Michigan consumer sentiment should give an indication of the mood ahead of Christmas shopping. We are looking for a modest improvement. Finally, Bernanke, Dudley and Duke are scheduled to talk in the last round of speeches before the FOMC rate decision on 16 December.
  • In Euroland German industrial orders on Monday will need to show an increase above 1.0% in October in order to confirm that the German rebound hasn't lost steam. German industrial production due out on Tuesday could be somewhat more downbeat.
  • In the UK the Bank of England is due to meet next week. It is unlikely to make any changes to policy. The message in the statement is also not expected to be changed much as data has evolved broadly as expected since the last meeting. The pre-budget report is likely to attract some attention given much focus on the poor state of UK public finances. However, it is probably too early for the government to make cutbacks as the economic recovery is still too fragile. But there will be increasing pressure to explain the exit strategy.
  • The central bank in Switzerland SNB is due to meet on Thursday. While leading activity indicators have reached pre-crisis levels, there are still no inflationary signs to be found. This should provide the SNB with time to assess the sustainability of the recovery and we therefore expect no marked policy change at Thursday's meeting - hence, we look for an unchanged three-month LIBOR target and for the SNB to reiterate its stance on the Swiss franc. That said, the SNB is expected to turn less dovish, which could easily outweigh communication on currency intervention, and hence support the franc - though, at current levels the downside in EUR/CHF should be limited.
  • At Tuesday's Bank of Canada meeting, rates will be kept on hold and the statement will likely reiterate the dangers of CAD strength, and the commitment to keep rates unchanged until mid-2010.
  • China is due to release most economic data for November this week. Due to the base impact from lower activity last year, industrial production should look extraordinarily strong - up close to 19% y/y. Underlying growth in industrial production in Q4 is picking up at some pace following a temporary breather in Q3. Inflation should be back in positive territory in November - partly because the base impact from higher commodity prices last year have started to wane. Year-on-year inflation should increase substantially in the coming months and should exceed 3% by April 2010.
  • In Japan data for private capital spending and inventories suggests Q3 GDP growth will be revised down substantially to 3.1% q/q AR from 4.8% q/q AR in the first release.
Scandi movers
  • In Denmark the current account deficit is likely to show a decline from September to October. Inflation has bottomed as rising oil prices will pull up inflation in the coming months. We expect inflation to hit 1.2% in November.
  • The week ahead in Sweden is a busy one, with industrial data, the GDP indicator and inflation releases all due. We expect inflation to continue its ascent from deflationary territory thanks to statistical base effects from interest rates and energy. However, even excluding these statistical aberrations, we believe that inflation will rise somewhat more than the Riksbank is currently forecasting. As for activity data, anything but another strong consecutive rise in industrial production poses a severe challenge to our view of a recoil in growth due to, inter alia, inventory rebuilding. On this last note we should also get some input when the GDP indicator (activity index) is published.
  • In Norway the coming week brings CPI data for November. We expect underlying inflation to climb to 2.5% y/y, driven by base effects. We still expect a stronger NOK and lower growth in costs to result in falling inflation through to the summer. Also due are industrial production figures for October and the final regional network report of the year from Norges Bank. We expect these indicators to continue to rise slowly, but cannot rule out the weak PMI data soon being reflected in lower industrial production figures.

Global update: Goodbye Dubai - hello X-mas

Another ride in the financial rollercoaster
The financial scene changed significantly this week as focus turned away from Dubai to recovery hopes and signs of financial healing. As a demonstration of the latter Bank of America (BoA) was able to raise a significant amount of capital in order to pay back the government. BoA raised USD19.3bn in the biggest sale of stock by a US company since 2000.

Although the Dubai crisis is fading, it serves as a reminder that there are still weaknesses in the system. The effects will be limited, but too many Dubai incidents could erode confidence among market participants and business leaders. And confidence is key to unleash pent-up demand in the global economy and make companies invest and create jobs again. Keep a close eye on US and European commercial real estate where losses could be higher than currently expected.
Market activity is likely to slow down further towards year-end and focus will turn to the possible Xmas rally in equities that often occurs around the holiday. The quick rebound from the Dubai crisis might encourage investors in the short term that the market is getting more resilient and hence attract even more money.

