Sunday, December 19, 2010

Global update: Strong US retail sales and strong German confidence indicators have helped to boost expectations

Strong US retail sales and strong German confidence indicators have helped to boost expectations that the economic slowdown is coming to an end and that the economies are entering a period of stronger growth.
The EU summit did not provide much of a solution to the debt crisis. EU leaders agreed on a limited amendment to the Treaty, which paves the way for setting up a permanent crisis mechanism for countries in financial difficulty from 2013, but this step was already considered a done deal. The idea of introducing joint euro area government bonds did not gain much traction.

On Friday Moody’s downgraded Ireland by 5 notches from Aa2 to Baa1. Ireland is still investment grade. Greece has been put on review for a possible downgrade and a multiple notch downgrade remains a possibility.

US: a strong start to the holiday shopping season 
US retail sales were extraordinarily strong in November with an increase of 0.8% m/m
and upward revisions to both September and October. Retailers have generally reported a
strong start to the holiday shopping season, but if early rebates have fast-forwarded some
of the traditional holiday spending, it leaves some downside risks to December retail
sales. However, even with a conservative estimate of no growth in nominal personal
spending in December we revise up our forecast for Q4 real personal spending growth to
3.6% q/q AR from our previous estimate of 2.4%.

Despite the better growth outlook following last week’s tax compromise and better macro
data recently, the December FOMC statement was almost identical to the November
statement apart from a slight upgrade to the economic view. The Committee still regards
progress towards meeting its dual mandate as disappointingly slow and both the asset
purchase plan and reinvestment policy were maintained.

Looking forward, we expect the Fed to eventually purchase all USD600bn in treasury
securities. We see only a very limited chance that the programme will be extended as we
expect growth to remain above trend during the next quarters and the labour market to
continue to improve gradually. We continue to believe that the first Fed funds rate hike
will come in Q2 2012.

Confidence is high despite the debt crisis 
This week was dominated by the release of confidence indicators and the EU summit at
the end of the week, which focused on how to combat the debt crisis.
At the EU summit leaders verbally signalled that they have deep pockets and agreed on a
limited amendment to the Treaty, which paves the way for setting up a permanent crisis
mechanism for countries in financial difficulty from 2013. The idea of introducing joint
euro area government bonds did not gain much traction.

Euro area composite PMI, which was published Thursday, was pulled down by a decline
in service PMI. In contrast manufacturing PMI increased strongly. Manufacturing PMIs
signal that the soft spot has come to an end and that growth will pick up in early 2011.
Composite PMI new orders now signal that the ECB should be in hiking territory, but we
do not expect a hike before Q4 2011 as the signal from the monetary analysis remains
rather downbeat.

The Ifo index increased further from already high levels and now points to very strong
German growth in Q1. Ifo expectations point to annual growth in German industrial
production around 8% q/q annualised in Q1. The German ZEW expectations index as
well as the current conditions index increased. After this round of strong confidence
indicators we begin to think that there could be some upside risk to our already upbeat
forecast of German GDP growth at 2.7% in 2011.

Ireland and the Irish bad bank, NAMA, were both downgraded five notches to Baa1 from
Aa2 on Friday. Moody's government debt projections (120% of GDP in 2013) are more
negative than those of the Irish government, but broadly in line with ours. On Thursday
Moody’s warned that Greece could be downgraded. Berlusconi won the confidence vote in both the senate and the lower house and Irish GDP increased 0.5% q/q in Q3.

Inflation surge past 5%  in China 
In China inflation in November jumped sharply for the second month in a row to 5.1%
y/y from 4.4% y/y in the previous month, see Research - China: Widening inflationary
pressures.  Although the increase continues to be largely driven by higher food prices,
there are signs that inflationary pressure is spreading. Core inflation also increased in
November driven by a sharp increase in clothing prices. In addition house prices in
November increased for the second month in a row, suggesting that the impact from the
government’s tightening measures targeting the property market has started to wane.
Other November data released confirmed that growth in China is again accelerating,
industrial production in November increased 1.4% m/m and the development in industrial
production suggests GDP growth in Q4 10 will be around 9% Q/Q AR, a slight
acceleration from 7.6% q/q AR in Q3.

So far it appears that China’s macroeconomic targets for 2011 will have a clear growth
bias despite the recent surge in inflation. Not all targets have yet been communicated after
the conclusion of the important Central Economic Work Conference last weekend, where
all the most important policy makers met and tried to reach a consensus on the targets for
2011. The inflation target for 2011 will be 4% compared to the 3% inflation target for
2010. With the higher inflation target for 2011 the Chinese government will not be forced
into aggressive monetary tightening next year, despite the recent surge in inflation. In
addition it appears that the government will try to soften the impact lower infrastructure
spending by boosting the construction of social housing.

