*Market Movers ahead*
* US markets will be closed for Martin Luther King Day on Monday.
The stream of data releases will kick off on Tuesday with New York
Fed's manufacturing index. We expect the figure to show some
strength; on the same note, we expect to see yet another strong
manufacturing figure from Philadelphia Fed.
* In Euroland, the Eurogroup and the Ecofin Council meetings on
Monday and Tuesday respectively should attract a lot of attention.
We expect intense discussions on an increase of the European
Financial Stability Facility (EFSF).
* The German ZEW expectations are projected to increase while the
assessment of the current situation is stabilising.
*Global update*
* In the US, all of the new hawkish voters in the FOMC have spoken
this week. So far there has been no indication of great opposition
to the Fed's QE2 programme, although there are sceptics.
* Initial jobless claims surged 35,000 to 445,000 in the week ending
8 January. The increase should however be taken with a pinch of
salt, as an administrative processing backlog after the holiday
weeks is likely to have pushed claims higher.
* In the eurozone, the main focus this week was the peripherals'
issuance of debt. Increasing interest rates at the start of the
week caused some concern and prompted the ECB to intervene prior
to Portugal's issuance of long-term debt on Wednesday. Interest
rates decreased due to the substantial ECB purchase and paved the
way for a successful auction.
* The ECB has become somewhat uneasy with the recent surge in
commodity prices and inflation and has taken the first baby steps
to prepare the markets for future rate hikes.
*Global*
Next week, the US markets will be closed for Martin Luther King day on
Monday. The stream of data releases will be kicked off on Tuesday with
the New York Fed's manufacturing index. We expect the figure to show
some strength, increasing three points to 14.0. On the same note we
expect to see yet another strong manufacturing figure from the
Philadelphia Fed. However, the index has been moving at exceptionally
high levels, indicating that we should see some softening this month.
Hence, we expect a slight drop to 20.0.
Data for the housing market is expected to send mixed signals. On the
downside we expect to see weak figures for both housing starts and
building permits. This can however by and large be attributed to last
month's poor weather conditions. On a positive note, we expect to see
improvement in the NAHB index, from 16 to 18 points. Furthermore, we
expect the positive trend in existing home sales to continue. This
could encourage some optimism in the otherwise gloomy housing market.
Finally, Philadelphia Fed President, Charles Plosser, will give
another speech next week. He is the most likely candidate for a
dissenter at the January FOMC meeting, but his comments this week
suggest that he is not yet ready to vote against the FOMC statement.
In Euroland the Eurogroup and the Ecofin Council meetings on Monday
and Tuesday, respectively, will get a lot of attention. We expect
intense discussions on an increase of the European Financial Stability
Facility (EFSF). If the Eurogroup fails to agree on a sizeable
increase in the capacity of the EFSF this is likely to disappoint the
markets and we could see sovereign spreads widen.
The Eurogroup is also expected to discuss an expansion of the EFSF's
mandate in order to give it powers to buy sovereign bonds in the
secondary market and to make credit available to solvent countries
outside the framework of an EU-IMF recovery plan. A reduction in the
interest rate charged to Greece, Ireland and other countries in need
of financial support may also be on the agenda. However, any reduction
in the rate by the European Financial Stability Facility (EFSF) could
have negative implications for its triple-A credit rating, so we do
not expect a decision in the coming week.
The German ZEW expectations are projected to increase while the
assessment of the current situation is stabilising. Ifo expectations
are at an all-time high and are expected to peak soon. Nevertheless,
our model indicates that the upward trend may continue in January. The
Ifo current situation is expected to begin stabilising and may soon
show some retrenchment.
The CPI release on Tuesday is going to take centre stage in the UK
next week. Inflation hit 3.3% in November with inflation expectations
at 3.5%, clearly worrying for the Bank of England, which is being
criticised for having lost its commitment to deliver price stability.
We project CPI growth in December at 3.3% y/y, up 0.5% from November.
However, risks are on the upside to our forecast as the 2.5pp VAT rise
is kicking in and many shops are reported to have lifted prices by
even more. Keep an eye also on the RICS house price balance (-47%
expected) and Rightmove's house price index, the first indication of
house price developments in 2011.
In Switzerland, the calendar is fairly thin for the coming week with
money supply data and the SNB monthly statistical bulletin on Friday
as the main events. Market focus remains centered on the Swiss franc,
however and any potential comments from the SNB. Last week SNB's
Jordan talked about the potential economic costs of the volatile and
strong franc by stating that "for the domestic sector of the Swiss
economy, interest rates are extraordinarily low. For the part of the
Swiss economy influenced by the exchange rate, monetary conditions are
extraordinarily restrictive".
China will next week release most economic data for December in
addition to GDP growth for Q4 10. We expect GDP growth to ease from
9.6% y/y in Q3 to 9.1% y/y in Q4. However, it is important not to
focus too much on the decline in y/y GDP, because q/q GDP growth is
again accelerating. According to our estimate, GDP growth in Q4
accelerated to 9.2% q/q AR from just 7.6% q/q AR in Q3. Hence, growth
has been close to potential in Q4 and will probably exceed potential
in Q1. CPI inflation in December is expected to ease to 4.6% y/y from
5.1% y/y in November. The decline is due to a decline in some food
prices in December in addition to a large increase in consumer prices
in December in 2009. The decline in inflation in December will
probably only be a temporary relief. We believe inflation could jump
above 5% y/y again in December. Industrial production is expected to
increase a solid 1.6% m/m in December. Nonetheless this should
correspond to growth in industrial production declining to 12.9% y/y
from 13.3% y/y in November.
