Global
• We have a fairly slow week in the US markets coming up, as markets will be closed on Monday for Presidents day. We will, however, receive some potentially interesting housing figures, starting off with existing home sales on Wednesday. We have seen some improvement over the past few months, after the figure reached a historical low in the summer of 2007. However, we only expect to see a moderate gain of 1.0% in January, indicating that there is still a long way to go to get back to normal levels. In spite of the improvement in the sales of existing homes, we are still not seeing any signs of takeoff in new home sales. We expect the figure to remain flat in January –far from the boost the housing market needs in order to start being a positive contributor to growth.
• On the same note we will receive University of Michigan consumer confidence on Friday. We do not expect major gains, as gasoline prices continue to dampen consumer sentiment.
The Eurogroup meets on Monday to discuss the approval of the second rescue
package for Greece. It is increasingly clear that the European finance ministers are not willing to throw good money after bad. If the Greek government does not live up to all its commitments, the EU and IMF will no longer make up excuses for lending Greece more money. The reason for this shift in paradigm is that from a market viewpoint Greece now matters less – a three-quarter default is already priced in and all but Portugal appear to have successfully shown that they are not playing in the same league as Greece. If Greek politicians haven’t yet realised this shift in paradigm the risk of a disorderly default is very real. This could be very harmful to the Greek banking sector, which would need EUR30bn in recapitalisation. We expect the Eurogroup and Greece to make ends meet at the beginning of the week, which should pave the way for a bit of a relief rally in the market.
• Flash PMIs for February will be watched intensively on Wednesday as they will give an important indication of to what extent the renewed uncertainty about Greece will impact hard data. We expect modest improvements, which will be seen as a confirmation that growth has returned to the euro area in Q1. Later in the week the German Ifo expectations index is likely to show that the German economy is regaining strength. The volatile Euro area industrial new orders are expected to have increased slightly in December following a 1.3% m/m decline in November.
• From the UK, we get data for public sector net borrowing on Tuesday, Bank of England Minutes on Wednesday and second estimate of Q4 GDP data including subcomponents on Friday. The government’s cash requirements remain high which markets have gotten used to, meaning the data probably won’t have an impact on trading. We guess the Bank of England’s decision to lift the asset purchase target by GBP50bn to GBP325bn was unanimous and everything else can have a pound positive impact as forecasters on average concluded the BoE was moving closer to an end of its easing programme. We still think the BoE will announce another GBP50bn buying in May, but it all depends on the economic data and whether the BoE is certain that the economy is strong enough to recover without crutches. The Q4 GDP can in our view be revised slightly higher as December was better than feared. The pound is in our view on the expensive side and could lose vs. the euro going forward.
• In China we are currently in the quiet season regarding data releases because many of the most important economic data like industrial production, fixed asset investment and retail sales for January will not be released until mid March together with the release of the February data. In the coming week the most important release will be the flash estimate for the HSBC manufacturing PMI for February. The details in the January HSBC manufacturing PMI were relatively strong with a marked improvement in the leading new order inventory balance. In addition there might be some upward bias in February because the Chinese New Year holiday was in January this year compared to February last year. Hence, we expect HSBC manufacturing PMI to improve from 48.8 to 50.2 in February. China’s National Bureau of Statistics is also expected to release house prices for January this weekend.
• In Japan the main release next week will be the foreign trade data for January. The preliminary data released for the first 20 days in January suggest that Japan’s import surged and exports remained subdued in January. Consequently Japan’s seasonal adjusted trade deficit probably surged in January to JPY1,010bn from JPY567bn in December last year. However, it should be noted the trade data are probably distorted by the Chinese New Year celebration across Asia. As the Chinese New Year this year was in January compared to February last year, this seasonal pattern will tend to depress the year-on-year growth rates. We expect export growth to ease further to -11.6% y/y in January from -8.0% y/y in December.
Scandi
The most important data this week in Denmark will be consumer confidence for February. Consumer confidence has been closely watched of late, as it has shown consumer expectations going forward to be negative, though consumption has actually risen over the same period. However, if this negative view of the future becomes more deeply entrenched, it would be difficult to imagine consumption continuing its recent positive trend. We expect that good news on a number of economic fronts in February will ease consumer pessimism. That said, consumers are traditionally more pessimistic in February due to the end of the sales, among other things. Overall we therefore expect a slight fall in consumer confidence to -8 in February from -7 in January.
• As Riksbank and January inflation are out of the way, the market is likely to shift focus to NDO’s new budget forecast (6 March) and the upcoming issuance of the new 20-year bond (SEK10-20bn switched nominally vs. 10-year bonds), which will start on 12 March. This will add risk to the market and is likely to continue to put upward pressure on the Swedish long-end until it is done. The appetite for this bond, however, is likely to be at least partly dependent on the global market sentiment on the state of the European debt crisis.
• Data wise there are some potentially important numbers out. The unemployment rate is set to rise in January. We expect the ordinary nsa figure to print 8.0% and the figure to hit 7.6%. There is nothing dramatic about these figures but they suggest that the trend has turned up and this in turn – as an important determinant for Swedish government finances - suggests that the budget balance will continue to deteriorate, raising bond supply going forward. This number, and the Q4 GDP figure out in the following week, may have a direct impact on NDO’s new forecast. We expect NDO to revise its 2012 budget forecast to a SEK25-50bn deficit, from currently a SEK25bn surplus. There is also the February NIER business and consumer confidence survey. These data have recently suggested that there is very little relief in most sectors, but we note some stabilisation at quite low levels in retail trade and consumer confidence.
• In Norway, the coming week sees the Labour Force Survey for December
(November-January). Recent months have brought divergent labour market data, with unemployment holding up according to the LFS but falling according to the Norwegian Labour and Welfare Administration (NAV). The latter’s unemployment measure has a tendency to lead the LFS in periods of economic recovery when the labour market is picking up. We therefore expect LFS unemployment to fall to 3.3% in December, confirming the impression of a rebound in the labour market. It is also worth keeping an eye on the figures for employment as an indicator of sentiment in industry. 
Global update
Tug of war continues
The tug of war between uncertainty about Greece and relatively strong economic data, particularly in the US, continues. GDP in Q4 contracted in both the euro area and Japan, but from a growth perspective it appears that the worst is over as long as the euro crisis does not spiral out of control.
Euro area contracts
Euro area GDP contracted for the first time since Q2 09, declining 0.3% q/q in Q4 11. The peripheral countries showed substantial weakness with Italy and Spain’s GDP declining 0.7% q/q and 0.3% q/q respectively, but also Germany posted negative growth at -0.2% q/q. France surprised positively with a 0.2% increase driven by private consumption and investments. The contraction in the euro area is expected to be shortlived and we could see a return to growth already in this quarter.
The Eurogroup cancelled a meeting scheduled for Wednesday and held a teleconference instead. Ahead of the meeting ECB governor Mario Draghi and the finance ministers received a two-page letter from Samaris, leader of the New Democrats and a likely candidate to become the next Greek prime minister, showing his commitment to implementing reform measures also after the elections but also stating that modifications could be needed. The remaining EUR325m in cost cutting measures had also been found.
Jean-Claude Juncker, Head of the Eurogroup, concluded in a statement that the Eurogroup “will be able to take all the necessary decisions on Monday, 20 February”. The IMF is concerned that the agreed measures might not be enough to bring the debt down to 120% of GDP in 2020. Germany, Finland and the Netherlands are pushing for more promises and more controls. Some commentators argue that the German finance minister, Schäuble, is really pushing for Greece to give up and leave the euro area.
The US continues down the recovery track
Despite some slightly disappointing releases, the past week’s data did not provide any major discouragements concerning the recovery of the US economy. On Tuesday retail sales figures disappointed slightly on the back of weak care sales figures, as headline came out rising 0.4% m/m – a decent figure, but only half of consensus expectations. However, the details remain strong, as the core index, excluding autos and gas, rose by 0.6% in January. Overall this puts us on course for decent Q1 consumption growth of 2.5% ann.
On Wednesday we received January’s industrial production figures. In spite of the flat headline reading, dragged down by utilities production due to the mild weather, we saw some rather encouraging details. Manufacturing industrial production rose 0.7% in January, and with an upward revision of the December number to 1.5%, we are seeing a consistent improvement, particularly in motor vehicles and parts production (which soared 6.8%) as the supply distortions from last year’s Japanese earthquake and the flooding in Thailand wear off.
This indicates that we are on track for very decent Q1 growth in the manufacturing sector. This was further supported by decent Philly and Empire manufacturing PMI readings, supporting our view that ISM will continue its climb over the months to come.
Good news came in the form of continued improvement in the initial jobless claims figures. Only 348,000 persons were added to the unemployment line in the week ending 11 February, 13,000 less than the week before – the lowest reading since early 2008. The improvement we have seen in February’s claims figures signals some underlying strength in the labour market. This bodes well for the February payrolls figures to be released in two weeks time.
