Weekly Focus: Central Banks Dominate the Agenda

Global update

• US retail sales rose in May, but this was down to gasoline prices. Retail sales excluding autos, gasoline and building materials were unchanged, so it was really just a case of stabilisation.
• German industrial production fell by 1.9% m/m in April, which was something of a disappointment, but the pain was eased somewhat by the upward revision of March industrial production from unchanged to growth of 0.3% m/m.
• Asia continues to forge ahead, and the past week has brought a raft of data from China. Investment growth has accelerated further, car sales are very strong, and turnover in the housing market is rising rapidly.
• There were disappointing figures for the Swedish economy, with further falls in retail sales and the activity index.
• Interest rates have climbed strongly recently, and there is the risk of a correction in the short term. But in the long term there is still the prospect of higher long yields in the USA.

Market movers ahead

• Central banks take centre stage in the coming week, with rate-setting meetings in Norway, Japan and Switzerland. We expect an unchanged policy rate and an upward revision of the interest rate path from Norges Bank. We also expect unchanged rates from the BoJ and SNB, and no further unconventional measures.
• The spotlight is also on the central bank in the USA. Speculation about the outcome of the FOMC meeting on 24 June has now kicked off, and so attention will centre on the many Fed speeches in the coming week.
• The week also brings housing market data, regional PMIs and inflation figures in the USA, while in Euroland the most interesting release is the ZEW indicator, where we expect a sharp rise in the expectations index

Global update: New headwinds

US consumers spending again - but risk from oil and bond yields
The US retail sales figures surprised on the upside in May, easing consumer concerns a bit after disappointing April sales. The underlying trend is not strong, though, but at least we continue to see signs of stabilisation in demand (See Flash Comment). This should continue in the coming months as tax cuts will have a further positive effect on consumer demand. Jobless claims also improved further during the past week adding support to the thesis that the labour market is slowly starting to improve. Jobless claims fell further to 601k from 625k last week after having peaked at 674k in late March.
On the negative side, we are seeing oil prices continue to rise, reaching USD73 per barrel this week. This is one of the key risk factors for the global economy we pointed out in Global Scenarios released this week. Overall we expect a manufacturing recovery to materialise more clearly in the coming quarters as production has clearly been undershooting demand, providing a strong case for a rise in global production. However, it is important that underlying demand can continue to grow into next year and rising oil prices is a clear threat to this. Adding to the headwinds is the recent strong rise in US bond yields on the back of heavy supply and improving data. These developments will have to be watched closely in the coming months.
China roaring ahead
Chinese fixed asset investment data for May were much stronger than expected. Together with soaring home and car sales, they suggest that domestic demand in China is currently very strong (See Flash Comment). This was supported by a further improvement in Chinese imports which were up over 10% in May compared with three months ago. Asia continues to be the strongest-performing region in the world, providing needed support for the world economy. We believe we will soon see improvement in exports from US and European companies to the Asian region giving support to the industrial recovery.
More good news for car industry
The past two weeks have provided more upbeat data on car sales. In Asia, Chinese car sales rose 34% y/y in May and South Korean car sales were up 22.8% y/y in the same month. In Europe, German car sales also held up at a high level in May while French car sales were reported up 18% m/m in May on the back of a cash incentive from the government. US car sales have stabilised in the past months but have not recovered as seen in a lot of other countries. However, during the past week, the House passed the ‘cash for clunkers' bill in which car buyers can get up to USD4500 in cash if they are exchanging their old car for a new more fuel-efficient car. It still needs to get approval in the Senate but this is expected to come through soon. Once implemented, it should help to boost US car sales as well from the current very downbeat levels.
As car production has been slashed by more than 50% over the past nine months, inventories are being reduced at record speed and production will have to rise soon to meet the demand. This is indeed what we are seeing in Japan where car producers are planning significant rises in production in the coming months (see Global Scenarios for more on this issue).
Signs of housing stabilisation accumulating
Another key theme this year is expected to be the stabilisation in global housing markets. The UK RICS housing survey provided more support to this story in the past week as it rose by much more than expected to -44 in May from -59 in April. The index for new buyer enquiries – a leading indicator for the housing market – rose further to the highest level in 10 years. Data on actual house prices in UK has also improved further recently with rises in all important housing statistics. The bottoming in house prices is happening earlier than expected and is probably a result of the significant decline in mortgage rates and improving credit conditions.

