Friday, November 5, 2010

Weekly Focus: Fed delivers

  • The coming week should be relatively quiet in terms of US data releases, after this week’s overload of events. On Wednesday trade balance figures will reveal whether exports are starting to pick up. Over recent months, imports have rebounded faster than exports – adding to US trade imbalances. In addition, we expect University of Michigan consumer confidence to increase slightly to 68.0, driven by the recent rebound in equity markets. Even though there will only be a few Fed speeches next week, they might elaborate on the statement from Wednesday’s FOMC meeting.
  • In Euroland the focus next week will be on flash GDP figures for Q3 to be released from most countries, with the euro area flash estimate as the grand finale on Friday. We expect the data to show a substantial slowdown compared with Q2, but growth might nevertheless remain at a fairly decent 0.4-0.5% q/q. We expect higher growth in Germany while Greece and possibly Spain will contract. Industrial production for September will give an idea of how we exited from Q3. We might see a bit of softness in September where PMI data fell notably. German trade data for September to be released on Monday morning is expected to show that the rebound in exports still has momentum. Trichet’s speech on “How to overcome the crisis” on Wednesday should also attract some attention.
  • BRC’s retail sales monitor, RICS house price balance and industrial production are the key data to watch in UK markets next week. Any weakening of sentiment could raise expectations of additional QE from the BoE even though these fears are contained for now as the MPC decided against more bond purchases at its last meeting. We maintain our view that more bond purchases could be on the cards if data deteriorates further – a risk that cannot be ruled out with nearly half a million people in the public sector being laid off over the next four years. The pound is being supported by M&A flows for now but relative rates suggest that EUR/GBP should adjust towards 0.90.
  • The G20 heads of state will meet in Seoul, South Korea on 11-12 November. It appears that the G20 countries will be able to agree on some longer-term targets for external balances, albeit these will only be indicative. In addition, the G20 leaders will be able to put final signatures to an agreement to increase emerging markets’ quotas (voting power) in the IMF by 6% largely at the expense of European countries. However, G20 will probably not to be able to agree on a specific ‘code of conduct’ for exchange rate policies, as the US and Japan in particular have been pushing for recently. Hence, we are unlikely to see any firm commitments on the exchange rate at the G20 meeting and we do not expect any major market impact from the meeting.
  • In Asia the main focus next week will be the release of most economic data for October in China. We expect the main message to be that growth is again accelerating and increasing inflationary pressure is again becoming a major concern. Particular attention should be paid to CPI inflation, which we expect to increase to 3.9% y/y from 3.6% y/y in September. The acceleration in inflation is due to higher food prices and a hike in retail gasoline prices in late October. While some of the increase in food prices in October is likely to prove temporary, it now looks increasingly challenging to get inflation back to the Chinese government’s 3% target soon. We expect industrial production to increase 1.1% m/m, 13.7% y/y in October and for the third month in a row the monthly increase in industrial production will exceed 1% m/m. In line with recent manufacturing PMIs, it suggests Chinese growth is again accelerating.
  • The calendar in Japan is light next week. The main focus will be on machinery orders, which we expect to have dropped 6.0% m/m in September largely as payback on a massive 10.1% m/m increase in the previous month.
  • In Denmark, Tuesday brings balance of payments data for September; we predict a current account surplus of DKK8.5bn. On Wednesday we have the consumer and net price indices for October; we predict inflation of 0.1% m/m, or 2.7% y/y. Rounding off the week are figures for construction activity in Q3.
  • In Sweden, we receive industrial data in the form of orders, production and inventories, which will give an indication of the outcome of Q3 GDP, which we receive at the end of the month. We see no reason to expect a weak number, and to be honest, other outcomes for Q3 – both production and demand-side primary data – have also been quite strong. This suggests that there might be some upside risks to our ex ante Q3 GDP forecast of 4.5 % y/y.
  • In Norway focus turns to inflation. We expect underlying inflation to have picked up slightly from 0.9% y/y in September to 1.1% in October. However, the rise is primarily due to a so-called base effect as underlying inflation fell more than normal in October last year. Hence, Norwegian inflationary pressure is still quite modest. Our forecast is marginally below Norges Bank’s 1.2% y/y. October is not normally a month that surprises analysts, and we think we should see underlying inflation below 1.0% y/y or above 1.3% y/y to see a pronounced market reaction. Total inflation is expected to rise from 1.7% to 2.1% mainly due to higher energy prices. All in all the numbers should support the market view that Norges Bank is on hold until at least the summer of 2011.
Full report: Weekly Focus: Fed delivers

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