Sunday, January 17, 2010

Weekly Focus : Testing Times for Greece - and the Euro

Market movers ahead
  • Quiet week coming up with mostly tier-2 data in the US. We expect a fall in housing starts, while the Philadelphia Fed survey should rise further.
  • In Euroland Flash PMI and German ZEW are up for release.
  • It's the big week in China with data on GDP, industrial production, retail sales and inflation.
  • In Scandinavia we expect Danish consumer confidence to climb higher. No big movers in Sweden and Norway.
Global update
  • US retail sales disappointed, but still show underlying improvement.
  • Greece put forward an ambitious plan to reduce its budget deficit, but it remains to be seen whether and how it will be implemented.
  • China surprised by raising the reserve requirement ratio earlier than expected. Monetary policy is shifting focus in order to prevent inflation and bubbles.
  • In the first focus article we look at the outlook for oil prices. The negative feedback between oil and growth will keep a lid on oil prices and we look for an average price of USD83 in 2010.
  • In the second focus article we take the temperature on the Irish economy. The Irish government is taking harsh medicine in terms of harsh budget cuts. But positive signs of a peak in unemployment are emerging.

Market movers ahead

Global movers
US: The data calendar is relatively thin in the coming week, but there are a few releases worth keeping an eye on. Firstly, we will receive an update on the state of the housing market. The NAHB housing market index has remained steady at very low levels since May last year. We expect the index to move slightly higher in January to 17. We expect a setback in housing starts following the jump in November as unusually cold weather and snow storms have put a brake on construction. We look for a decline in building permits as well.

Secondly, inflation data are likely to show modest inflation pressure in producer prices and finally, we expect the Philly Fed to increase further. This is the first regional PMI for January and hence the first hint on developments in the national ISM manufacturing released later this month. However, bear in mind that the regional surveys have been lagging the ISM lately. Furthermore, the earnings season in the US has kicked off and the stream of earnings reports will continue next week.

Euroland: Next week European confidence indicators will be in focus. The German ZEW economic sentiment indicator to be published Tuesday is expected to increase to 53.2 and the ZEW current situation assessment should increase notably too. Euroland PMIs out Friday are also expected to increase further. Although we do expect that the speed of improvements will soon slow down it is likely that both the Euroland manufacturing and the service PMI will be able to keep the pace of increases seen in November and December. We would very much like to see notable increases in the PMI new orders indices. German PMIs are expected to increase the most. Disappointing new orders in several countries indicate that Euroland industrial new orders in November to be published Friday seems to have increased just 0.3%.

Asia: All eyes will be on China next week, when it will release most economic data for December and not least GDP growth for Q4 09. The surprisingly strong export data for December and the continued improvement in China's two manufacturing PMIs suggest that the December data will be strong and that China's growth again started to accelerate in late 2009. We expect a solid 2.6% m/m gain in industrial production. Despite the strong finish growth in industrial production for Q4 as a whole will only be slightly higher than in Q3, and hence it appears GDP growth in Q4 has only accelerated slightly to 9.5% q/q AR from around 8% q/q AR. It is slightly less than we expected, but on the other hand, it now looks as if Q1 10 could be stronger on the back of the strong finish last year.

It will be particularly interesting to see if there are any nasty surprises in the CPI inflation data in light of Peoples Bank of China's surprising hike in the reserve requirement for banks last week. Several indicators like the price component in manufacturing PMI suggest there might be.

Global update: Testing times

Mixed signals
This week retail sales in the US fell short of expectations while industrial production in Euroland surprised to the upside. On a particularly positive note, Chinese exports surged strongly in December. Although data have been somewhat mixed recently the overall picture is that the global recovery remains on track. The rebound has been particularly strong in Asia and this week Peoples Bank of China embarked on monetary tightening by increasing the reserve requirement ratio for commercial banks by 50bp. Stock markets experienced a slight setback in the beginning of the week, but quickly returned to the rising trend.

Greece got a lot of attention this week. First the European Commission published a very critical report on the quality of Greek statistics, then the Greek finance minister announced ambitious targets for the stability programme, but did not give much detail on how to achieve them and finally we had an ECB Governing Council meeting where Trichet said that Greece leaving the euro was an “absurd hypothesis”, but also that the ECB will not change its collateral framework for one country. Spreads widened during the week to around 275bp for Greek 10-year government bonds.

