Euro Tensions to Continue

Global

• Following a bit of a slow week in US markets, quite a few interesting events are on the agenda next week. On Tuesday, the last FOMC meeting of the year will be held. We do not expect any major surprises policy wise, but there could be changes in the communications strategy, with particularly Fed vice chairman Yellen, who is also heading the task force on FOMC communication, and Chicago Fed president Evans speaking out in favour of changing the strategy, by clarifying how Fed policies depend on economic activity, by e.g. formulating a specific numerical threshold for unemployment and inflation. More specifically, Evans suggested that the FOMC should communicate that it will continue to keep the federal funds rate close to zero as long as the unemployment rate exceeds a given threshold, conditional on the medium-term inflation outlook remaining at or below a specified level. However, it remains unclear whether the task force is far enough along with its work to present a new strategy as early as next week, or whether we will have to wait until the new year.

On Tuesday, we expect the retail sales report for November to remain on track,
increasing 0.5%, with the main driver being car sales, which have surprised on the upside over the past few months. Core sales are expected to look somewhat weaker than last month, as chain store sales figures have been losing steam over the past few months. On Friday, core CPI is expected to remain modest, but slightly over consensus, increasing 0.2% m/m, due to the rent-of-shelter component, which has remained surprisingly strong over the past couple of months.

The first figures for manufacturing confidence in December will be released in the form of local business surveys from New York and Philadelphia Fed. Following last week’s surprisingly strong ISM figures, we expect moderate increases in both surveys, with the Empire figure rising to 4.6 and the Philly figure increasing to 7.0.

• The final outcome of the EU Summit, which started on Thursday, and the ECB
response will be decisive for risk sentiment in the coming week. Previous hints from ECB president, Mario Draghi, that the ECB could increase its crisis response if the politicians can come up with proposals that mitigate the moral hazard problem in the EMU, was downplayed at the ECB meeting. Nevertheless, the actual SMP purchases will continue to be an important factor for risk sentiment. Also S&P’s move on whether or not it downgrades the euro area countries and the EFSF will be important.

A number of interesting releases are due in the week ahead. Most important are the flash PMI data for Germany, France and the euro area. We expect minor decreases in line with the continued deterioration in the new orders components. German ZEW data could also attract some attention. Despite strong industrial production data from Germany (released this week), we expect euro area industrial production to decrease in October and continue the decreasing pattern in the coming months. Details on euro area inflation in November will be released. We expect both headline and core inflation to be unchanged relative to the October reading.

• In the UK, investors will focus on the RICS house price balance, Nationwide
consumer confidence, CPI, unemployment report and data for retail sales in
November – all due to be released next week. UK data has generally surprised on the upside lately, but only because expectations have been rather low ahead of almost all releases. The Bank of England left monetary policy unchanged at its last meeting and will carry on with its asset purchases. We believe the BoE will also buy Gilts next year and bond holdings from quantitative easing will amount to GBP400bn by end- 2012. Markets are expected to be thin next week, which means volumes will be lower and movements can appear erratic.

• In Switzerland all focus will be on Thursday’s SNB monetary policy meeting. The consumer price report released earlier this week showed core inflation falling more than 1% y/y in November. Together with signs of significantly weakening economic conditions in the eurozone (Switzerland’s biggest export market), this increases the probability of further SNB action – including the possibility of a higher minimum target on EUR/CHF. However, it could also come via capital controls or negative interest rates. So, will the SNB hike the 1.20 floor on Thursday? Given the increased deflation risk the probability of this has likely risen above 50%, but it is by no means given.

• In China the important and secretive annual Central Economic Work Conference for 2012 will be held on 12-14 December. All the important economic policymakers will gather and decide on the most important macro goals for economic policy in 2012. Hence, the meeting might give us an idea of how forcefully the Chinese government is moving economic policy in a more growth-supportive direction. We do not expect the Chinese government to signal a dramatic easing of economic policy. Monetary policy will probably still be described as ‘prudent’. The target for inflation in 2012 will probably be lowered slightly to 3.5% from 4.0% in 2011. The target for M2 money supply growth will probably be unchanged at 16% and finally the target for banks’ new loans will probably be raised slightly from CNY7.5trn to CNY8.0trn. These targets will, in our view, leave room for a slight easing of monetary policy. China is also scheduled to release foreign trade data this weekend and bank loans and
money supply M2 growth sometime during next week.

• In Japan the main focus next week will be the release of the Bank of Japan’s Tankan Survey for Q4. We expect it to have deteriorated, indicating that growth is poised to slow markedly in Q4 on the back of the sharp recovery in Q3 in the wake of the earthquake. Our forecast on Tankan also suggests that there could be some downside risk on our 2% q/q AR growth forecast for Q4.

Scandi

• In Denmark, the coming week brings consumer prices for November. We expect inflation to fall slightly to 2.6% y/y from 2.8% y/y in October, due partly to lower petrol prices but primarily due to base effects. This is still relatively high, due partly to the introduction of the new fat tax in October, which has lifted inflation 0.3pp.

• In Sweden, we will receive inflation and we are interested to see if the 0.5pp
deviation from the Riksbank’s forecast prevails or not. Should the week unfold as expected, we are provided with additional arguments to expect a Riksbank cut of at least 25bp at the December monetary policy meeting.

• In Norway, the week’s main event is, of course, the rate-setting meeting at Norges Bank. Both the market and analysts are agreed that the only uncertainty is how far interest rates will be lowered – but is a cut actually a 100% certainty? Although the turmoil in financial markets has persisted, it is also worth noting that money market premia have been lower than Norges Bank predicted in its last monetary policy report. The report also made full allowance for a global economic downturn. There have been no dramatic changes in the market’s interest-rate expectations for Norway’s trading partners since October, and the import-weighted NOK exchange rate is largely as projected in the monetary policy report. The impact of the crisis on the Norwegian economy is clear, especially in surveys of business and household confidence, but ‘hard’ data show that private consumption is holding up, house prices are still climbing and homebuilding activity remains strong, and the outlook for oil investment has even been revised up. Our impression is that growth will be lower than Norges.

Bank assumed, but there are no signs of a serious downturn. So far, therefore, there does not seem to be a need for “a decrease in the key policy rate […] to prevent growth and inflation from becoming too low”, as discussed in the October money policy report. In an article in Dagens Næringsliv on 21 November, the governor of the bank wrote: “Should the outlook deteriorate significantly, the key policy rate may be lowered as a counterbalance to higher funding costs in the bank system.” As the outlook has not deteriorated significantly, we assume that Norges Bank will leave interest rates alone, which goes right against the market’s expectations. Concern that NOK could become too strong may nevertheless lead Norges Bank to cut its rates, and it would then remain to be seen whether this cools the rise in house prices and debt.