Weekly Focus: Data and Earnings Fuel Optimism

Global update

• Upside surprises in global economic data and Q3 earnings in the US have increased optimism of a sustained recovery
• In the US, retail sales provided good news on the underlying strength in consumption and initial jobless claims added some optimism on the labour market
• Despite a slightly disappointing ZEW in Germany, on balance economic data in Euroland have been positive
• Industrial activity in Euroland continues to recover and increased for the fourth month in a row in August
• In China exports and imports soared in September easing our fears of a substantial slowdown in H2 2009
• Minutes from the latest FOMC meeting showed that the majority of the committee members are still on the dovish side

Market movers ahead

• In Sweden the main event is the Riksbank rate decision. We do not expect the Riksbank to change its forecast, nor do anything new. Also keep an eye on earnings reports from Swedbank and SEB
• A stream of FOMC members are speaking during next week including Chairman Bernanke. Given the wide range of views expressed lately changes in the stance of the inner-circle of the FOMC will be watched closely
• Euroland flash PMI and German Ifo are expected to increase but at a slower pace than in recent months
• We expect US housing market data to show further improvement
• In Asia focus next week will be mainly on China, where most September data and Q3 GDP growth will be released

Global update

Past week's positive news on the macro front and better than expected Q3 earnings in the US have increased confidence in a global recovery
Private consumption in the US shows signs of life
The September retail sales data in the US were very encouraging despite the sharp drop in headline retail sales. As expected, this was solely the result of a sharp drop in car sales as the positive impact from the “cash-for-clunkers” programme has started to wane. As can be seen in the chart on the right, retail sales excluding cars, gasoline and building materials remained very healthy in September. Hence private consumption is starting to show some strength despite the weak labour market. According to our estimates the September retail sales data suggest that private consumption could exceed 3% q/q AR in Q3.
Industrial production in Euroland continues to recover
Despite a slightly disappointing ZEW-indicator in Germany, economic data in the Euro area on balance have been positive. Importantly industrial activity in Euroland continues to recover and in August increased for the fourth month in a row. The development in industrial production suggests we should return to substantial positive GDP growth in Q3, as seen in the chart to the left.
Strong Chinese export data ease slowdown fears
In Asia data in the past week have eased our fears of a substantial slowdown in China in H2 2009, when the impact from the massive fiscal stimulus starts to wane. Both exports and imports soared in September following a slightly disappointing August. The continued strong growth in import volumes suggests domestic demand remains strong and China continues to be an important driver for global growth. In addition, the recovery in exports appears to be on track and for that reason stronger exports should offset some of the slowdown in investments that will materialize when the fiscal stimulus starts to wane.
Besides China, South Korea and Taiwan have so far reported foreign trade data for September. For all three countries exports developed better than expected in September and the recovery in global trade appears to be firmly on track. This bodes well for September export and industrial production data globally.
Bank of Japan is not rushing for the exit
In Japan Bank of Japan (BoJ) at its monetary meeting upgraded its view of the economy further and now believes the recovery has started. However, BoJ did not suggest imminent plans to exit some of its quantitative easing programmes. In the US the FOMC minutes in general reflected less disunity than could have been expected following the wide range of opinions expressed by individual committee members in recent weeks. The most surprising fact is that some members actually favoured an expansion of the MBS purchase programme while only a single member wanted to scale down the programme.

Market movers ahead

Global

• In the US the calendar is dominated by housing market data. Generally we expect data on housing activity to show further improvement with a rise in housing starts, building permits and existing home sales. Fed will be in focus again this week with a stream of FOMC members speaking, including Chairman Bernanke. Individual committee members have expressed a wide range of opinions in recent weeks, so keep a close eye on changes in the stance of the inner circle of the FOMC.
• On Friday we get Euroland flash PMI and German Ifo for October. This week the German ZEW indicator disappointed with a small setback and we project that although both PMI and Ifo will increase, they will not increase particularly strongly. Our models indicate further increases in the coming months. Euroland industrial new orders in August are also out on Friday and are expected to show that the strong rebound continues (German export orders surprised notably to the upside).
• In Asia focus next week will be mainly on China, where most September data and Q3 GDP growth will be released. The very strong foreign trade for September bodes well for the Chinese September data. While we expect the year-on-year GDP growth rate to accelerate to 9.2% y/y it masks some slowdown in GDP growth from more than 16% q/q AR in Q2 to about 10% q/q AR in Q3. However, the main message is GDP growth remains above trend.

Scandi

• For the Swedish market there is one main event and one important development to watch. The event is the Riksbank rate decision on Thursday and the development is the budget process and non-recourse law news out of Latvia. We do not expect the Riksbank to change its forecast, nor do anything new next week. An unchanged rate and no new non-standard measures are in the cards. Furthermore, keep an eye on earnings reports from Swedbank and SEB where focus will be on loan losses and provisions.
• In Norway, central bank governor Gjedrem gives a speech at the annual meeting of the Norwegian Savings Banks Association on Thursday. We expect no monetary policy signals this close to the MPC-meeting on 28 October.

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