Sunday, November 28, 2010

Weekly Focus: Debt crisis intensifies amid encouraging data

Market movers ahead

  • The evolving European debt crisis will remain a key theme. Next week a Portuguese bill auction and the Spanish bond auction will test the market.
  • The ECB is expected to announce a continuation of its full allotment policy on the current terms through Q1 2011 at its monetary policy meeting.
  • In the US the ISM and the employment report are expected to draw the headlines. We look for confirmation of the recent tendency toward improving data.
  • In Asia the focus will be on the PMIs out of China and Japan, which is set to improve modestly.
  • In Scandinavia, Sweden and Denmark are set to report national account figures for Q3. In Sweden and Norway the focus will be on the PMI reports as well.

Global update

  • Deteriorating conditions in the European sovereign debt markets and an armed dispute between North and South Korea rattled the markets this week. Global risk appetite is under moderate pressure.
  • In Ireland the government formally applied for EU/IMF assistance and approved a four-year austerity plan. The Greens from the coalition government called for elections early next year.
  • Incoming German and European industrial surveys indicate that the core European industry is now reaccelerating. German growth could be quite solid next year.
  • In the US the data continues to hint at accelerating growth as initial claims reached a cyclical low and personal spending was healthy in October. However, housing data remains depressed.

Market movers ahead


  • Next week’s US calendar will be dominated by two major data releases – the ISM on Wednesday, and non-farm payrolls on Friday. We expect the manufacturing ISM index for November to show yet another strong reading, with only a minor decline to 56.2 from 56.9. Regional PMIs received so far have sent mixed signals, but notably Philly Fed showed a strong rebound, indicating that a major decline in ISM is unlikely.
On Friday we expect payrolls to show a considerable increase in employment, for the second month in a row. We expect the employment report to add 120,000 to non-farm payrolls and 130,000 to private payrolls. Particularly the service sector is expected to have seen strong gains, whereas the development in manufacturing remains uncertain, as employment continues to fall in spite of healthy production figures. We will get quite a few Fed speeches next week, most notably Bernanke speaking on Tuesday. On the same note Fed’s Beige Book is released on Wednesday.
  • In Euroland there will be a lot of attention on the ECB Governing Council meeting on Thursday. We anticipate that Trichet will announce that the ECB will continue to provide full allotment at long-term refinancing operations (one and three months) in January, February and March and at the main refinancing operations, at least until the end of next year’s third refinancing period on 12 April 2011. The shift to fixed allotment will then be announced at the Governing Council meeting on 3 March 2011. There is a risk that the Governing Council, which is eager to move ahead with its exit strategy, decides to remove full allotment at the three-month auctions. We think that this is a bit premature and could add further fuel to the debt crisis unless a solution for helping in particular the Irish banks with their funding need will be presented. The Securities Markets Programme will continue, but we don’t expect to see much buying. The ECB does not consider this programme very successful. Interest rates will be kept unchanged. 
  • The European Commission will present its autumn forecast on Monday, which is likely to show a notably more positive outlook than the spring forecast. Inflation is projected to decline to 1.8% in November from 1.9% in October. PMIs are likely to show that the Spanish economy is contracting while the message on Italy should be somewhat more upbeat. We estimate that euro area retail sales increased 0.2% in November following a soft October. Unemployment in Germany and the euro area is expected to remain unchanged.
In the UK, the November PMI data will be in focus after the second estimate for Q3 GDP confirmed the strong preliminary reading. Last month, the manufacturing PMI rose for the first time since May and a further rise would suggest that the UK economy has sustained momentum in to Q4. With the recent BoE minutes pointing to concerns about the limited availability of credit, the data on M4 money supply could also draw attention. We will also receive further cues on the state of the UK housing market on Wednesday.
  • The October data to be released in Japan next week are expected to be weak and confirm that GDP growth will slow substantially in Q4 and possible be negative. We expect industrial production to plunge 3.0% m/m in October driven mainly by a sharp decline in auto production in the wake of the expiry of subsidies for auto purchases in September. That said, we do expect both production plans for November and December and manufacturing PMI for November to show some signs of stabilisation.
We expect manufacturing PMI to improve slightly to 47.7 from 47.2. We expect retail sales to drop 1.6% m/m in October following a 2.8% m/m drop in September. As in September the decline in retail sales will be driven by lower auto sales. The weak retail sales in September and October suggest private consumption will decline in Q4 10. On a positive note, our labour markets indicators do so far not suggest there has been a significant negative impact on the labour market, but we might see that early next year. Hence, we expect the unemployment rate to drop another notch from 5.0% to 4.9% in November,
  • In China focus next week will be on the release of its two manufacturing PMIs. We expect HSBC manufacturing PMI to improve slightly in November to 55.5 from 54.8 in the previous month. However, the NBS Manufacturing PMI could actually in our view decline marginally from 54.7 to 54.3 in November mainly due to seasonal distortions. According to our calculation seasonality will subtract 1.5 from NBS PMI. Hence, the slight decline in NBS PMI is still consistent with an underlying improvement.  

  • A busy week lies ahead in Denmark. Kicking things off on Monday is business confidence for November, which we expect to improve a little on the back of a small decline in October. Tuesday brings the national accounts data for Q3, where we predict GDP growth of 0.2% q/q (3% y/y). Next up, on Wednesday, are retail sales for October, which we expect to climb 0.4% m/m (-0.9% y/y). Finally, Thursday brings unemployment figures for October, where we predict a rise in gross unemployment of 1,000 people and an unchanged official unemployment rate of 4.2%.
  • Next week’s focus in Sweden will be third quarter GDP data, retail sales and PMIdata. To make a long story short, Sweden continues to show impressive progress. We expect that to be confirmed by solid growth numbers (1.4% q/q) for Q3. And the “quality” should be good too, i.e the strong data are not expected to be driven by further inventory accumulation but by a broadly based recovery in final demand. The retail sales numbers for October are interesting because they will provide information about the consumers moving into Q4. We expect to see sales volumes up by a healthy 5.5% y/y. A final thing to keep an eye on, the Riksbank is releasing the second financial stability report of the year. This will probably attract some interest since the RB here has an opportunity to express its views in more detail about for instance the housing market and consumer debt and to what extent this is a potential problem
  • An eventful week is in store in Norway. After strong growth in private consumption towards the end of Q3, we expect a slight correction in retail sales in October. Reports from the retail sector suggest that sales remained brisk in October, but we still anticipate a drop of 0.5% m/m following the jump of 1.3% in September. We expect credit growth to continue to accelerate, driven by higher business investment and solid turnover in the housing market. The moderate rise in September was due to low growth in lending to the local government sector, and we expect this to drag down overall credit growth again in October. One surprising trend globally has been the upswing in PMIs. Given a relatively large export sector and continued high activity in oil-related industries, we expect the Norwegian PMI to be largely unchanged from September. The Norwegian Labour and Welfare Administration (NAV) jobless figures for November will probably confirm largely unchanged unemployment, but the unemployment rate will fall to 2.6% for seasonal reasons.

Full report : Weekly Focus: Debt crisis intensifies amid encouraging data

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