Sunday, November 28, 2010

Global Update : Encouraging signs from the US labour market

Global Update
Encouraging signs from the US labour market

It has been a short week in the US due to Thanksgiving but we did receive some
interesting data early on.
First, initial jobless claims surprised everyone by dropping to the lowest level since the
beginning of the recovery. In combination with the encouraging October employment
report and the fact that growth in the more labour-intensive service sector has accelerated,
it raises hopes that job growth is finally gaining some speed.

Second, the key theme in the minutes from the November FOMC meeting was the
disappointing progress in meeting the Fed’s dual mandate, especially the high
unemployment, which led to the decision of a second round of asset purchases. As
expected, members in the policy committee disagreed about the effects of quantitative
easing, but most saw the benefits as larger than the costs. The release also included
minutes from a conference call held on 15 October in which the FOMC discussed the
Fed’s communication, potential targeting of a term interest rate and how to conduct
further QE.

Finally, housing data continue to be weak with both existing and new home sales
stabilising at very low levels.

Debt crisis moves on
This week the sovereign debt crisis took centre stage again. The Irish government
formally applied for financial assistance from the EU and IMF last Sunday and it was
approved shortly after at an EU finance ministers’ emergency conference call. There are
still no details on the total size of the aid package, but rumours indicate that about
EUR85bn is likely. A substantial part of this will go to a fund for potential future capital
needs of the banking sector.

The relief rally was very short. Monday Moody’s announced that it expected to
downgrade Ireland’s sovereign debt and in addition The Greens, the junior partner in the
coalition government, called for general elections, which will be held early next year.
Tuesday the mood worsened when S&P downgraded Ireland’s sovereign debt.

Wednesday the Irish government presented its four-year plan, which was pretty much as
expected. Two-thirds of the tightening will be expenditure cutting. The corporate tax rate
is set to remain unchanged at just 12.5%. The plan failed to calm markets.

Thursday there were some attempts to calm the market by verbal intervention. Klaus
Regling, head of the rescue fund, said that there was zero chance of the eurozone
breaking up. As we already saw in the spring, verbal intervention has little impact at this
stage. Thursday evening sovereign spreads were at record highs. Portugal has failed to
improve its budget this year and could easily be the next country to ask for financial

On a positive note confidence indicators showed that the euro area recovery is gaining
speed after a temporary slowdown. The German Ifo index for November was very upbeat
and the PMIs indicate strong growth in both Germany and France.

Japan’s exports drop for the third month in a row
In Japan real export declined 1.2% m/m in October. This is the third month in a row with
a decline in exports, underlining that Japan’s export engine has lost considerable steam in
recent months and net export will subtract from growth in Q4. Japan’s headline increased
from -0.6%y/y to 0.2% y/y in October, so it is finally out of deflationary territory. The
increase in inflation was mostly driven by the substantially higher tobacco taxes from 1
October. Higher tobacco taxes alone added 0.3 percentage point to inflation in October
and higher food prices have added as well in recent months. For that reason there is little
to celebrate in Japan’s inflation numbers. Higher inflation will mostly subtract from real
income growth and weigh on private consumption. In our view private consumption is
poised to contract in Q4, driven not least by the sharp decline in auto sales in the wake of
the expiry of subsidies for auto purchases in September. With both exports and private
consumption weak, GDP growth could be negative in Q4

Geopolitical uncertainty on the Korean peninsula returned to the headlines in the past
week when North and South Korea exchanged artillery fire. This comes on the back of
the apparent sinking of a South Korean naval vessel by North Korea in March. As in
March, the market impact has been limited so far and in our view the incidents mainly
underline the increasingly unstable economic and political situation within North Korea.

Status quo does not seem to be an option any longer for North Korea. The question
remains whether the endgame will be a complete collapse of the North Korean regime
and economy or a gradual transition to a more reform-minded political leadership. The
last option is the preferred one for both China and South Korea. There will be
considerable event risk from Korea.

Scandi Update
Denmark: Unemployment statistics all over the place
Statistics Denmark published its Q3 Labour Force Survey (LFS) during the week. The
survey is particularly interesting because it contains an alternative measure of
unemployment which can be used to supplement the official monthly register-based
unemployment statistics. In principle, the LFS includes all those out of work, while the
official monthly register-based statistics include only those receiving public benefits. In
principle, therefore, the LFS is more comprehensive and paints a better picture of the true
state of the labour market.

Turning first to unemployment, the LFS data have shown without doubt that the official
unemployment statistics have underestimated the rise in unemployment during the course
of the crisis. The main reason is that some Danes opted out of unemployment funds
during the boom years, when labour shortages probably gave most people a strong sense
of job security. And the difference is considerable. According to the LFS statistics, there
were 214,000 people out of work in Q3, whereas the official figure for gross
unemployment was just over 168,000 – a difference of 45,000 people (seasonally
adjusted). The LFS also reveals that the growth in employment in Q2 turned negative in
Q3, with a decrease of 11,000 people. This is not good, as it means that the drop in LFS
unemployment in Q3 was not due to more jobs being created, but to a decrease in the
labour force.
Despite these rather disappointing figures, we still expect the labour market to continue to
stabilise in the coming quarters. The figures do, however, support our view that we are
definitely not looking at an upcoming employment boom, and can expect instead a period
of largely unchanged employment and unemployment.

Sweden: The Riksbank in limbo
Sweden is in a phase of very strong recovery. Unemployment drops, businesses report
continued strong demand basically across all sectors and consumers are happy. In other
words, a clear cut environment for the Riksbank to tighten policy further (and it most
likely will).

Then there is the increased turmoil in the Euro-area and the uncertainty about how
European growth will respond to fiscal tightening. There is little doubt that Europe is far
from stable financially or economically. Renewed instability in financial markets is
definitely one of the prominent risks the Riksbank is worried about and its probability
seems to be increasing.

The board is split; a minority so far has attached a greater weight to a negative outlook for
Europe and argued in favour of slower rate hikes. Others say that the strong recovery in
Sweden justifies higher rates. Both sides could claim that they are correct. Still, given the
recent data outcome we would be quite surprised unless there will be further rate hikes
delivered up to at least Q1 next year

Norway: Growth forecast revised up
The GDP figures for Q3 showed growth in the mainland economy of 0.9% q/q, which
was as expected. At the same time, though, the figures for H1 were revised up. This
stronger growth means that we are now revising up our growth forecast for 2010 from
1.8% to 2.0%. Private consumption in particular seems to have been higher than
previously believed, with the consumption of services particularly strong. With the
prospect of slightly stronger global growth, continued rapid growth in private
consumption and acceleration in private investment, we have also revised up our forecast
for next year from 3.1% to 3.5%. Coupled with a continued upswing in the housing
market and household debt, this will put pressure on Norges Bank to move earlier than
the market currently anticipates. It is important to remember that capacity utilisation in
the Norwegian economy is higher than in most other Western countries. Norway is also
unlikely to be hit by fiscal austerity measures.
Full report: Global Update : Encouraging signs from the US labour market

No comments: