• We are still waiting for a solution to the Greek debt woes, with the Greek parliament due to vote on key elements of the additional austerity measures – possibly as soon as Sunday.
• In the US, retail sales could surprise the markets on the upside and CPI numbers are set to increase at a modest pace.
• Eurozone Q4 data should confirm our outlook for a sharp drop in production in the final quarter of last year.
• China’s vice president will start his official visit to the US on Monday and the 14th EU-China summit will be held later in the week. In Japan, GDP probably contracted slightly in Q4 11.
• Inflation in Sweden is set to drop sharply and we still expect the Riksbank to cut its policy rates.
• In Norway, attention will centre on the annual address of the central bank head. Q4 11 GDP data are likely to show growth just below trend.
Global Update
• Greek politicians reached a deal on austerity measures but Eurogroup finance
ministers set conditions for approving the second bailout package for Greece.
• The US economy continued on the recovery track, with consumer credit numbers surprising on the upside and initial jobless claims declining.
• An unexpected large acceleration in Chinese inflation in January seemed to be mainly due to seasonal distortion.
Recession in Denmark has been called off, as the Danish economy moved into the black in Q4. In Norway, chances of further policy rate cuts are fading.
Market movers ahead
Global
• Next week will see quite a few interesting data releases for the US economy. On Wednesday we will receive the Minutes from January’s FOMC meeting. After the historically transparent initial statement, in which the committee for the first time published its projection for the Fed Funds rate, we do not expect any significant new information in the minutes.
On Tuesday we expect the retail sales report for January to surprise on the upside rising 0.8% m/m, as we saw substantial gains in both chain store and car sales, indicating that underlying demand is picking up. On Friday we expect both core and headline CPI to increase modestly 0.2 % m/m.
Additionally we will see the first figures for manufacturing confidence, in the form of local business surveys from New York and Philadelphia Fed. We expect them both to have improved as the manufacturing sector has shown strong momentum, with the latest ISM reading continuing the upward trend. This supports our upbeat forecast for industrial production,released on Wednesday, of a 0.9% gain in January. Lastly our eyes will be on the housing figures coming out next week. We expect to see gains in housing starts, building permits and the NAHB housing market index. This could help to underline the recent positive trend in housing data, signalling a more consistent bettering of the otherwise depressed housing market.
• In the euro area the focus continues to be on the new rescue package for Greece. This weekend the Greek parliament is expected to vote on key elements of the additional fiscal tightening plans. It will be very interesting to see whether collective action clauses will be imposed, and hence whether from a legal point of view there will be a default that will trigger CDS-contracts.
In the coming week Q4 GDP data will be released in a number of euro area countries. In the euro area we expect the sharpest drop in production to occur in Q4 with a drop of 0.3% q/q which is slightly higher than consensus of -0.4% q/q, published on 23 January 2012. Spain GDP figures have already been released and showed a reading of -0.3% q/q. We forecast a mild recession in the euro area with another slight decrease in GDP of 0.1% in Q1 2012 before returning to positive growth rates in Q2.
Euro area industrial production numbers for December will be released in the coming week. We expect a substantial drop of 1.7% m/m in line with the poor German December figures. Also the ZEW figures for February are worth keeping an eye on despite the high correlation with market sentiment. We expect to see a continued improvement in the forward-looking indicator.
• The UK data calendar is packed next week with CPI released on Tuesday,
unemployment data and Bank of England’s inflation report on Wednesday and retail sales on Friday. Inflation will most likely take another nose dive to below 4%, but still above BoE’s upper acceptance level at 3%, while retail sales data probably will show lower spending in January compared to December.
The Bank of England announced earlier this week that it will continue with its
quantitative easing programme. Specifically, the Bank of England will purchase GBP 50bn Gilts over the next three months, i.e. monthly buying will decrease slightly from GBP 18.7bn to GBP 16.7bn. As the bond supply in H1 is slightly higher than in Q4, there will be a modest reduction in the net impact of QE. QE will still outpace supply though. In an attempt to reduce the risk of undesirable frictions in the functioning of the gilt market, the BoE made some adjustments to its buying strategy, which caused the yield curve to steepen. We believe the BoE will keep rates low in the coming months with its bond buying. It seems like the BoE isn’t particularly worried that additional QE will push CPI higher.
• In China focus next week will be on a couple of political events. First, the Chinese Vice President, Xi Jinping, will on Monday start his official visit to the US. This is important because Xi is expected to become Chairman of China’s Communist Party and China’s next president in connection with the big power transfer that will start late this year. As usual China’s foreign exchange policy will probably be on the agenda during Xi’s US visit. In addition the fourteenth EU-China summit will be held in Beijing on 14 February. EU council president Herman Van Rompoy and commission president José Manuel Barroso will participate from the EU and Prime Minister Wen Jiabao among others will participate from China. On the agenda is expected to be possible financial assistance from China. We think that the Chinese line will continue to be that any direct financial assistance from China will have to be through IMF. In our view it is possible that China will announce a major contribution to IMF’s resources in connection with the G20-finance minister meeting on 25-26 February. With a heavy political calendar in the coming weeks we think that the pace of appreciation of CNY could temporarily pick up in the coming weeks to avoid too many critical questions about China’s willingness to allow its currency to appreciate. In the data calendar money supply and credit data are the only major releases next week.