Global PMI held on to decent levels in November pointing to continued strong growth, although the picture was a bit mixed with disappointments in some countries. In general leading indicators continue to support short-term strength in the global economy, but with signs that growth will peak in Q1 (see our Global Business Cycle Monitor released this week).

A mixed bag out of the US
The US manufacturing ISM index took a dip in November, but details suggest that the underlying upward trend remains intact. The new orders index rebounded while inventories declined, leaving the gap between the orders and inventories index wider. This indicates that production gains will be needed going forward as orders are unlikely to be filled from increasingly lean stockpiles. On top of this, our hard data based inventory demand ratio is currently sending the most positive signal for the ISM seen in the past 40 years. We expect that industrial production growth will remain strong over the coming months and look for the ISM index to reach 60 within the next three months. That said, the path is likely to become more uneven from here and the pace of improvement is likely to slow.

Turning from supply to demand, the strength of US consumer spending over the past months has been a surprise to us, but the past week provided mixed news on the consumer front. On the positive side auto sales increased for the second month in a row after the pay-back from the cash-for-clunkers in September. Light vehicle sales are now back at their highest level since October 2008 (excluding the cash-for-clunker spike in auto sales) and there is still plenty of pent-up demand waiting to be released. Chain store sales on the other hand disappointed which suggests that sales outside autos saw a setback in November. On a final note, jobless claims dropped sharply again, which suggests that we could see job growth soon which will provide much needed support for the consumers.

ECB heading for the exit
Focus is increasingly on exit strategies and ECB this week took the first steps towards an exit. ECB announced a gradual withdrawal of liquidity measures next year with the 12mth auctions ending in December and 6mth auctions ending in March (see Flash Comment - ECB: Heading for the exit). ECB's move underpins our view that it is likely to move faster than Fed in withdrawing some of the extraordinary stimulus. There are many reasons for this, but the most important ones are that 1) ECB is more worried about creating new bubbles, 2) the slack in the Euroland economy is viewed as much smaller than Fed's view of slack in the US economy and 3) ECB focuses on headline inflation, which will go up soon, whereas Fed focuses on core inflation, which will continue down.

Drawing a line in the sand on the JPY
In Japan the government and Bank of Japan (BoJ) are trying to draw a line in the sand for JPY following its recent appreciation. On Tuesday BoJ held an emergency meeting. In a press statement BoJ said that “instability on the foreign exchange markets” is threatening the recovery. BoJ introduced a new borrowing facility that allows banks to borrow liquidity for 3-month liquidity at a 0.1% interest rate. Currently money market rates in Japan are slightly higher than in the US, and the hope is probably that closing or narrowing this gap might help to stabilize JPY. So far it appears Japan's attempts to draw a line have been successful. Should JPY appreciate significantly further easing measures from BoJ are possible and at some stage Japan will probably intervene in the FX market.

Some of last week's economic data give some support to BoJ's concerns about the impact from the stronger JPY on the economy. Manufacturing PMI surprisingly declined with particularly export orders showing signs of weakness. In addition, industrial production was weaker than expected in October, but with productions plans for the rest of the year looking strong, industrial activity for Q4 as a whole still looks solid. However, the weak manufacturing PMI suggests we might see a substantial slowdown in Q1 2010.

In the rest of Asia manufacturing PMIs were mixed. Manufacturing PMIs continue to improve, albeit only slightly, while manufacturing PMIs have now peaked outside China. This is consistent with our view that growth in Asia will continue to be very strong in Q4, but should slow substantially in Q1 next year.

UK PMI disappointed while Swiss GDP confirmed recession exit
UK PMI for the manufacturing sector was a major disappointment as it dropped to 51.8 in November from 53.4 in October (consensus 54). Service PMI also fell slightly but generally hangs on to high levels. This throws a bit of cold water on the manufacturing recovery story and puts more focus on next week's industrial production data.

In Switzerland, economic data continue to improve and, as expected, GDP numbers released on Tuesday showed that Switzerland escaped its year-long recession in Q3. The GDP report was overall quite strong and will leave the Swiss National Bank (SNB) with increasing pressure to scale back its emergency policy setting. However, while leading activity indicators have reached pre-crisis levels, there are still no inflationary signs to be found. This should provide the SNB with time to assess the sustainability of the recovery and we therefore expect no marked policy change at Thursday's SNB meeting (see Market Movers for more on next week's meeting).

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