Weekly Focus

Greece Blocks ECB Exit

Market Movers ahead

• It is widely expected that the ECB will leave its key monetary rates unchanged at its Governing Council meeting. Further, we expect the ECB to communicate that it will keep full allotment during Q2 auctions.
• February manufacturing and service sector PMIs released across Europe and Asia will provide information about the strength of the recovery. ISM is released in US.
• Labour market reports out of Euro area, US and Japan: Euro area unemployment is expected to rise, while Japanese unemployment is expected to remain unchanged and US unemployment is expected to decline a little.
• Swedish GDP for Q4 09 is due to be released next week. Both consensus and Riksbank forecasts expect it to come in at around 0% y/y. We are more downbeat.

Global Update

• EUR/USD declined and stock markets retreated somewhat as Greece remained on the radar screen due massive private sector strikes on Wednesday and negative statements from rating agencies.
• US Fed chairman Ben Bernanke delivered the semi-annual report on the economy. He reiterated that rates will stay low for an “extended period”, and he emphasised the importance of a credible plan to reduce the budget deficit.
• Data have been soft recently in both Europe and the US resulting in declining interest rates and higher volatility on the stock markets. The softness might partly be due to bad weather keeping consumers at home and affecting weather-sensitive sectors like construction.

Focus

• In this week's focus article we take a look at general PPP models for G10 currencies in order to assess their valuation. SEK and GBP look undervalued.

Market movers ahead

Global

Following a round of disappointing labour market indicators in the US over the previous two weeks, markets have started to fear that the pace of job growth will not be strong enough to ensure a sustained recovery. The centre of attention next week is therefore the employment report from February. Unfortunately the data are influenced by several distorting factors. First and most important are the distortions from the unusually bad weather with several snowstorms hitting the East coast. Data from previous episodes of snowstorms show that nonfarm payrolls printed significant weakness in the month of the snowstorm followed by an accordingly large rebound in the following month. Rough estimates of the snowstorm effect on February payrolls range from around -150,000 to -100,000. Second, the hiring for the decennial census will distort data over the coming months. The first hiring is likely to show up in the February data although it should be minimal (see Research US: Census - a springtime hiring shot). Given the above mentioned factors, our best estimate of payrolls is a decline of 60,000 reflecting a -110,000 effect from the snowstorms and an underlying trend growth in payrolls of +50,000. One should in general be prepared for large fluctuations and severe weakness in February data.

Furthermore, the ISM indices for February will give an indication of the underlying growth momentum in the US economy. We expect the manufacturing ISM to continue its ascent towards 60 as the new orders index surged in January, indicating more upside on the headline index. The non-manufacturing ISM has been lagging its manufacturing counterpart and we expect to see some catch-up. However, since this activity index covers both the construction sector and retail stores, the snowstorms are likely to lead to some weakness in this index

The key event in Euroland next week will be the monthly ECB's Governing Council meeting. It is widely expected that the ECB will leave its key monetary rates unchanged. We expect the ECB to be dovish at next week's Governing Council meeting. Meanwhile the ECB staff projections for 2010 GDP in the Euro area is likely to raised from the current very downbeat range of -0.5% - 0.9%. We also expect the ECB to communicate that it will keep full allotment during Q2 at the main refinancing operations (one-week auction) and the long-term refinancing operations (one- and three-month auctions).

Data wise, we are looking for final February PMI across Euroland. We are looking for minor upward revisions of German and French manufacturing PMIs. Market watchers will probably take a close look at Spanish PMIs to judge whether Spain is still decoupling from the Euro area. Greek PMI is also likely to draw some attention.

Euro area unemployment data for January are due to be released on Monday. Until recently, we had believed that Euro area labour markets would begin to stabilise during Q1; however, that might not happen before mid-2010. We expect unemployment to inch up to 10.1% in January from 10.0% in the previous month.

In a data compact week, we also look for Euro area retail sales and details on Q4 GDP. Further we anticipate German January factory orders on Friday, which we expect to show some improvement after weak December numbers.

In Asia the main focus in the coming week will be the release of manufacturing PMIs. Overall manufacturing PMIs have been strong in the past two months and in line with recent data for industrial production, and exports suggest that that growth in industrial activity is again accelerating for emerging markets in Asia. Signs of renewed momentum has been most pronounced outside China with countries like India, Indonesia, Thailand and Taiwan again showing very strong momentum. We expect this trend to have continued in February, with manufacturing PMIs probably improving further outside China, while we expect both China's manufacturing PMIs to be largely unchanged in February.

In Japan the main focus will be on the release of the labour market report for January. We expect growth to slow substantially in Q1 10 and hence the pace of the improvement in the labour market is expected to slow versus Q4 09. We expect the unemployment rate to be unchanged at 5.1% in January. In addition, the capital expenditure survey for Q4 will be released next week. This is the most important new information in the first revision of the Q4 GDP figures and hence will give some idea about the direction and size of the first GDP revision. In both Q2 and Q3 the capital expenditure survey resulted in sharp downward revisions of the GDP numbers.