• In Japan the most interesting release next week will be Q4 11 GDP data. We expect GDP to have contracted slightly in Q4 after having expanded close to 6% q/q AR in Q3. The contraction in GDP in Q4 has mostly been driven by a drop in private consumption and exports. The weak private consumption in Q4 should largely be seen as a normalization after Q3 when private consumption was boosted extraordinarily by pent-up demand after the earthquake. Exports have been hit by both slower growth and the flooding in Thailand that has disrupted the supply chain for many Japanese manufacturers. With both private consumption and industrial production recovering a technical recession in Japan looks unlikely at this stage. That also appears to be the view of Bank of Japan (BoJ) and with no severe appreciation pressure on JPY at the moment, we do not expect BoJ to announce additional quantitative easing measures in
connection with next week’s monetary meeting.
Scandi
• In Denmark, the most interesting release of the week is the quarterly employment statistics, which will give us a first indication of whether the decline in previous quarters continued into Q4. Although we now anticipate positive GDP growth in Q4, this will probably not be enough to turn the labour market around and so we expect the figures to reveal a further fall in employment in Q4.
• In Sweden, it is undoubtedly the Riksbank monetary policy announcement on
Thursday that is the main event. Inflation is published simultaneously but given the competition it probably will not have a major market impact. We nonetheless expect another sharp drop in inflation. On the Riksbank, we firmly believe that it will cut by 25bp to 1.5% due to a host of very weak data – especially relative to Riksbank forecasts – over the last couple of weeks. The upcoming (29 Feb) GDP-outcome will only serve to confirm that, and the Riksbank is sure to have seen this as well. Looking ahead we expect the Riksbank to put in another cut in its forecasts, but to remain wary of demonstrating a return to crisis monetary policy stance, which is why it will probably keep a strong upward bias over the longer term.
• In Norway, attention will probably centre on the central bank chief's annual address. Norges Bank’s governors have traditionally used the annual address to look to the long term and focus on structural challenges in the Norwegian economy. Only once has the address contained market-moving information, but that is enough to keep market participants on their toes each year. We expect this year's address to focus on the challenges of keeping cost inflation in check and urge unions, employers and politicians to exhibit moderation in a period when problems are piling up in neighbouring countries. The Q4 GDP figures will probably show growth in the mainland economy of 0.5% q/q, which is slightly below trend but far from disastrous with Europe in recession. Although this is also somewhat lower than Norges Bank predicted in October, we think it will be enough to stave off further rate cuts in Norway. 
Global Update
Greece misses a handful of deadlinesThis week Greece missed one deadline after the other before finally reaching a deal on austerity measures on Thursday afternoon. The last stumbling block was a EUR325m reduction in pensions – money that Greek politicians would rather find somewhere else.
At a Eurogroup meeting on Thursday evening, the European finance ministers were not willing to sign off on the second rescue package. Instead, they demanded that Greece vote the austerity package through parliament and detail the remaining budget cuts before the rescue package will be made available.
Euro area
At the Eurogroup meeting on Thursday night, the euro area finance ministers set three conditions that need to be fulfilled before the ministers will approve the second rescue package to Greece: (1) parliamentary approval of the policy package (vote set for Sunday), (2) additional EUR325m in structural reduction of deficit to be detailed before next Wednesday, and (3) that the political leaders of the coalition parties sign up to the implementation of the programme. A new extraordinary assembly for Eurogroup finance ministers has been set for Wednesday, but this meeting is conditional on Greece fulfilling the three conditions. When the rescue package is made available, Private Sector Involvement and Collective Action Clauses will be announced, see our expectations in Greece close to a deal.
The ECB meeting was a bit of a non-event and overshadowed by developments in Greece. The ECB kept the leading interest rate unchanged at 1% as expected. We continue to expect the ECB to keep the refinancing rate unchanged until 2014. The chance of more rate cuts has diminished further. Mr Draghi expressed concerns about the signs of credit tightening, see ECB meeting: Looking intensively at credit tightening risk.In the event of a broad-based credit contraction in the euro area, we expect policy reaction from the ECB, EBA and/or governments. Mr Draghi declined to comment on how the ECB’s holding of Greek sovereign bonds will be treated, but de facto ruled out taking a loss. We expect the ECB to sell its Greek bonds at purchase price. The market reaction was muted as the ECB delivered as expected.
US economy continues down the recovery track
US events did not cause much of a stir over the past week. December’s consumer credit figures provided a positive surprise, rising 9.3% m/m annualised – the second major increase in a row. This provided another step on the road towards a complete recovery following the major contraction in consumer credit following the financial crisis in 2009 and 2010. The rise in December was primarily driven by the non-revolving credit component – mainly student loans and auto loans. This corresponds well to the increase seen in car sales, along with soaring student loans expenses. This indicates that we are
seeing easing credit conditions, as highlighted in the latest Senior Loan Officer survey, along with signs of rising demand.