In Japan  the Tankan business survey in Q4 10 declined for the first time since Q1 09,
albeit less than expected, see Research - Japan: Tankan not as bad as feared. The decline
in current business conditions is consistent with our expectations that GDP will contract
slightly in Q4 10 and Tankan also suggests that there is a risk that the economy will
continue to contract in Q 11. However, other indicators like productions plans and
manufacturing PMI have recently shown improvement and we think growth will resume
in Q1 11 and Japan will be able to avoid a double dip.

Scandi Update
From public to private consumption
The Danish Car Importers Association revealed during the week that 13,125 new cars
were registered in Denmark in November, an increase of 44.7% y/y and, by our
reckoning, 5.6% m/m SA. Thus car sales are continuing to recover rapidly after a sharp
drop during the crisis.

Private consumption in Q3 was 3.3% higher than at its lowest point, and almost half of
this rise is down to households buying more cars. There has also been an increase in
leasing. Of course, many lease cars are leased by businesses, not households, but we have
to assume that many will still be used privately as company cars etc. These latest figures
for car sales therefore point to healthy consumption growth in Q4, which is also
supported by data for Dankort debit card purchases.

On the other hand, public consumption fell by DKK1bn in current prices in Q3,
corresponding to a nominal decrease of 0.7% (0.3% SA). This was not enough to stop
public sector net assets turning into net debt for the first time since Q1 2007, which is
naturally a cause for concern, but having net public sector debt of just DKK16bn, or 1%,
puts Denmark in an unusually favourable position relative to most other countries. EMU
debt is markedly higher, being a measure of gross debt, and climbed to DKK781bn at the
end of Q3, or 45%.

The budget deficit for the first nine months of 2010 was DKK51bn, DKK4bn more than
for the whole of 2009. Worrying as it is to see such a large deficit, it is worth noting that
at one point we feared that the deficit this year could be as high as DKK100bn, which
these latest figures do not support. There is now much to suggest that this year's deficit
will be below DKK70bn.

Sweden –Expect more rate hikes next year 
In some respect, the Swedish Riksbank did what was expected of them at the December
policy meeting; raised rates by 25bp and revised the macro outlook upwards. The
Riksbank underlines that Sweden right now is in a unique situation in terms of growth.
Given available data the GDP forecast for the current year was raised from 4.8% to 5.5%
and for 2011 growth is now seen to reach 4.4% (previously 3.8). Accordingly
unemployment will have declined more rapidly and inflation is expected to be slightly
higher. In fact, the Riksbank doesn’t appear to be too concerned right now about the
problems that debt-loaded economies in Europe (and the US) are facing even though
these issues are mentioned as risks. Given  the rather significant upward revisions that
have been made only between the October and December forecasts (not to mention the
massively more upbeat outlook now compared with the projections in the beginning of
2010) one would have thought that the RB should see reasons to hike the repo rate
somewhat faster. But in fact, it left the repo rate forecast basically unchanged reaching an
average 2.03% by Q4 2011, 2.90% by Q4-2012 and 3.45% by the final quarter of 2013.

What probably is holding the bank back a bit might be that international leading central
banks (The Fed and ECB) are assumed to stay on hold for a considerable period of time
which is why a (too) rapid widening of the short rate spread could result in a (too) strong
krona. Still, the combination of marked revisions of the macro assumptions and an intact
repo rate forecast appears to be somewhat inconsistent. There are six policy meetings next
year and we would assume that the repo rate will be raised at each meeting at least up to
Q3, leaving the repo rate at 2.50% at the end of 2011.

Hawkish signals from Norges Bank 
As expected, there was no change in Norges Bank's key interest rate, but the bank did
give a number of signals suggesting that its first hike could come earlier than suggested in
the monetary policy report at the end of October. Back then Norges Bank predicted a rate
increase in summer 2011, and the bank’s interest rate path suggested that it considered
August the most likely month. At the press conference, the deputy governor said that the
bank has not revised its interest rate path or its inflation projections, but the bank did say
four things that are worth noting: 1) Core inflation has been largely as expected. We
thought it would say that core inflation had been slightly lower than expected, because
CPI-ATE inflation has come in below the path in the monetary policy report in recent
months. Clearly Norges Bank is attaching more importance to other indicators of inflation
at present. 2) The rise in house prices and consumption has accelerated. 3) Growth among
Norway's trading partners has been higher than expected. 4) No particular weight was
attached to the strong NOK in the bank's deliberations. These signals tie in well with our
expectation of a first hike in May 2011 being most likely, but with the risk of an earlier
Full report: Global update: Strong US retail sales and strong German confidence indicators have helped to boost  expectations

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