Sunday, October 24, 2010

Weekly Focus : Double−dip fears on the retreat

Market Movers Ahead

  • The G20 meeting is not expected to provide any meaningful results. The G20 Summit in November will be the key event for international co-operation. 
  • Focus continues to be on Fed speeches ahead of the 3 November FOMC meeting. 
  • US housing data, preliminary Q3 GDP and durable goods orders provide more input to the short-term growth path.
  • ECB has allotment on a 3 months refinancing operation, which matures after the year turn. This could increase excess liquidity and send rates lower.
  • A decline in the Swiss KOF indicators will point to weaker growth. 
  • We look for a rate hike from the Riksbank of 25bp and no change to the repo path. 
  • Norges Bank is expected to keep rates unchanged and make a downward adjustment of the repo path of about 20bp.
Global Update

  • The Fed is likely to add further stimulus at the November meeting, but it is still not clear how it will look. 
  • Germany is still going strong, pointing to a more robust recovery than expected. Euroland seems to be coping fine with the stronger euro, and fears of a double-dip are on the retreat.
  • Chinese growth slowed in Q3 but is already recovering

In this week’s Focus article, we take a closer look at China’s exchange rate policy ahead of the important G20 meetings. We argue that because of higher inflation, the weak US dollar and political pressure, China will probably appreciate the yuan substantially in the coming months.

Market movers ahead


  • Next week’s data release calendar for the US starts off with existing home sales, followed by figures for new home sales on Wednesday. Data for housing figures has been mixed lately, though moving at very low levels. Given the continued increase in pending home sales and the increase in NAHB, we expect existing home sales to show another increase. Once again the week will be characterised by a number of Fed speeches, running up to the FOMC meeting on 2-3 November.
We will also get data for durable goods orders for September. Core capital goods orders have been somewhat unstable over the past few months, but showed good gains last month. Hopefully this will continue on Wednesday, indicating a positive momentum in business capex. On the same note, we will get first estimates for both Q3 GDP and private consumption. We expect private consumption figures to be strong, increasing by 2.6% q/q AR, whereas we expect GDP growth to be more moderate, up by 1.9% q/q AR, due to another significant drag from net exports.
Finally, we expect consumer confidence measures to increase, driven by the recent rebound in equity markets. We expect University of Michigan confidence to increase slightly to 68.2, while conference board confidence is expected to land at 49.6, up from 48.5. In addition, we expect Chicago PMI to surprise on the upside, following the recent gains to other local surveys.
  • In Euroland the ECB gives full allotment on a three-month auction (Wednesday). This is the first auction to run into next year and it is thus possible that banks will use this opportunity to get extra liquidity. We believe that this could temporarily give some downward pressure on EONIA O/N. The European Council (Thursday and Friday) will discuss the final report of the Task Force on Economic Governance and decide how to implement the report’s conclusions. The monetary developments (Wednesday) in September should get some attention too. If bank lending continues to recover, this will confirm that we have seen a turning point and this could push rates higher as we then should expect a shorter pause in the ECB’s exit strategy for non-standard measures than otherwise. Industrial new orders in August (Monday) will show a strong increase driven by a sharp improvement in Italy, Spain and Germany.
This is old news, but we might nevertheless see a bit of positive market reaction – will EUR/USD go higher again? It seems quite likely. National flash inflation data for October might increase slightly as a result of increasing global food prices. German  unemployment (Thursday) will remain unchanged at 7.5% though the underlying trend is still downward.
  • UK: GDP growth is likely to have been modest in Q3 and we expect a small advance of 0.3% q/q. Numbers will probably underline that economic growth remains subdued and lots of slack persists. On Thursday, the government spelled out how it intends to save GBP83bn – e.g. by cutting 490,000 jobs in the public sector (8% decline). The austerity measures are in our view justified as the UK was on an unsustainable debt path earlier in the year and in serious danger of losing its AAA-rating. That risk has clearly diminished but the years ahead will be painful and growth will stay below trend. Nationwide house prices will probably continue the declining trend.

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