The number of people filing for unemployment benefits for the first time in the week ending 4 February continued to be a source of positive news, dropping 15,000 to 358,000(after an upward revision to 373,000 the week before). This led the less volatile fourweek moving average to fall to 366,250 – the lowest level since April 2008. Claims data tends to lead unemployment by a couple of months, indicating that the last month’s drop in the unemployment rate will continue moving forward. It is a very encouraging sign that claims figures seem to have moved onto a stable downward trajectory. However, it is still a little early to tell just how much of the last few months’ improvement in the labour market can be ascribed to the exceptionally mild winter weather.
China: Looking through the dust
In China we are now in the season where it is usually very difficult to read the economic data due to the seasonal distortions from the Chinese New Year Holiday (CNYH). This year the CNYH started on 22 January compared with 2 February last year. Because food prices usually increase in connection with CNYH, the seasonal pattern this year will tend to push inflation higher in January and lower in February. The seasonal distortion from CNYH appears to be the main reason for the acceleration in consumer price inflation in January from 5.1% y/y to 5.5% y/y. Looking ahead, we still expect consumer price inflation
declining substantially in the coming months to below 3.5% y/y by mid-2012. That said, the unexpected large acceleration in inflation in January will be another argument for the People’s Bank of China (PBoC) to only ease monetary policy cautiously. The large drop in China’s export and import growth in January was also largely due to the seasonal impact from CNYH. While we should be careful about drawing conclusions on the back of the January numbers alone, there are signs that export growth has started to improve after substantial weakness in H2 11. In addition, there are also signs of slower growth in imports. In our view, import of
particularly commodities was excessive in H2 11 relative to China’s economic fundamentals and for that reason we believe China’s import of commodities could slow temporarily in the coming months despite our expectations of an overall improvement in the economy.
Japan: Intervention by stealth
In the past week, Japan’s Finance Ministry released detailed data for its FX intervention in Q4. The Finance Ministry had already confirmed that it intervened heavily on 31 October (JPY8trn), so this was really no big surprise. More surprisingly, the data also revealed that Japan also intervened on the following four days from 1-4 November. This intervention has never been confirmed. For some this was interpreted as a possible change in Japan’s intervention policy opening up for a more continued and non-confirmed intervention in the FX market (intervention by stealth). We believe this would be a wrong conclusion. First, the intervention from 1-4 November was modest (just JPY1trn) and second, Japan has not intervened in the market since 4 November. In our view, the Japanese intervention strategy is broadly unchanged: intervention will be substantial and concentrated on single days. The data also revealed that all intervention has been in the USD/JPY cross, which we also expect to be case in the future.
Scandi Update
Denmark – Recession called offHeartening data signalled clearly during the week that the Danish economy has moved back into the black in Q4 after dropping into the red in Q3. The latest foreign trade data showed that exports grew 0.4% in Q4 despite the euro zone and Sweden, our two most important export markets, currently being in mild recession. Figures for Dankort debit card purchases in January confirmed the upswing in consumer spending seen at the end of last year. With clear signs of improvement in both consumer spending and exports in Q4, the national accounts data released at the end of this month will in all probability show a
return to growth, allaying fears of a double dip. On the other hand, the latest data for redundancy notices revealed a further increase in January. Although the Danish economy looks like avoiding recession, the economy is still in bottom gear, which is not enough to rescue the labour market. We will therefore see employment falling and unemployment beginning to rise in the coming months, adding another 10,000-15,000 people to the dole queue by the end of the year.
Sweden – Arguments strengthening
Not much new information was released in the past week and the little new information that we received, i.e. service and industrial production together with the Riksbank’s “beige book”, solidified our view of a rapid weakening in the Swedish business cycle during the winter. We are thus more convinced that the Riksbank’s sole argument for keeping rates unchanged, a low repo rate level to begin with, is not sufficient to withhold a Riksbank cut – especially since the Riksbank itself even in December deemed there was a 50/50 chance of a February cut: More grist for our mill, that is.
Norway – Hopes of rate cuts recede
The Norwegian economy has performed better than feared since the European debt crisis escalated last summer and data so far in 2012 indicates that growth has probably accelerated. The PMI is pointing to a significant rebound in manufacturing activity after the drop in December and house prices climbed 0.7% m/m in January, so there is still nothing to suggest that the housing market is cooling off. On top of all this, data from the Norwegian Welfare and Labour Administration (NAV) shows that gross unemployment fell by 2,300 people from December to January and vacancies are 12% higher than in January last year. This goes to show that the Norwegian economy still has plenty going for it despite the negative effects of the European crisis on exporters and financial
markets. Capacity utilisation is relatively high and growth will probably be above trend this year. The chances of further rate cuts from Norges Bank are therefore steadily diminishing.