FOREX TRADING

Market Movers ahead

• In the US the main event next week is the FOMC meeting. We expect very few changes in the statement. If anything the section on growth might be downgraded.
• In Euroland we look for a small decline in both German Ifo and Euro flash PMI.
• The main event in the UK will be the crisis budget due on 22 June. It certainly looks like the austerity measures will be very tough.
• In Scandinavia Swedish confidence data and the meeting in Norges Bank will be in focus. We expect Norges Bank to keep rates unchanged.

Global Update

• The news flow has been mostly negative over the past week with softer macro data and continued tension in Euro bond markets.
• However, risk markets have been covered with Teflon, staging a recovery from the lows. The euro also managed to rise despite the EU bond market tension.
• US data have disappointed recently with declines in Philly Fed, housing data and retail sales. The data are not as weak as the headline suggests, though.
• EU debt problems continue to dominate the news flow in Euroland. A setback in ZEW sent a warning signal of weakening confidence.

Focus

• The first focus article takes the temperature of the US labour market after the recent disappointments in payrolls. We continue to look for decent gains in employment in coming quarters.
• In the second focus article we look at the outlook for Chinese growth and monetary tightening. The euro debt crisis has caused a postponement of a renminbi revaluation, but has not taken it off the table.

Market movers ahead

Global

In the US the main event next week is the FOMC meeting. We expect very few changes in the statement. If anything, the section on growth could be downgraded a bit on the recent deterioration in financial conditions and the weak housing data. The recent turmoil in the market has put the normalisation process on hold. Hence, the central bank is likely to reiterate that the level of the federal funds rate will remain exceptionally low for an extended period. Hoenig is likely to vote against the statement again. Recently, he said he favours an increase in the federal funds rate to 1% by the end of the summer.

May home sales is likely to provide a mixed picture. New home sales is expected to suffer a significant setback, as the positive impact from the extended first time home buyer tax credit faded in May. On the contrary, existing home sales should post a positive reading due to the publication lag in this statistic, which is not recorded before the contract is closed.

Finally, durable orders will provide some fresh information about the momentum in the manufacturing sector and business appetite for capital goods. Following April’s setback in core capital orders, we look for a rebound this month.

Some interesting data coming out of the euro area in the coming week. On Tuesday we await the important German Ifo index. While the Ifo indices have surged strongly from a low point in the beginning of 2009, the direction is now less clear. In the previous report, key Ifo indicators remained broadly unchanged at levels that suggest a robust economic recovery in Germany. For this month, we expect another month of roughly unchanged Ifo numbers. We expect a minor decline in the Ifo business climate and expectations index, while we expect current assessment to advance marginally. Overall we think the robust momentum in the German economy will carry on in to H2 10, but most likely at a slightly slower pace than in Q2. On Wednesday, June flash PMI might give us some indications about the current momentum – we look for a slight decline in euro area manufacturing PMI.

The main event in the UK will be the crisis budget to be released on 22 June. It certainly looks like the austerity measures will be very tough. The spending cuts will in our view imply lower UK growth and underline that UK rates will be held low for a very long time. In that respect, we note that central bank governor King this week repeated a very dovish message. It seems more and more likely that UK monetary policy will be loosened than it will be tightened going forward. A crisis budget that ‘kills’ growth could very well fuel speculation that the BoE will restart its quantitative easing programme going forward. We will scrutinise the UK minutes for comments on this issue. We believe sterling and Gilts are heading for some headwinds going forward – not least after the latest rally.

In Japan focus will mainly be on the release of consumer prices for May on Friday. We expect the consumer prices excluding fresh food to have eased slightly to -1.3% y/y from -1.5% y/y in the previous month. The overall message continues to be that deflationary pressure is easing. It should be remembered that abolition of high school tuition fees shaved 0.5 percentage points off consumer prices in April and adjusting for this impact deflation would substantially less. Finally, wage growth has picked up, suggesting core inflation should start to pick up in H2 10. There are no important releases in China next week.

Global Update: Bumpy Road

Risk appetite recovering despite softer data

It has not exactly been great news hitting the screens over the past week. Data has been more mixed with deterioration in US Philly Fed, US housing data, US jobless claims and the German ZEW index. And it follows a week of weaker-than-expected US retail sales and non-farm payrolls. At the same time, uncertainty over Euro debt issues has continued with Spanish banks in the spotlight and another downgrade of Greece to ‘junk’ – this time by Moody’s. Yield spreads in PIIGS countries went higher again. This may give a flavour of what’s in store for the second half: activity data that indicate growth is shifting down a gear from high-speed to cruising speed. And a financial environment that will probably continue to be fragile.

