Saturday, December 11, 2010

Weekly Focus Central bank week in Scandinavia

Market movers ahead 
• FOMC meeting due on Tuesday. We do not expect much change compared with the
November statement.
• In Euroland it is time for flash PMIs,  the German ZEW and the Ifo index for
December. We believe that PMIs could increase slightly and that the Ifo could stay at
elevated levels.
• In the UK we have a busy data calendar with CPI, unemployment and retail sales.
• In Scandinavia attention turns to the Riksbank meeting and the Norges Bank meeting
on Wednesday. After the surprisingly strong GDP numbers and higher than expected
inflation a rate hike from Sweden should be a “done deal”, whereas Norges Bank is
expected to keep rates unchanged.
• China has brought forward the release of most economic data for November from
Monday December 13 to Saturday December 11. The focus will particularly be on the
inflation following the sharp acceleration in inflation in November.

Market movers ahead 
• After a bit of a slow week in the US, quite a few interesting releases are due out next
week. On Tuesday, it is the last FOMC meeting of the year. We do not expect much
change compared with the November statement and the meeting could turn out to be a
non-event market-wise. On the same note, there is only one Fed speech on the agenda
so far, with Atlanta Fed’s Lockhart due to speak on Wednesday.  

On Tuesday, we expect headline retail sales for November to surprise on the upside,
as in particular gasoline sales have gone up, driven by higher oil prices. That said, we
expect the details of the report to be soft, with retail sales ex autos rising a modest
0.1% much lower than consensus expectations. On Wednesday, core CPI is expected
to remain modest, increasing 0.1 % m/m.

In addition, we will see the first figures for manufacturing confidence in the form of
local business surveys from New York and Philadelphia Fed. We expect a considerable
rebound in empire manufacturing from -11.1 to 4.8. On the other hand, we expect the
Philly figures to fall back somewhat, after last month’s massive gain.  Data for the
housing market is expected to remain weak, but a slight increase in both housing
starts and building permits is expected. The same goes for the NAHB index where we
look for a one point increase.

• In Euroland  the main confidence indictors – flash PMIs and the German ZEW and
the Ifo index for December – will be key events next week as this is our best signal
about the impact of the debt crisis on the real economy. So far the impact of the debt
crisis on the real economy seems very small for the euro area as a whole. For
Germany the net effect could even be positive as the debt crisis has resulted in a
weakening of EUR/USD. We think PMIs  could increase slightly from the already
high levels, though German service PMI at 59.2 does look a bit stretched. Our Ifo
expectations model has for some time called Ifo down, but is now improving sharply.

We think that Ifo will remain at elevated levels, but would not be surprised to see a
small setback from last month’s all-time high. ZEW expectations have started to
improve and we expect to see further strong improvements here. Euro area final HICP
is expected to show that food prices have started to pull inflation upwards while core
inflation remains low. Euro area industrial production is expected to show a notable
improvement after last month’s setback as we have already seen in German data.

• A busy data calendar in the UK next week with CPI, unemployment and retail sales
coming up. None are however expected to be much different from previous months
and thereby have much market impact. Keep an eye also on CBI’s retail sales
monitor, which has been trending up since early 2009, but now approaches levels
where a turnaround is usually seen. There is however still some upside left as the
downturn in late 2008 was extraordinarily deep. The release of the Bank of England’s
inflation attitudes survey (Thursday 10:30 CET) would normally attract some
attention but even though CPI remains above the bank’s upper band of 3%, the
vulnerability of the economy makes monetary tightening impossible at present.

