Global
The coming week should be relatively quiet in terms of US data releases. We expect the ISM non-manufacturing index to increase modestly to 53.3 from 52.9 last month. The index has been hovering around 53 since the summer, so hopefully we will start to see a more permanent increase, signalling a robust expansion in the service sector. On Friday, trade balance figures are expected to deteriorate somewhat, as exports are being depressed by the insecurity in Europe in particular. However, we do not expect to see a major shift in the balance. In addition, we expect University of Michigan consumer confidence to increase somewhat, as the recent decline in gasoline prices is expected to cancel out this month‟s equity losses.
In Euroland the two main events in the coming week are the ECB‟s announcement of interest rates and the EU summit on Friday. At the ECB meeting on Thursday we expect a 25bp cut which would bring the refinancing rate down to 1%. We expect another 25bp cut in January, which also means that we see the risk on Thursday‟s meeting as skewed towards a 50bp cut. A refinancing rate of 0.75% would be an historical low. The expected drop in inflation in 2012 has enabled the ECB to cut its interest rates in response to the negative growth outlook in the eurozone. Furthermore, we expect the ECB to introduce 24-month LTROs, possibly combined with an easing of the collateral requirements on, for instance, covered bonds in attempt to help the financial sector.
On the official agenda at the European Council meeting are the current economic situation and growth-enhancing initiatives. However, it will be proposals focused on a strengthening the fiscal integration through surveillance and possible enforcement instruments that will be in focus. In that respect, the proposal from Merkel and Sarkozy on Monday will be key, as they have announced that they will reveal key components before the actual summit. Also discussions and proposals on potential future treaty changes can be expected. Both the Commission‟s proposals for possible Eurobonds and the German economic experts‟ proposal for redemption bonds are likely to be discussed as well. There have been a few hints from the euro area leaders that the ECB could be expected to increase its crisis response if the politicians can come up with proposals that mitigate the moral hazard problem in the EMU. Hence, communication from the ECB in the weekend following the summit will be key.
There are some interesting releases scheduled for the week ahead. In the eurozone we will get GDP details, retail sales and final PMIs. In Germany and France we expect industrial production numbers for October to decrease further.
In the UK, focus is very much on the eurozone crisis and the government‟s austerity measures, both of which are likely to drag down economic growth and potentially pull the UK into another recession. The Chancellor‟s Autumn Statement was not encouraging, suggesting the UK will have to borrow more in the coming years and austerity will continue beyond the government‟s term period. An IFS report showed that Britons will be worse off in 2015 than in 2002. The Bank of England is likely to keep the base rate unchanged at 0.50% on Thursday but the most important is the asset purchase target which can be lifted from the current GBP275bn. Our view is that the BoE will wait until January before raising the target as the current speed of Gilt buying is what the market can absorb and it would do little good to the economy to soak up assets faster. An extension of the bank‟s Special Liquidity Scheme could also be on the agenda soon. Keep an eye also on industrial production data due onWednesday and trade balance on Friday as these can give a hint on how weak Q4 GDP will be.
In Switzerland, November CPI data is due to be released on Tuesday. The consensus expectation is for unchanged consumer prices, which would take the year-on-year inflation rate to -0.4%. The inflation data is important, as it will affect how likely the market will view an early hike of the 1.20 minimum target in EUR/CHF at the 15 December policy meeting. Any signs of increased deflation risk in Switzerland mean a higher probability of SNB action – including the potential of a hike of the minimum target to say 1.25 or 1.30. A negative inflation reading could send EUR/CHF back above 1.24.
In Asia, China will be in focus next week where most economic data for November will be released. We expect CPI inflation to plunge to 4.4% y/y from 5.5% in October driven by a sharp decline in food price inflation. However, core inflation should also start to ease in November. In our view, CPI inflation is poised to drop below 3.5% y/y in Q2 12. Based on the weak manufacturing PMIs, we expect industrial production to ease to 12.6% y/y from 13.2% y/y in October. While the headline growth in industrial production continues to look strong, the underlying sequential trend is considerably weaker (8.2% 3m/3m AR according to our calculations). In addition, retail sales, foreign trade and urban fixed asset investment and HSBC service PMI for November will be released next week.
In China, the important annual Central Economic Work Conference for 2012 should also be around the corner. The meeting is usually held in the first half of December but has not been finally scheduled. In connection with the meeting, all 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.
Scandi
In Denmark, the week will bring figures for exports and industrial production in October. The escalating European debt crisis has hit Denmark‟s most important export markets, and the coming week will tell us what consequences this has had for exports and export-dependent manufacturing. We expect to see a decrease in both exports and industrial production from September, probably in the region of 3%. This expectation is supported by the negative manufacturing sentiment data for October. Decreased activity in the export and manufacturing sector would confirm our assumption that the Danish economy is now in recession again. GDP fell by 0.8% in Q3, and the coming week‟s data will provide an early indication of whether it will continue to fall in Q4 and so plunge Denmark back into recession. Finally, the central bank is expected to follow the ECB on Thursday; however, the current strong DKK opens up for a larger Danish rate cut.
Industrial data (Thursday, 09:30 CET) is the main course on the Swedish menu for the week ahead. We expect a further deterioration of both production and orders but refrain from producing a numerical estimate since the data is extremely volatile. October service production (Tuesday, 09:30 CET) and the November budget balance (Wednesday, 09:30 CET) will also be published, but should not make a lasting impact on financial markets.
In Norway, the week‟s most important release is the inflation figures for November. Of course, inflation is far from the most important variable for the Norwegian economy and Norges Bank‟s rate-setting at the moment. Economic data are such a mixed bag at the moment, however, that unexpectedly low core inflation could tip the balance in favour of a rate cut in December. However, we reckon that continued high cost growth and surprisingly robust demand for consumer goods will limit the chances of inflation slowing significantly. With NOK also relatively stable, there is no reason to expect import prices to fall notably either. We therefore expect core inflation to hold at 1.2% y/y, which is slightly higher than Norges Bank assumed in its October monetary policy report but by no means enough to get the market re-pricing interest rate expectations. The week also brings data for industrial production in October, and after surprisingly strong growth in September the PMI is pointing towards roughly zero growth in October. Norwegian industry is currently being pulled in two directions, with dwindling global activity on the one hand and strong growth in oil investment on the other.
The coming week should be relatively quiet in terms of US data releases. We expect the ISM non-manufacturing index to increase modestly to 53.3 from 52.9 last month. The index has been hovering around 53 since the summer, so hopefully we will start to see a more permanent increase, signalling a robust expansion in the service sector. On Friday, trade balance figures are expected to deteriorate somewhat, as exports are being depressed by the insecurity in Europe in particular. However, we do not expect to see a major shift in the balance. In addition, we expect University of Michigan consumer confidence to increase somewhat, as the recent decline in gasoline prices is expected to cancel out this month‟s equity losses.
In Euroland the two main events in the coming week are the ECB‟s announcement of interest rates and the EU summit on Friday. At the ECB meeting on Thursday we expect a 25bp cut which would bring the refinancing rate down to 1%. We expect another 25bp cut in January, which also means that we see the risk on Thursday‟s meeting as skewed towards a 50bp cut. A refinancing rate of 0.75% would be an historical low. The expected drop in inflation in 2012 has enabled the ECB to cut its interest rates in response to the negative growth outlook in the eurozone. Furthermore, we expect the ECB to introduce 24-month LTROs, possibly combined with an easing of the collateral requirements on, for instance, covered bonds in attempt to help the financial sector.
On the official agenda at the European Council meeting are the current economic situation and growth-enhancing initiatives. However, it will be proposals focused on a strengthening the fiscal integration through surveillance and possible enforcement instruments that will be in focus. In that respect, the proposal from Merkel and Sarkozy on Monday will be key, as they have announced that they will reveal key components before the actual summit. Also discussions and proposals on potential future treaty changes can be expected. Both the Commission‟s proposals for possible Eurobonds and the German economic experts‟ proposal for redemption bonds are likely to be discussed as well. There have been a few hints from the euro area leaders that the ECB could be expected to increase its crisis response if the politicians can come up with proposals that mitigate the moral hazard problem in the EMU. Hence, communication from the ECB in the weekend following the summit will be key.
There are some interesting releases scheduled for the week ahead. In the eurozone we will get GDP details, retail sales and final PMIs. In Germany and France we expect industrial production numbers for October to decrease further.
In the UK, focus is very much on the eurozone crisis and the government‟s austerity measures, both of which are likely to drag down economic growth and potentially pull the UK into another recession. The Chancellor‟s Autumn Statement was not encouraging, suggesting the UK will have to borrow more in the coming years and austerity will continue beyond the government‟s term period. An IFS report showed that Britons will be worse off in 2015 than in 2002. The Bank of England is likely to keep the base rate unchanged at 0.50% on Thursday but the most important is the asset purchase target which can be lifted from the current GBP275bn. Our view is that the BoE will wait until January before raising the target as the current speed of Gilt buying is what the market can absorb and it would do little good to the economy to soak up assets faster. An extension of the bank‟s Special Liquidity Scheme could also be on the agenda soon. Keep an eye also on industrial production data due onWednesday and trade balance on Friday as these can give a hint on how weak Q4 GDP will be.
In Switzerland, November CPI data is due to be released on Tuesday. The consensus expectation is for unchanged consumer prices, which would take the year-on-year inflation rate to -0.4%. The inflation data is important, as it will affect how likely the market will view an early hike of the 1.20 minimum target in EUR/CHF at the 15 December policy meeting. Any signs of increased deflation risk in Switzerland mean a higher probability of SNB action – including the potential of a hike of the minimum target to say 1.25 or 1.30. A negative inflation reading could send EUR/CHF back above 1.24.
In Asia, China will be in focus next week where most economic data for November will be released. We expect CPI inflation to plunge to 4.4% y/y from 5.5% in October driven by a sharp decline in food price inflation. However, core inflation should also start to ease in November. In our view, CPI inflation is poised to drop below 3.5% y/y in Q2 12. Based on the weak manufacturing PMIs, we expect industrial production to ease to 12.6% y/y from 13.2% y/y in October. While the headline growth in industrial production continues to look strong, the underlying sequential trend is considerably weaker (8.2% 3m/3m AR according to our calculations). In addition, retail sales, foreign trade and urban fixed asset investment and HSBC service PMI for November will be released next week.
In China, the important annual Central Economic Work Conference for 2012 should also be around the corner. The meeting is usually held in the first half of December but has not been finally scheduled. In connection with the meeting, all 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.
Scandi
In Denmark, the week will bring figures for exports and industrial production in October. The escalating European debt crisis has hit Denmark‟s most important export markets, and the coming week will tell us what consequences this has had for exports and export-dependent manufacturing. We expect to see a decrease in both exports and industrial production from September, probably in the region of 3%. This expectation is supported by the negative manufacturing sentiment data for October. Decreased activity in the export and manufacturing sector would confirm our assumption that the Danish economy is now in recession again. GDP fell by 0.8% in Q3, and the coming week‟s data will provide an early indication of whether it will continue to fall in Q4 and so plunge Denmark back into recession. Finally, the central bank is expected to follow the ECB on Thursday; however, the current strong DKK opens up for a larger Danish rate cut.
Industrial data (Thursday, 09:30 CET) is the main course on the Swedish menu for the week ahead. We expect a further deterioration of both production and orders but refrain from producing a numerical estimate since the data is extremely volatile. October service production (Tuesday, 09:30 CET) and the November budget balance (Wednesday, 09:30 CET) will also be published, but should not make a lasting impact on financial markets.
In Norway, the week‟s most important release is the inflation figures for November. Of course, inflation is far from the most important variable for the Norwegian economy and Norges Bank‟s rate-setting at the moment. Economic data are such a mixed bag at the moment, however, that unexpectedly low core inflation could tip the balance in favour of a rate cut in December. However, we reckon that continued high cost growth and surprisingly robust demand for consumer goods will limit the chances of inflation slowing significantly. With NOK also relatively stable, there is no reason to expect import prices to fall notably either. We therefore expect core inflation to hold at 1.2% y/y, which is slightly higher than Norges Bank assumed in its October monetary policy report but by no means enough to get the market re-pricing interest rate expectations. The week also brings data for industrial production in October, and after surprisingly strong growth in September the PMI is pointing towards roughly zero growth in October. Norwegian industry is currently being pulled in two directions, with dwindling global activity on the one hand and strong growth in oil investment on the other.