So how did markets respond to this cocktail of news over the past week? Interestingly, risk appetite managed to recover with equities up 7% since the bottom last week and the euro actually strengthened despite the new tensions in euro debt markets. US bond yields, however, decoupled from equity markets falling during the week on the back of the softer data which is pushing out expectations for Fed hikes further. It seems that positioning in the equity and FX markets is already reflecting quite downbeat news and that we may be facing a ‘short squeeze’ after the massive sell-off in these markets during May and early June – see also Financial Views.

US: A weak run of data. How bad is it?

The weaker US data has increased concerns that the economy is heading for a more pronounced slowdown in H2. While we believe that growth is set to moderate in the coming quarters, we think the recent data overstates the weakness.

First, the retail sales data was pushed lower due to a sharp drop in building materials (following the expiration of the first time buyer tax credit), declining energy prices and a seasonal quirk in auto sales. Excluding these factors, sales were up 0.1% m/m. Further, our bean-counting model for personal consumption suggests that real personal consumption rose by a robust 0.4% m/m in May. Hence, there is no evidence of a slowdown in consumer demand and Q2 consumption is still tracking a 3.5% q/q AR growth rate.

Second, housing data has been awful with sharp declines in the NAHB index, housing starts and building permits. We believe that most of this is explained by the expiration of the first time home buyer tax credit, which has boosted numbers to exaggerated levels in recent months. The true trend is probably somewhere in between and we are likely to see some recovery in housing data over the coming months. Residential construction spending is still tracking close to 10% q/q AR in Q2.

Some limited evidence of a negative sentiment effect is probably what turned up in the Philadelphia Fed in June. However, contrary to the headline, subcomponents actually indicated an improvement. Hence, so far, evidence from local business surveys in June suggest only a very moderate setback in the ISM.

Recent inflation data indicates that disinflation seems to be moderating a bit. Core PPI inflation is showing signs of bottoming out and core CPI disinflation moderated somewhat in May. That said, we still look for declining core inflation for the remainder of the year. But the risk of a prolonged period of negative core inflation seems to be subsiding.

Euroland: Another downgrade in the euro area

Moody’s downgraded Greece’s government bond rating by four notches to Ba1 from A3 late Monday. As a result, there will be even fewer potential buyers for Greek government bonds. Demanding that two out of three ratings are investment grade is typical for institutional investors and Greece now only has one left. In addition, Greece will be removed from important global and European government bond indices. Economic and Monetary Affairs Commissioner Olli Rehn said that “Moody’s decision came at quite an astonishing and unfortunate moment”. He added that he had discussed the matter with EU Commission President Jose Manuel Barroso and Internal Markets Commissioner Michel Barnier, saying that the move “revived the debate over the issue of ratings agencies”.

The EU summit on Thursday confirmed that the EU will go ahead with proposing a financial transactions tax at the G20. There is agreement on the need to strengthen the stability and growth pact, but few details on the road ahead. Further details are to be expected at the October summit. The bank stress tests will be published in the second half of July.

Euro employment stabilised in Q1 and according to our employment survey model it is set to increase in Q2. Euro exports declined 2.4% in April and imports declined even more by 3.5%, thus improving the trade balance. Judging from indicators of growth momentum in export markets and the euro depreciation, it is difficult to see why euro area exports should start falling. We expect to see a return to strong export growth in the coming months. ZEW declined from 45.8 to 28.7 in June – the lowest level since April last year.

Asia: Bank of Japan shows it cares

There were no major surprises at this week’s Bank of Japan (BoJ) monetary meeting. BoJ still sees signs of a moderate recovery, albeit there is some downside risk from the European debt crisis. BoJ again promised to “maintain an extremely accommodative financial environment” and in our view it will not raise its interest rate until H2 11.

At this week’s monetary meeting, BoJ revealed the final details in its latest new lending facility named “fund-provisioning measure to support strengthening the foundations for economic growth”. This new lending facility should mainly be regarded as a structural measure to improve financing conditions for innovative companies. This programme will not become operational until September and because of considerable documentation requirements in the approval process it will have no impact in the short run. Even if the new funding facility is utilised, it will only expand BoJ’s balance by about 2%. The main purpose of the new funding facility appears to be political. However, on the BoJ board, the consensus view appears to be that it is hard to justify further ‘real’ monetary easing in light of recent recovery signs.

It has been a quiet week on the data front in Asia this week. In Japan the tertiary industry index – a measure for activity in the service sector – increased 2.1% m/m in April following a 2.7% m/m decline in the previous month. While this index can be extremely volatile, the overall picture appears to be some slowdown in the service in Q2 following a solid Q1.

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