The Chinese president Hu Jintao will be on an official state visit to
the US from 18-21 January. Hence, focus will be back on China's
exchange rate policy and not surprisingly China appears to have
stepped up the pace of appreciation ahead of the summit and we expect
this trend to continue next week. While international pressure will
continue to be important for not least the timing of China's
appreciation, our case for appreciation of the renminbi is mainly
based on our view that a stronger currency is increasingly in China's
own interest, because it will contribute to easing inflationary
pressure.
*Three themes driving markets*
There are mainly three themes driving the markets at the moment.
First, global growth continues to show strength, adding to a more
upbeat view of the world in 2011. Second, inflation has surfaced as a
major theme as commodity prices are yet again rising sharply, creating
challenges for central banks. This is particularly true in emerging
markets where food prices have a much higher weight. But this week the
ECB also turned up the volume on warning against upside pressures to
inflation. Finally, the euro debt crisis continues to be a major
theme, although tensions took a small breather towards the end of the
week.
We believe these three themes will continue to be the main market
drivers in the coming months. Strong growth and inflation fears point
to higher bond yields - especially in Germany and core countries - as
the ECB's focus on headline inflation is making the headache more
significant here compared with the US where the Fed mainly looks at
core inflation and thus tends to disregard inflationary pressures
coming from commodity prices. The relative rise in euro bond yields
compared to the US is also pushing EUR/USD higher - especially as euro
debt fears have eased a bit.
*Eurozone: spreads are looking better for a change*
The main focus this week was the peripherals' issuance of debt.
Increasing interest rates at the start of the week caused some concern
and caused the ECB to intervene prior to Portugal's issuance of
long-term debt on Wednesday. Interest rates declined due to the
substantial ECB purchase and paved the way for a successful auction.
Together with speculation of extending the EFSF, this helped change
sentiment and the subsequent auctions in Spain and Italy on Thursday
passed without further turmoil.
Prior to Thursday's meeting of the ECB's Governing Council, the recent
increases in food and energy prices must have caused some concern.
Inflation was indeed the main theme, although the tone was mild.
Nevertheless the message was clear: the ECB has become somewhat uneasy
with the recent surge in commodity prices and inflation and has taken
the first baby steps to prepare the markets for future rate hikes. We
expect a first hike in Q4 11, but Thursday's message from Trichet has
increased the likelihood that the ECB could deliver a first rate hike
even earlier. Furthermore, Trichet called for the EFSF to be improved
in both quantity and quality.
Preliminary German GDP figures for 2010 showed an increase of 3.6%.
This is the highest growth in more than two decades. The eurozone
November industrial production surprised positively with an increase
of 1.2% m/m. This is substantially higher than consensus expectations
of 0.5% and indicates that our current forecast of 2% growth in 2011
is not off track.
*US: new FOMC voters scale down the hawkish language*
All of the new hawkish voters in the FOMC have spoken this week. So
far there has been no indication of great opposition to the Fed's QE2
programme although there are sceptics. The upshot is that we could go
from one dissenter (Hoenig who has rotated out of the FOMC as a voting
member) to unanimity at the next FOMC meeting on 25-26 January. We do
expect the president of the Philadelphia Fed, Plosser, to eventually
vote against the statement. Given his recent comments however, that
might have to wait until later in 2011 when the labour market has
improved further.
This week's main releases are retail sales and inflation data for
December, but unfortunately these releases come after the deadline of
this publication. However, the week did provide some other interesting
data. First, initial jobless claims surged 35,000 to 445,000 in the
week ending 8 January. The increase should however be taken with a
pinch of salt, as an administrative processing backlog after the
holiday weeks is likely to have pushed claims higher. A better measure
of the level of initial claims is probably the four-week moving
average which rose to 417,000. Overall, we still expect the gradual
improvement in the labour market to continue and for initial claims to
resume the downward trend over the coming weeks.
Second, producer prices for December showed that inflation pressures
are on the rise in the production pipeline as commodity prices are
spiking. So far, this has not spilled over to consumer prices though.
According to the Fed's Beige Book released this week, competitive
pressures at manufacturers and retailers are the reason for the modest
passthrough into final prices. More generally, the impression from the
Beige Book supported the upbeat economic releases in November and
December.
*China's imports surge, trade surplus plunge*
China's imports in December surged for the second month in a row,
increasing 6.6% m/m following a whopping 13.4% m/m increase in the
previous month, see Flash Comment - China: Imports surge and the trade
surplus plunges. For Q4 as whole imports increased a solid 12.1% q/q
following a 0.9% q/q contraction in Q3. This underlines that stronger
imports from China have probably been an important driver behind the
recent strength in the manufacturing sector across the world. China's
export growth also appears to be improving, although exports were only
broadly flat in September. It should be remembered that exports surged
in November and for Q4 as a whole export growth accelerated to 5.1%
q/q from just 1.9% q/q in Q3. Because of the strong import growth,
China's trade surplus has plunged in recent months. Recent trade data
suggests that China's current account surplus has declined to less
than 5% of GDP. This is a substantial decline from more than 10% of
GDP in 2007.
Despite the decline in China's trade surplus, there are no signs that
China's accumulation of foreign exchange reserves is easing, but it
appears that the increase in FX reserves is increasingly driven by
speculative 'hot money' inflows despite China's extensive capital
controls. Despite the surge in China's foreign exchange reserves in H2
10, China's purchase of US securities has been modest recently,
suggesting it might be diversifying its reserves out of USD, see Flash
Comment - China: Reserve accumulation continues unabated.
In the past week, both South Korea and Thailand have raised their
leading interest rates. South Korea's move in particular came as a
surprise. However, it underlines the fact that with growth again
accelerating and inflation edging up, containing inflation is
gradually becoming the prime objective in monetary policy across Asia.
We also expect faster appreciation of their currencies to be part of
the policy response.
Source: ActionForex.Com
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