Weekly Focus: Upbeat Earnings Overshadow Mixed Data

Global update

• Q3 earnings in the US continue to surprise on the upside, around 80% have beaten expectations
• In Sweden, the Riksbank held the repo rate path unchanged
• Strong Q3 GDP growth in China and a round of healthy monthly activity indicators for September add further pressure on Chinese authorities to shift focus from supporting growth to controlling inflation risks
• In Euroland, PMI data and the German Ifo index showed further increases, suggesting that economic activity in Euroland continues to recover
• US housing data disappointed compared with expectations, suggesting that housing construction has lost some momentum heading into the current quarter
• An article in FT this week suggested that the Fed is warming up for a change in the 'extended period' phrase. While the Fed's Beige Book indicated a modest improvement in activity, it had a weak undertone
• UK GDP unexpectedly declined in Q3 as the economy continues to struggle under its large dependence on the service industry

Market movers ahead

• In Norway, all focus is on the monetary policy meeting and the new Monetary Policy Report
• Key macro data to watch in Sweden will be the manufacturing confidence figures, and retail sales
• In the US, focus will be on Q3 GDP growth, durable goods orders and regional PMIs
• Euroland inflation data and M3 growth will be worth watching in addition to German unemployment data
• In Asia, the monetary policy meeting at the Bank of Japan will take centre stage

Global update

Upbeat start to earnings season
The earnings season has been awaited with anticipation after the stellar performance of equity markets during the past six months. As expected, earnings are surprising to the upside as corporates have continued to cut costs, while rising top line growth adds to the profits. Roughly a third of the companies in S&P500 have reported so far and around 80% have beaten expectations.
We may be at the height of earnings growth momentum, though. While we expect top line growth to be strong in the coming quarters as well, cost cutting will be less aggressive and in fact we expect US corporates to start adding jobs again already late this year. Earnings growth is likely to continue at a robust pace, but probably not as strong as we have witnessed in the past couple of quarters.
The global rebalancing of growth is coming through in many corporate reports as sales growth is mostly rising in Emerging Markets – not least Asia – whereas markets in Europe and the US are still sluggish. Some of the strong results came from Caterpillar, the industrial bellwether, saying that sales had hit bottom and it saw signs of improving economic conditions. Tech companies have also fared well with for example Apple and Yahoo showing strong results and reporting that brand spending is coming back a bit – a sign that consumer sentiment is improving.
Rebalancing continues
That China has taken over as the most important contributor to world growth was once again confirmed this week. China reported GDP growth of 8.9% y/y, but this mirrors an annualised quarterly growth rate of around 11% following 16% annualised growth in Q2. We expect growth to slow a bit more in coming quarters as the effect from stimulus will fade, but the economic activity is likely to remain robust as external demand improves benefitting exports and private investment. In fact, Chinese export data confirmed a picture of improvement in September. Chinese property investment is also likely to rise in response to the strong rise in home sales. As growth starts to prove sustainable, focus will increasingly shift to inflation and to avoiding asset price bubbles. Policy tightening and scope for appreciation of the Renminbi will gradually receive more attention.
The rebalancing theme got more attention this week as Fed chairman Ben Bernanke said that imbalances might re-emerge as the recovery unfolds. An effort is needed in the US to raise savings through a credible trajectory for reducing fiscal deficits, while Asian countries must work on reducing the high household savings rate through reforms that limit the need for precautionary savings. Such reforms include strengthening pension systems and increasing government spending on education and health care.
Bumps in US housing recovery
US housing data this week revealed that the housing recovery may be losing a bit of steam. Housing starts was slightly softer than expected, although still showing underlying improvement, and NAHB housing index slipped after rising for several months. House prices from FHFA also slipped after rising for several months. Housing data will likely become more bumpy in the short term due to the expiration of the tax credit by end- November (there is some discussion of extending it) but we believe the underlying trend will continue to be one of gradual improvement – most clearly in activity and subsequently also in house prices.

Market movers ahead

Global

• In the US we will receive the last regional PMIs ahead of the ISM release the week after. On balance, the regional indexes released so far point to another increase in ISM in October. Recent data on durable goods orders suggest that CAPEX spending could be recovering and it will be interesting to see if September data will confirm this trend. We expect new home sales to post a robust gain and finally, we estimate that Q3 GDP grew to around 4% q/q AR with domestic demand adding 3pp and inventories 1.5pp.
• In Euroland inflation data and M3 money supply growth will provide new input for the ECB's thinking on exit strategies. German unemployment has been stable for the past four months, which is partly the result of widespread labour sharing. Anecdotal evidence indicates that employers have tried to avoid large-scale firing ahead of the German elections, which were held late September. The stabilisation could thus be somewhat artificial and we might see a renewed increase in German unemployment.
• In Asia focus next week will be on Japan. Bank of Japan (BoJ) is expected to keep the leading interest rate unchanged at its monetary policy meeting. We do not expect a termination of any of the non-conventional easing measures, although we believe it could happen at the next meeting in November. Focus will mainly be on the release of new GDP and inflation forecasts. The GDP forecast is likely to be revised up.

Scandi

• Key macro data to watch in Sweden will be the manufacturing confidence figures, inasmuch as industrial data have been surprisingly poor in Sweden relative Euroland and retail sales. We also suspect that household lending data will see a growing importance going forward, as the Riksbank is becoming increasingly attentive to real estate valuation and credit expansion in Sweden.
• In Norway, all focus is on the monetary policy meeting and the new Monetary Policy Report. A rate hike is widely expected and attention is on the new interest rate path presented in the report.

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