Global update

Risk appetite returns

Greece remained on the radar screen as massive private sector strikes on Wednesday and negative statements from rating agencies emphasised the uncertain outlook. Standard & Poor's said late on Wednesday that it might cut Greece's BBB+ rating by one or two notches within a month. This drove EUR/USD down further and weakened stock markets.

Another focus point this week was the semi-annual report on the economy from Fed chairman Ben Bernanke. As expected he did not reveal much new information. He reiterated that rates will stay low for an “extended period”, which gave some comfort to the markets, and he emphasised the importance of a credible plan to reduce the budget deficit. We continue to expect the Fed to hold rates steady until November this year.

Data have been soft recently in both Europe and the US, which has resulted in declining interest rates and has added some volatility to the stock markets. Markets became particularly concerned when US consumer confidence declined this week. The softness might partly be due to bad weather, which is keeping consumers at home and is affecting weather-sensitive sectors like construction. Bernanke noted that the bad weather will probably have a temporary impact on employment.

US consumer confidence raises uncertainty over sustainability

The main attention in the US this week was the decline in US consumer confidence in February (see chart). Since the US consumer is critical for sustaining the recovery in the US, this was clearly a disappointment. Consumer confidence is still at a very low level historically and has not yet managed to rise to the trough level of the previous downturn in 2003. The labour market component also slipped a bit although it still points to an overall stabilisation in the unemployment rate. Fortunately hard data for the US consumer such as retail sales is looking much better (see Flash Comment - US: The consumer is not dead) - and after all it is how much people spend that matters and not what mood they are in. But still it is a bit worrying for the medium-term outlook that confidence is not really improving.

So what could explain this weakness? It is possible that the bad weather has had an influence as it affects job opportunities for people working in weather-sensitive sectors. Also the survey was made during the time when equity prices fell strongly in February. The impact from weather is probably also affecting the weekly jobless claims data. Initial claims again rose more strongly than expected from 474k to 496k despite many other indicators pointing to underlying rising demand for employment such as the indices from the ISM survey and a rapid rise in temporary help workers.

The news from the housing market is increasingly mixed as new home sales fell again and house price statistics were mixed (Case/Shiller rose 0.3% m/m but the FHFA house price index fell 0.4% m/m in December). Fortunately it was not all bad news. Durable goods orders continues to show a rising trend (see chart) which points to a continued pick-up in investment in the US from the very depressed levels in early 2009.

Another week of mixed data in Euroland signalling soft Q1

The German Ifo index surprised with a decline in current conditions and further increases in expectations. The downturn in current conditions reflects disappointing retail sales in February and might be partly caused by the harsh winter. We would have liked to have seen the slump isolated to Q4 09, but the Ifo institute says we could see negative growth in Q1 10. Our assessment is that this is too negative.

On Thursday the European Commission published its interim forecast with growth in the Euro area unchanged at 0.7% in 2010 from its November forecast. We are more upbeat, but less so after the disappointing Q4 09 GDP data and the mediocre outlook for Q1 10. The same day the ECB published data on monetary developments. The credit developments are still not giving any warning signals of future bubbles and will not give the ECB any reason to 'lean against the wind' and hike rates in the near future.

German GDP data showed that the flat GDP in Q4 resulted from strong net exports and a decline in all domestic demand components. German unemployment remained unchanged at 8.2% in February. On a positive note, Euroland industrial new orders rose by 0.8% m/m in December after a 2.7% m/m increase in November. The increase was driven by strong capital goods orders and very strong French figures, which may partly reflect the French car scrapping scheme, which expired at end-2009. A partial reversal in early 2010 for these components should then be expected.

Better-than-expected data in Japan still suggests slower growth in Q1 and resilient deflation

In Asia data released in Japan in the past week was overall was better than expected. Industrial production in January increased 2.5% m/m (consensus: 1.0% m/m) on the back of a solid 1.9% m/m increase in December. The strong industrial production figures are in line with the strong export data for January also released in the past week. However, there are signs that the pace of the recovery in industrial activity will slow in coming months. Production plans for February and March were overall weak and new orders in manufacturing PMI declined for the second month in a row.

There were some signs of improvement in domestic demand in Japan in data released on Friday. Retail sales in January beat expectations by increasing 2.6% y/y (consensus: -0.2%), suggesting we will avoid a contraction in private consumption in Q1. Housing starts for January also came in much stronger than expected and there are now clear signs that residential investments will finally start to add to growth. CPI inflation was broadly in line with expectations at -1.3% y/y in January. However, there are no longer signs of easing deflationary pressures as core inflation appears to have stabilised below -1%.

We still believe data is consistent with GDP growth in Japan slowing to just below 2% q/q AR in Q1 10 from 4.6% q/q AR in Q4 09. Growth should accelerate towards 3% q/q AR again in Q2 10 as the impact from another fiscal stimulus package starts to kick in. We expect Japanese data to be mixed in the coming months and Bank of Japan (BoJ) is unlikely to upgrade its view of the economy further in the coming months. It might even start to sound a bit more cautious, not least in light of the increased volatility on financial markets internationally. We cannot completely rule out the possibility that BoJ could step up its non-conventional easing if deflationary pressure persists.

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