Optimism ahead of U.S. earnings reports raised the USD, stock markets and long-term government interest rates on Friday. NOK gained on improved risk appetite, while the latest figures for Norwegian inflation, as expected, confirmed a clear downward trend, DnB NOR Markets writes in today’s Morning Report.
“With low international price pressures and the strengthening of the krone over the past year, we expect that the import price inflation will remain in negative territory for some time to come.”
Kjersti Haugland
“In a thin summer market, where trading volume in the U.S. was at its lowest so far this year, stock markets ended a strong week with further increase Friday. Optimism in relation to the outcomes of the profit reporting season in the U.S. starting this week contributed to improved risk appetite in markets,” DnB NOR analyst Kjersti Haugland writes in today’s Morning Report.
USD strengthened on a broad basis, having been through a bad week characterized by uncertainty surrounding the outlook for the U.S. economy in wake of weak figures.
Increased risk appetite helped the NOK strengthened through Friday, and a rise in long U.S. and German government rates as a result of less demand for safe havens.
Interest rate rise is probably also adapting to an increased supply of government debt this week. Monday, Tuesday and Wednesday will be added into U.S. government bonds nominal value of 64 billion USD.
The positive developments euro seems to have stagnated, and the EUR/USD traded this morning at $1.26, after reaching its highest level in two months – $1.2723 – on Friday.
OECD leading indicator signals that the world economy is still in an expansionary phase.
The level of 103.7 is well above the 100 limit that indicate growth, and the index is rising still. The growth in the index has declined for ten consecutive months, and in May rose by 0.1 index points, compared with 0.3 in April.
Sub-indices for France, Britain and China have already reached the top and is declining, while the American sub-index is a clear increase.
The Chinese trade surplus has picked up again, and monthly figure for June was back to levels before the financial crisis. The increase to 20 billion dollars in June was due to both increased exports and falling imports. The strong export trend (43.9% a / to) indicates that global demand growth will stand.
June figures for Norwegian inflation confirms a clear downward trend, although the outcome was marginally higher than expected.
Total CPI index grew by 1.9% to / to in June, down from 2.5% in May.
A fall of 4.6% in electricity prices from May to June, contributed to the fall. CPI-XE, Norges Bank’s indicator of underlying inflation, slowed from 1.9% to / y in May to 1.6% in June.
Core inflation as measured by the CPI-ATE rose by 1.3% from June last year to June this year, more than we (1.1%) and Norges Bank (1.2%) estimated.
This is largely due to the transportation prices rose more than expected, driven by an increase in flights in the entire 36.2 percent from the previous month.
On the other hand, food prices fell by 1.1% from May, while we had expected a slight upturn. The fall in import prices are rising, from 0.3% to / to in May to 0.6% in June.
With low international price pressures and the strengthening of the krone over the past year, we expect that the import price inflation will remain in negative territory for some time to come.
At the same time slowing the rise in prices for Norwegian goods and services produced as a result of low capacity utilization, productivity growth and moderate wage growth.
Swedish industry recover after being hard hit by the financial crisis. Industrial output grew by 2.3 percent from April to May, clearly more than the consensus of 1.0%.
Swedish auto industry was the main contributor to the strong development. Also, orders for industrial growth, with the 20.4% in the same period, slightly higher than expected.
Although the sector still has considerable overcapacity, the trend is positive and strong. This is well in line with the upward revision of growth and interest rate picture presented in the National Bank’s monetary policy report at the beginning of July, in which it was notified at least two ups in 25 basis points by the end of the year.
This week will probably be characterized by performance reporting and a continued focus on the details of stress tests of the European banks that are published 23 July.
In addition, we get numbers of U.S. retail sales on Wednesday, as well as consumer confidence and inflation on Friday. Wednesday and Thursday we get reports from the last interest rate meeting of the Fed and the Riksbank.
By Kjersti Haugland
DnB NOR Markets
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EconoTwist's 
Have Norway's Central Bank Lost Touch With Reality?
According to the original plan from last year, the Norwegian key policy rate should now be 2,5%. But over the last months the Central Bank of Norway have been forced to freeze the rate amid growing uncertainties about the economic developments in both Norway and abroad. Some economist suggest that the central bank will have to lower the policy rate again, but at the moment that is out of the question as Norges Bank keeps holding on to its optimistic outlook.
“Recent developments in the Norwegian economy have been broadly in line with expectations. Activity is rising moderately. Inflation has slowed and is now below 2%.”
Svein Gjedrem
“Recent developments in the Norwegian economy have been broadly in line with expectations. Activity is rising moderately. Inflation has slowed and is now below 2 per cent,” Governor Svein Gjedrem at Central Bank of Norway says in a statement after the decision to keep the policy rate unchanged for a while longer.
