Weekly Focus

Global Recovery on Track

Market Movers ahead

• In the US, the key event of the coming week is the FOMC meeting. We do not expect the Fed to change its rhetoric much. Importantly, the 'extended period' phrase will probably be removed, sending a clear signal of the ZIRP remaining in place for some time yet.
• In the eurozone, attention will focus on the German ZEW indicator. Over the past couple of months, the ZEW has trended down, underlining the current risk of a double-dip in the eurozone economies. However, we feel comfortable about the outlook and expect a modest improvement in the ZEW going forward.

Global Update

• Stock markets have recovered sharply over the past month. Two main factors seem to explain this development. First, the Greek debt crisis has abated after more clear backing for Greece from the EU. Second, strong US job numbers have raised hopes that the recovery will prove sustainable. Note, however, that another correction in equities could be in sight before long.
• In the eurozone, talks about the creation of a European Monetary Fund (EMF) continue. Last Sunday, German finance minister Wolfgang Schäuble said that he would present proposals for a European monetary fund soon.

Focus

• In the past week, we published our Global Scenarios - March 2010 with updated forecasts for the global economy. Read an excerpt from the publication.
• We throw the spotlight on the Chinese economy, which has grown at a rapid pace recently. Are we facing a 'growth miracle' or will China be the next bubble to burst?

Market movers ahead

Global

In the US the FOMC meeting is next week's most important event. The Fed is expected to leave policy measures unchanged confirming that the MBS purchase programme will terminate by end-March. The statement is expected to include minor changes to the growth and inflation assessment. While the assessment on the labour market could be upgraded, a more downbeat message on the housing market is likely. Most importantly, the 'extended period' phrase is likely to be retained indicating that rates will remain close to zero for a long period yet. That said, there a signs that the Fed is slowly warming up for a change in the forward looking language. A recent WSJ article reported that Fed officials have begun discussing how and when to implement such a change. Finally, it will be interesting to see if others than Hoenig dissent on the statement language. We expect no change in the discount rate from the meeting.

The week also includes a tight calendar in terms of economic releases. The local business surveys from Philadelphia and New York will provide some tentative signals about the upcoming ISM release. We look for improvement in the Philadelphia index, while the Empire is expected to see less upside. The PPI and CPI reports are likely to confirm the moderate inflation outlook. Housing starts and permits decline in a response to the recent setback in home sales and bad weather, while the NAHB could move a tick higher.

The key data release for the coming week will be the March ZEW indicator for Germany due on Tuesday. In the past couple of months the trend has been for a fall in ZEW expectations, a warning of the risk of another slowdown. On a positive note ZEW current conditions improved significantly over the past three quarters, a sign that the recovery is materialising. For the March reading we expect a further narrowing of the spread between expectations and current conditions. We expect another moderate rise in ZEW current conditions reflecting that economic recovery is gathering momentum as also seen in the January industrial production out of Germany, France and Italy. At the same time we expect a moderate fall in ZEW expectations reflecting some worries that a European double-dip could materialise. However, ZEW expectations should stay well above its long-term average of 27.1.

In the UK, attention will be on the BoE Minutes, the unemployment data and public finances. We do not expect the Minutes to contain any material news on monetary policy and the small expected rise in unemployment is not set to be a huge market mover. The Labour government is arguing that the UK is too fragile to justify the massive budget deficit but financial markets are not so sure. GBP remains under pressure and we will probably need to get beyond the election before seeing real consolidation here.

The SNB softened the tone toward appreciation of the CHF in the past week's statement on monetary policy. This opens up for lower levels in EUR/CHF but the spot didn't move immediately. Trade data and industrial production is the most interesting from the data calendar.

In the coming week focus in Asia will be on the monetary meeting in Bank of Japan (BoJ) closing on Wednesday. In the Japanese press there has in past week been speculation, that the BoJ will discuss further easing measures in connection with the monetary situation. Basically there are two arguments for easing further. The most important being that deflation, measured by CPI excluding food & energy, has eased slower than expected and in addition the strong JPY is a major concern. However, comments from board members Suda and Noda in the past week do not suggest that there currently exists a consensus for further easing. If the BoJ eases further, it will not happen until April and it would likely be done by the BoJ providing liquidity at longer maturities at fixed interest rates in the money market. In December the BoJ started providing liquidity on three-month maturities in the money market at a 0.1% interest rate. If the BoJ eases further it will probably extend maturities to six months. It should push longer term money market rates slightly lower, but the impact should be limited.

In China the National People's Congress (NPC) is set to close its annual session on Sunday March 14. The strategy for the economic policy has already been communicated at the opening of the NPC session, but we cannot rule out there could be further important news, not least in connection with Prime Minister Win Jiabao's closing press briefing.

Global update

Slowing momentum versus sustainability creates volatility

Our expectation that markets would become more volatile in 2010 has so far proven correct. After the biggest correction in the stock market since equities bottomed in early 2009, stocks have recovered to recent highs again. Two main factors seem to explain this development. First, the Greek crisis has moved to the background after more clear backing for Greece from the EU. Second, a positive surprise in US non-farm payrolls and strong ISM employment indices raised hopes that the recovery will prove sustainable. There are signals, though, that global growth will lose momentum during the coming quarters (see latest update of Tactical Monthly). This mixed bag of on the one hand falling leading indicators and on the other hand more signs of sustainability is likely to keep volatility high in risk markets and we believe another correction in equities could be in sight before long.