More aggressive QE from Bank of Japan
In Japan GDP in Q4 contracted 2.3% q/q AR, which was a substantially larger contraction than expected. The contraction was mainly driven by lower exports and inventory cuts. Taken together net export and inventories subtracted 3.6%-points q/q AR from GDP growth in Q4. However, it should be remembered that the contraction in GDP in Q4 comes on the back of a 7.0% q/q AR surge in GDP in Q3, when GDP was boosted by pent-up demand and emergency reconstruction in the wake of the March earthquake. There has been a lull in reconstruction in Q4, which should prove temporary. In addition there has been a negative impact on many Japanese manufacturers’ supply chain from the flooding in Thailand that should also prove temporary. Finally, the large cuts in
inventories are unlikely to be repeated in Q1. Hence, a return to a technical recession in Japan looks very unlikely at this stage. The latest industrial production numbers and production plans suggest that GDP growth will rebound relatively strongly again to above 3% q/q AR in the current quarter.
Despite the weaker than expected Q4 GDP Bank of Japan (BoJ) surprised most by announcing relatively aggressive quantitative easing in connection with its monetary meeting on Tuesday. BoJ expanded its asset purchase programme by JPY10trn to JPY30trn. Importantly BoJ also announced that it intends to complete the purchases by the end of 2012 (no target date for completion of purchases had been announced previously). BoJ has purchased assets for about JPY10trn since the asset purchase programme was announced in October 2010. Hence, Japan will have to purchase financial assets (mainly government bonds) for about JPY20trn before the end of 2012 or more than double the pace of asset purchases compared to 2011.
In addition BoJ announced an explicit 1% inflation target, albeit with some flexibility. In our view consumer price inflation will probably remain below 0.5% y/y by the end of 2013. Hence, the implication of the inflation target is that BoJ should not only keep its leading interest rate close to zero well into 2014, but also probably continue its asset purchases in 2013. Hence, the current JPY30trn ceiling is likely to be raised further at some stage (most likely in Q4).
Scandi Update
Denmark – Labour market moving sideways
Overall employment in Denmark remained flat in Q4 12, according to fresh job data. However, the data hide a decline in the number of people employed in the public sector of 5,000 and a comparable increase in private sector employment. The increase in private sector jobs was driven, not least, by en improvement in the construction industry, which saw jobs rise by 3,000. All things considered, the Danish labour market has thus proved surprisingly resilient in the face of the slowdown that hit the Danish economy following the escalation of the European debt crisis in late summer last year. In the past week, the European Commission published a report intended to shed some light on the macroeconomic imbalances in individual EU economies. The report points to well-known challenges in relation to the Danish economy. First of all, exporters have lost market share due to the weakening of competitiveness prior to the crisis. That the Commission highlights this issue is not surprising and we expect employers and employees to go some way towards addressing this problem in the ongoing wage talks. Secondly, on the positive side, the report emphasises the healthy economic fundamentals of Denmark and 11 other EU members, including Sweden (which is currently top of the EU class). As such, we expect the conclusions of the Commission report to have no significant bearing on Denmark.
Sweden – Riksbank cut again and more to come
Riksbank cut the repo rate by 25bp for a second time in this easing cycle. This was much expected by the analyst community although the market had priced less than a full rate cut. Hence, rates dropped on the announcement. Riksbank revised down both its economic growth and inflation forecasts, albeit very modestly. Again the Riksbank made a “one-off” cut in the repo rate forecast, which remains unchanged at 1.5% before turning up later on. The repo forecast, however, has never been a good guide for Riksbank action and we continue to see a steady string of rate cuts this year. Apparently, Riksbank is still building its case on a positive solution of the European debt crisis. In our view Riksbank is behind the curve and we see a high probability that it will have to revise down its growth and inflation forecasts once again. For instance, January inflation, which was released at the same time as Riksbank’s monetary policy report, was 0.3 percentage points lower than Riksbank’s forecasts for both CPI and CPIF. In addition, there is a good chance that Q4 GDP will turn out considerably lower than Riksbank is assuming.
Overall, this suggests there is actually a very attractive case for additional rate cuts. If Swedish mortgage and business rates fail to react to this rate cut, Riksbank may have to rethink its rate path or, at a later stage, possibly revert to unconventional measures. The latter, however, is not an option at this instance.
Norway – New tone from Norges Bank
As expected, there was not much direct market news in central bank Governor Olsen’s annual address. Concerns were again expressed about corporate competitiveness, but the speech contained no direct references to the NOK exchange rate or interest rates in connection with this. However, Olsen said that rate cuts, which might weaken the exchange rate, could easily trigger higher wage growth and hence weaken competitiveness anyway. This is a completely new tone from Norges Bank, which now appears to be almost ruling out the option of more rate cuts in Norway. As the regular economic data had indicated, growth remained buoyant in Q4. Mainland GDP was up 0.6% q/q, which was somewhat better than expected. A decline in exports of traditional goods was offset by high levels of activity in the service sector and further growth in investment. The most remarkable thing about the Norwegian numbers was probably that growth in Q4, when Europe was suffering, was almost in line with trend growth in Norway.