Market movers ahead

Global

• In the USA the debate about the monetary policy decision at the FOMC meeting on 24 June has now kicked off. The big question is whether the Fed will step up its purchases of Treasuries and mortgage-backed securities in the light of the sharp rise in interest rates. There will therefore be a particular focus on a number of Fed speeches in the coming week, in particular Ben Bernanke's on Wednesday. The week also brings a raft of housing market data in the form of the NAHB index and figures for housing starts and building permits. There will also be the first regional PMIs for June, which are expected to show further improvement, and, not least, inflation data in the form of the CPI and PPI.
• In Euroland there is little excitement on the agenda in the coming week. Most interesting will be the ZEW indicator. We expect a sharp rise in the expectations index and a more moderate improvement in the assessment of the current situation.
• In Asia the BoJ is expected to keep its key rate unchanged at 0.1% at the rate-setting meeting on Tuesday. Nor is there any prospect of fresh unconventional easing given the signs of stabilisation in the economy and less stress in the financial sector. However, there has been speculation in the Japanese press during the week that the BoJ will revise its view of the economy up further. We think it too early to declare Japan in recovery, so we expect only a marginal upward revision.
• In Switzerland the SNB holds a monetary policy meeting on Thursday. We expect the bank to leave its three-month LIBOR target unchanged at 0.25% and continue to issue liquidity at a mere 0.05% for some time to come. We do not expect the SNB to take any further steps to ease monetary policy given the signs of global recovery, but think that its rhetoric will be unchanged. We therefore doubt that the SNB is ready to relax its grip on the CHF, as further appreciation would still push deflation risks beyond the bank's pain threshold.
• In Norway there is a monetary policy meeting at Norges Bank on Wednesday, where we expect the key rate to be left unchanged. We also expect the interest rate path to be revised up by 25-50bp, which the market will probably interpret as there still being a 50/50 chance of one last rate cut in Norway. However, we do not anticipate any further cuts from Norges Bank, and we expect to see its first hike around March next year.

Financial views

Equities

• We maintain a positive view on equities in the medium term. Risk appetite has returned and our five point trigger list (from February 2009) for a stock market recovery has almost been completely fulfilled; we are consequently looking for new triggers.
• To underpin further market recovery in the coming months, we are looking for (a) signs that global final demand has started to pick up, (b) signs from the Fed that the easy money stance will continue into 2010, (c) decoupling from the government bond market and hence a return to a value market, (d) corporate earnings revisions for H2 09 and 2010 stabilise, and (e) deflationary impulses from global housing moderates.

Fixed income

• Global: Bond yields are expected to rise on a three- to six-month horizon based on improving macro conditions, increased risk appetite and heavy supply. US to underperform Euroland in sell-off.
• Intra-Euro: We have taken profit on our overweight in peripherals (Italy, Greece and Spain) versus Germany and now stand sidelined. On longer maturities we still prefer France and Finland to Germany.
• Scandi: We have closed our underweight long Danish government bonds versus Finland in the 10Y area, but we still have an overweight in Swedish government bonds versus Germany in the 5Y area. We recommend overweight of Norwegian govies versus Germany in the 10Y segment. We have a changed to an overweight on Danish 30Y callalble mortgages bonds versus both swaps and government bonds. We remain underweight in longer dated non-callables versus government bonds.

Credit

• During the past couple of months credit has enjoyed a very strong spell across the sectors and capital structure and spreads have tightened significantly. At the same time the activity in the primary market continues to be at a record high as more and more companies (are able to) turn to the capital markets instead of the banks for funding. The strong sentiment is largely the result of a significant improvement in the conditions in the money market and lower volatility.
• We question the sustainability of this massive rally as the pace is simply too fast in our view. The macroeconomic outlook is still challenging and defaults are currently increasing. A while ago we moved to overweight based on the large liquidity and risk premiums for credit. Both these premiums have now been reduced substantially and we go from overweight to neutral.

FX outlook

• EUR/USD is set to drift lower in the short run, but to continue upwards in the medium term. Important drivers for EUR/USD are equities as a proxy for risk and most recently oil prices. EUR/GBP is heading down as sterling is supported by positive economic data and a normalisation in financial conditions. USD/JPY will probably break above 100 in the near term. Carry can keep on performing, while defensive currencies will face headwinds.
• Swedish krona and Norwegian krone both have solid potential against the euro. Currently, however, risk aversion is still too high to see the Scandies exploit their full potential. The Danish krone is attractive (e.g. against Swiss franc) due to sound carry.

Commodities

• Base metals like copper and zinc continue to perform fuelled by heavy Chinese buying and global growth optimism. Oil prices have continued to rise over the past week to above USD72 per barrel.
• Sentiment is very strong in commodities at the moment but the short-term risk of a correction is growing. In our view, the market is neglecting near-term weakness such as weak oil demand and huge stocks in base metals. However, in six months' time, we expect a new leg up in prices when the different market balances are expected to tighten for real.

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