Fed has begun muttering about a change in language

It has been a quiet week in the US, with only a few interesting data releases. The NFIB small business optimism index for February inched lower from already depressed levels. Apparently small businesses continue to have a hard time compared with larger corporations as surveyed in the nationwide ISM. With small businesses being an important source of job creation, supplying about one-third of total new jobs in the US, this continues be an underlying concern with respect to the job market recovery. However, fortunately claims data now seems to have resumed the downward trend following a period where bad weather and backlogs have been disturbing the data. That said, the improvement remains slow and initial claims data still remains about the low of 450 late last year. However, the February employment report left little doubt that the underlying trend in payrolls is improving and we look for a solid March reading. See Flash Comment - US: Labour market defying East Coast blizzards.

This week the WSJ had an article that Fed members have begun muttering about how and when to change the 'extended period' language, which for many months has been an inherent part of the communication about future low rates for a long period. Although we do not expect such a change to be imminent, it is an important sign that things are beginning to move in that direction. Indeed, this could become a market theme sooner rather than later. Read more about the upcoming Fed meeting in the Market Mover section.

Talk of European Monetary Fund, Euroland data improves again

Talks about the creation of a European Monetary Fund (EMF) continues. Last Sunday, the German finance minister, Wolfgang Schäuble, said that he would present proposals for a European monetary fund soon. The European Commission said it supports creating the EMF to help Euro area facing balance-of-payments difficulties. The European Commissioner for Economic and Monetary Affairs, Olli Rehn, said that the Commission would present a formal proposal in the next few months. While we believe that setting up such a fund, with similar characteristics to the IMF, would make perfect sense, it could prove challenging to create such a fund. For example, this week German Chancellor, Angela Merkel, warned that creating the EMF would require a new treaty and the verification of all EU countries.

This week brought a bit of encouraging news, as industrial activity data out of Germany, France and Italy showed decent increases in January compared with December. This is especially welcomed since 'hard data' lately has been disappointing. Further we saw some indicative evidence that domestic demand might be picking up a little in Europe. This was seen in February export data out of China, which posted a strong gain of 3.1% m/m s.a. Of particular interest were the strong improvements in exports to both the US and Europe (US: +6.8% 3m/3m, Europe: +6.0% 3m/3m).

Overall this week's data releases support our view of decent GDP growth in Q1 for the Euro area. However, downside risks should not be ignored. In a speech given this week, ECB Governing Council member, Alex Weber, said that German GDP may contract in Q1. Mr Weber however also said that he sees German growth accelerating later in 2010. We are a little more optimistic than Mr Weber regarding Q1 expectations, but we acknowledge that economic activity got off to a weak start.

Chinese data improves, tightening coming closer

In China, comments from the central bank governor, Zhou Xiaochuan, and economic data released in the past week support our view that China will soon raise its leading interest rates and resume appreciation of CNY. In connection with the annual National People's Congress session, Zhou softened China's stance on appreciation compared with earlier official comments. Zhou said that the policy of keeping CNY broadly stable against USD since mid-2008 should be regarded as a crisis response and not a permanent state for China's exchange rate policy. Abolishing the 'USD peg' would basically be part of China's exit strategy. However, Zhou was still concerned about the outlook for the global economy and advised extreme caution in exiting current stimulus policies.

However, economic data released for January and February suggest that Zhou should not be overly concerned. Both industrial production and exports have been better than expected and investment demand did surprisingly well in early 2010, despite the government's attempt to curb credit growth. Overall these data suggest GDP growth is again accelerating above 10% q/q AR in Q1 10 from about 9.5% q/q AR in Q4 09 - see Flash Comment - China: Growth picks up speed again. In addition, inflation in February accelerated to 2.7% y/y from 1.5% y/y in the previous month. Although this is partly due to seasonal distortions from the Chinese New Year Holliday, inflationary pressure in China is increasing and in particular monetary policy will soon have to be adjusted. We still expect China to hike its leading interest rates in late April/May and resume appreciation of CNY in May.

In Japan, GDP growth in Q4 09 as expected was revised lower from 4.6% q/q AR to 3.8% q/q AR mainly due to a minor downward revision of private non-residential investment and a bigger negative contribution to growth from inventories. Q3 09 was revised slightly lower to -0.6% q/q AR while Q2 09 was revised markedly up and now shows a whopping 6% q/q AR GDP growth. Average GDP growth for Q2 to Q4 remains around 3% q/q AR and hence the revisions have no major impact on our forecast of 2.7% GDP growth in 2010. The Q4 national account data still shows a slight increase in private non-residential investments, suggesting private capex has finally bottomed out. This was confirmed by the latest core domestic machinery orders for January released last week. Core domestic machinery orders declined 3% m/m in January, but this came on the back of a 20% m/m increase in the previous month and it appears that core domestic machinery orders have stabilised.

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