• China  has brought forward the release of most of its economic data for November
from Monday, 13 December to Saturday, 11 December. In particular, focus will be on
inflation following the sharp acceleration in November. We expect inflation in
November to increase only slightly 4.6% y/y from 4.4% y/y in the previous month.
The modest increase in inflation in November largely reflects a base impact from last
year. Month on month, inflation has not eased and the year-on-year inflation rate is
poised to accelerate particularly from January. We expect industrial production  to
expand a healthy seasonally adjusted 1.6% m/m in November. This should correspond
to growth in industrial production moderating to 12.0% y/y from 13.1% y/y in
October. Finally, the important Central Economic Work Conference where
policymakers decide on all major macroeconomic targets for next year is now planned
to be held on 10-12 December. This conference is probably the main reason for
bringing the release of November data forward to Saturday. The inflation target for
2011 will probably be raised to 4% compared with 3% in 2010. However, targets for
credit growth and money supply will most likely be reduced, signalling that monetary
policy will be less accommodative next year. A rate hike is possible soon after this
meeting – possibly as soon as Sunday.

• In  Japan  the main focus next week will be on the release of the quarterly Tankan
business survey by the Bank of Japan. In Q4 current conditions are expected to have
deteriorated significantly, underlining that the recovery lost steam in Q4. However,
the outlook is expected to have improved slightly, suggesting that the weakness in Q4
should prove temporary. For large manufacturers, we expect current conditions to
decline from 8 to 3 while the outlook for large manufacturers is expected to improve
slightly from -1 to 1.

• It will be a relatively quiet week data-wise in  Denmark. On Tuesday Statistics
Denmark’s working hours data for Q3 will be published. This is an underlying source
for the employment figures already published in the national accounts. It will provide
a more detailed picture of the employment situation, which is very welcome in the
current situation with the labour market beginning to recover. On Thursday data for
public finances in Q3 will be published. It will be particularly interesting to see
whether there has been more fiscal discipline than usual, and we hope and believe that
there will be a step in the right direction.

The Riksbank’s rate decision will be in focus for  Swedish markets next week.
Although the Riksbank’s flattening of the repo rate path as such was not unexpected,
the timing of it – at the most recent meeting in October – took us by surprise, as the
Riksbank had signalled it is worried about the pace of credit (mortgage) expansion
and a possible build-up of a housing bubble. Nonetheless, we believe the Riksbank
might decide to make a small change to repo path again on 15 December, pushing up
the front-end until the July meeting to 2% to signal full 25bp hikes at each meeting
during spring/early summer 2011. The timing is of course uncertain, but in principle
there is no lack of arguments for such a move. GDP growth is extremely strong and
resource utilisation is rising faster than anticipated, rapidly closing the output gap.
The labour market is recovering and unemployment is on the decline. The housing
market still shows no signs of moderation. And inflation – at least in the short term –
is higher than forecast by Riksbank. Hence, there are all the reasons to expect the

Riksbank to steadily raise the repo rate in H1 11. After that, the outlook is more
clouded. Nonetheless, in our view, the first four Riba contracts (Dec10 to Sep11) are
priced very close to the Riksbank’s current repo path. Hence, risk/reward suggests
there is upside risk to March, June and September Riba of about 25bp. We also have a
new recommendation to buy FRAJun2011 which trades too tight.

• In Norway, we do not expect Norges Bank to touch interest rates at the monetary
policy meeting on Wednesday, nor do we anticipate any signals that the outlook has
changed drastically since the last monetary policy report in October. Since then, core
inflation has been slightly lower than expected, while economic growth looks like
being slightly higher. There are also signs that global economic growth may be
somewhat stronger than previously thought, and this has caused global interest rates
to push up over the past month. Although fears about European sovereign debt have
abated, we would therefore expect Norges Bank to be slightly more hawkish than in
October. It will also be interesting to see whether the bank mentions risks in the
housing market, what with house prices having climbed almost 5% over the past three
months. The week also brings unemployment figures for December from the
Norwegian Labour and Welfare Administration (NAV). The labour market may seem
to have weakened slightly in recent months, with a slight rise in gross unemployment,
but all leading labour market indicators point to growing demand for labour, which
should soon put an end to the negative trend.
Full report: Weekly Focus Central bank week in Scandinavia

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