According to the board of directors at Norges Bank, the global economic growth has been slightly stronger than expected, but the level of activity is still low in advanced economies.
Governor Svein Gjedrem. Central Bank of Norway.
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“Turbulence related to public finances in several European countries has receded,” they say in the press release, adding; “but the outlook for the US economy is somewhat more uncertain.”
“Considerations relating to both inflation and stable developments in output and employment imply that the interest rate should be kept low. The consideration of guarding against the risk of future financial imbalances that may disturb activity and inflation somewhat further ahead suggests that the interest rate should be gradually brought closer to a more normal level,” Governor Svein Gjedrem concludes.
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Too Optimistic?
Several economists have pointed out that the central bank’s perception of the global economy is just plain wrong.
“There’s one thing I really disagree with; that the Central Bank emphasizes that the global economy is stronger than expected,” says macro economist Shakeb Syed at Handelsbanken to the website DN.no.
He points to statement were the bank writes: “The growth in the global economy appears to have been somewhat stronger than expected, but the level of activity in industrial countries is still low.”
“You might find a few bright spots in Germany and Britain, but two birds do not make a summer,” Mr. Syed underlines.
OUTDATED: For some reason, Central Bank of Norway are not taking the lastest downward revisions into account.
Here’s few more optimistic statements from the Norwegian central bankers:
* Growth in world trade and global manufacturing output has slowed somewhat, but overall activity has picked up somewhat faster than expected earlier this year, particularly in some European countries. Growth in emerging market economies is still strong.
* The IMF revised up its global growth forecasts for 2010 from 4.2 per cent in April to 4.6 per cent in July and maintained its growth forecast of 4.3 per cent for 2011.
* Underlying consumer price inflation is low in the euro area and the US. Inflation expectations are still stable in most advanced countries.
* The differential between German and Greek 10-year government bond yields is approximately unchanged at 7.6 percentage points. For Spain and Portugal the differential has narrowed by up to 0.6 percentage point to 1.5 and 2.5 percentage points, respectively. Greece, Spain, Italy and Portugal have conducted successful auctions of government bonds in the market.
* On 23 July, the results of the stress tests on European banks were published. Seven of 91 banks did not satisfy the capital requirements. The tests have reduced the uncertainty surrounding the financial position of the banks.
Here’s a copy of the full statement from the Central Bank of Norway.
(And some nice, good looking, charts to go with it).
Nothing Is Fixed
However Shakeb Syed says that the signs of growth seen in the euro zone lately is just temporary.
Chief economist Shakeb Syed. Handelsbanken ASA.
“I think that overall the picture is pretty dark. Remember that the focus in the euro zone is aimed at cutting budgets – that is not growth inducing,” he explains.
He points out that there is the same focus in the US, and that you don’t find many good figures there, either.
“I believe in a catch-up in the longer perspective. Throughout the summer we’ve had some pretty okay numbers, but I don’t think were getting such good numbers going forward. I think we get figures showing that growth is very weak,” the Norwegian macro economist says.
Many of the euro pessimists have been pointing out that the rise in the euro zone is just a flicker, and that none of the issues that dominated Europe in the spring has been resolved.
Shakeb Syed agree.
“There is nothing that is fixed,” he says.
“This only strengthens the belief that interest rates will be ultra low for some time, not only in the US but also in Norway,” he concludes.
The Ghost of Ricardo
In the latest forecast by Norges Bank they estimate a 50% chance of a rate hike in December, and a 50% chance that the increase will come in January next year.
The reason for this uncertainty is (of course) those damn consumers who just won’t behave as expected according to the traditional Keynesian economic theories.
Economist David Ricardo
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Instead they seem to have started saving the extra money they get through low interest rates and various stimulus measures.
Almost like described in the 200 years old economic theories of David Ricardo. A theory usually dismissed because of its lack of empirical studies, and the fact that it presupposes a rational behavior amongst people.
But the fact is that the Norwegian consumption has virtually stagnated in recent months, and at times have been far below the projections of Central Bank of Norway.
During last monetary policy report in June, the central bank had to take down the consumption estimates sharply.
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Meanwhile – I’m waiting for the revelation….
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Related by the Econotwist:
Norway’s Foggy Outlook
Norway At The End Of An Era
Goodbye Keynes – Hello Ricardo!
The US FED Launch The QE2 – Beta Version
USA Could Be Forced Into Another Trillion Dollar Bank Rescue
Helicopter Ben; Cleared For Take Off
Wolfgang Münchau: A Cynically Calibrated Test To Fix The Result
Financial Authorities See No Point In Stress Testing Norwegian Banks
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