US retail sales fell short of expectations
December retail sales fell short of consensus expectations by a large margin, but upward revisions to November sales countered some of the disappointment. Core sales declined as well, but the 3-month trend is still up. On top of this, much of the reported gain in holiday sales arrived late in December and is thus likely to show up in January data. Real consumption is tracking 1.8% q/q AR in Q4, not far from our forecast. We expect that the pace of job growth in H1 will be sufficient to support aggregate household incomes and foster a continued although moderate upward trend in spending.

Otherwise, the week has been dominated by Fed speeches. Several Fed members have been in the press and their views have differed markedly. A general observation is, that the most hawkish FOMC members are non-voters while voters strike a more dovish tone. There seems to be pronounced disagreement within the committee on the Fed's asset purchase programme. While some, including New York Fed president Dudley, want the Fed to have a flexible stance on especially the MBS purchase programme, i.e. the possibility to extend it if deemed necessary, others are not willing to move away from the planned end date in March.

All eyes are still on Greece
This week we got the first details of the Greek stability plan, but Greek government bond spreads just widened further. The plan is very ambitious. Greece intends to bring the deficit down from around 13% of GDP last year to just 2.8% of GDP in 2012. However, we see three major problems: 1) Good intentions are not enough. We lack details on how the deficit will be reduced. 2) The European Commission report on Greek government deficit and debt statistics published this week said that Greek fiscal statistics (and macroeconomic statistics in general) lack quality and further revisions of Greek government debt and deficit cannot be ruled out. Historically there has been a tendency for upward revisions. 3) Public support for tough choices is still lacking. Luckily the Greek government is only 101 days old, so it does not need to focus much on the next elections, but to implement the stability plan will be so demanding a task that we should expect to see strikes etc.

This week was also ECB week. But even the ECB press conference focused on Greece. Trichet warned that high and sharply rising fiscal imbalances could trigger negative market sentiment and result in higher funding costs. Some remarks were of particular relevance for Greece. Not least on the need for reliable statistics. On the question whether Greece or any other country could leave the euro area Trichet replied that “I do not comment on absurd hypothesis”. We did not get any new information on the exit strategy. As expected Trichet indicated that we will have to wait for the March meeting for that. The view on economic development was only slightly more positive than at the previous meeting. Trichet acknowledged that growth remained in positive territory in Q4. Looking forward he noted that the withdrawal of support from temporary measures and low wage and consumption growth, we will only see moderate growth this year.

Euroland industrial production increased 1.0 % m/m in November and the decline in October was revised up from -0.6% m/m to -0.3% m/m. Euroland industrial production has now increased 4.7 % since it bottomed in April.

China starts monetary tightening
In China Peoples Bank of China (PBoC) this week started the monetary tightening by increasing the reserve requirement ratio for commercial banks by 50bp, even though this was only a cautious first step. It is a sign that focus in monetary policy is gradually shifting from mainly supporting growth to containing inflation and preventing bubbles from emerging on stock and property markets. In December China's exports surged more than 11.9% m/m (17.7% y/y) and it now appears that exports are returning to pre-crisis levels. A shift in monetary policy towards containing inflation and a substantial recovery in exports are in our opinion two necessary conditions for China to resume its gradual appreciation of CNY. Hence PBoC's move last week supports our case that China will resume its gradual appreciation of CNY in Q2 10. We still do not expect PBoC to raise its leading interest rate until Q2 10, although the likelihood it could happen sooner has increased.

It now appears that India will be the next major Asian country to follow China's monetary tightening. As in China there are signs of growth accelerating in late 2009 with data released during the past week showing a solid 3.5% m/m increase. On the other hand, wholesale inflation accelerated (the main inflation measure in India) increased to 7.3% y/y in December from 4.8% y/y in the previous month. We now expect the Reserve Bank of India to raise the reserve requirement by 50bp on 29 January and increase its leading interest rate by 25bp no later than April.

In Japan data have been a bit mixed. The Economic Watchers business survey improved in December for the first time in three months and in line with manufacturing PMI suggests that the recent deterioration in business confidence has stopped. On the other hand, domestic machinery orders plunged by 11.3% m/m in November. However, machinery orders are a very volatile series and if we look besides short term volatility the overall picture remains flat domestic machinery orders.

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