Important disclosures and certifications are contained from page 16 of this report. www.danskeresearch.com Investment Research — General Market Conditions Market Movers ahead In the US, we have a heavy calendar next week with many important data releases. Most importantly, the labour market report for May is due out on Friday, which might be pivotal to the market’s pricing of a potential summer hike from the Fed. We estimate non-farm payrolls increased by 160,000 in May. Moreover, we estimate that the unemployment rate declined to 4.9% and that average hourly earnings increased by 0.2% m/m, implying a wage inflation rate of 2.5% y/y. In the euro area, the main focus will be the ECB meeting on Thursday. We expect the ECB to maintain its patient stance as broad financing conditions have improved following the easing measures announced in March. In the UK, the PMIs for May might attract some attention and will tell us whether April’s dive to three-year lows across sectors was temporary or whether the economy is actually slowing further in Q2 ahead of the referendum, possibly due to Brexit uncertainties. In Scandinavia, focus will be on Q1 GDP figures from Sweden and Denmark, while both the labour market report and retail sales data from Norway will be watched closely as well. Moreover, we would also keep an eye on the Danish foreign currency reserves data due out on 2 June, as the latest daily net position data points to currency intervention of some DKK10bn in May. Global macro and market themes US consumption and housing gain pace giving comfort to the Fed. A summer hike is increasingly likely barring any negative surprises. The USD is set to strengthen short term driven by higher US yields. Euro yields are supported by QE – set to stay range bound. Moderate improvement in German sentiment indicators. US housing very strong in early spring… …and strong pick-up in US consumption Source: Macrobond Financial Source: Macrobond Financial 27 May 2016 Editor Senior Analyst Morten Helt +45 45 12 85 18 [email protected]Weekly Focus US domestic economy picks up speed Contents Market movers..................................................... 2 Global Macro and Market Themes......... 6 Scandi update ....................................................... 9 Latest research from Danske Bank Markets .................................................................. 10 Macroeconomic forecast .......................... 11 Financial forecast ............................................ 12 Calendar................................................................. 13 Follow us on Twitter for the latest on macroeconomic and financial market developments: @Danske_Research Financial views Source: Danske Bank Major indices 27-May 3M 12M 10yr EUR swap 0.54 0.50 0.90 EUR/USD 112 112 118 ICE Brent oil 49 47 53 27-May 6M 12-24M S&P500 2090 -3 -+3% 0-5%
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Important disclosures and certifications are contained from page 16 of this report. www.danskeresearch.com
Investment Research — General Market Conditions
Market Movers ahead
In the US, we have a heavy calendar next week with many important data releases.
Most importantly, the labour market report for May is due out on Friday, which might
be pivotal to the market’s pricing of a potential summer hike from the Fed. We
estimate non-farm payrolls increased by 160,000 in May. Moreover, we estimate that
the unemployment rate declined to 4.9% and that average hourly earnings increased
by 0.2% m/m, implying a wage inflation rate of 2.5% y/y.
In the euro area, the main focus will be the ECB meeting on Thursday. We expect the
ECB to maintain its patient stance as broad financing conditions have improved
following the easing measures announced in March.
In the UK, the PMIs for May might attract some attention and will tell us whether
April’s dive to three-year lows across sectors was temporary or whether the economy
is actually slowing further in Q2 ahead of the referendum, possibly due to Brexit
uncertainties.
In Scandinavia, focus will be on Q1 GDP figures from Sweden and Denmark, while
both the labour market report and retail sales data from Norway will be watched
closely as well. Moreover, we would also keep an eye on the Danish foreign currency
reserves data due out on 2 June, as the latest daily net position data points to currency
intervention of some DKK10bn in May.
Global macro and market themes
US consumption and housing gain pace giving comfort to the Fed.
A summer hike is increasingly likely barring any negative surprises.
The USD is set to strengthen short term driven by higher US yields.
Euro yields are supported by QE – set to stay range bound.
Moderate improvement in German sentiment indicators.
US housing very strong in early spring… …and strong pick-up in US consumption
The recent regional US manufacturing surveys have been weak across the board showing
that ISM manufacturing is likely to fall back further in May, adding to the correction from
the surge in ISM manufacturing in early spring. This could add uncertainty to investors
over the course for the US economy. The question is, how will this affect the Fed? Fed
members seem to put less emphasis on ISM manufacturing than in the past. When the Fed
lifted rates in December, ISM manufacturing stood at 48.5. Instead the Fed has
highlighted domestic developments lately, expressing optimism that growth is back on
track after weak development in Q4 and Q1:
Retail sales rebounded strongly in April pointing to a recovery in private
consumption following a couple of weak quarters (see chart next page).
Home sales have surged in the early spring months, with both new home sales and
pending home sales (a good indicator for existing home sales) jumping higher in
April. Part of the increase is probably exaggerated, but the trend since December is
clearly up. This breaks a period of slowing during 2015.
Consumer confidence (University Of Michigan) for May surprised to the upside,
rising back to the highs of early last year after a period of moderation. And this has
happened despite a rise in gasoline prices which normally weighs on consumer
sentiment.
Finally core durable goods shipments are showing signs of stabilisation following
a sharp decline in investment activity since mid-2015. It may be an indication that the
significant drag from the decline in oil investments is starting to fade.
US housing very strong in early spring following slowdown in 2015
Source: Macrobond Financial
Today’s key points
US consumption and housing gain
pace giving comfort to the Fed
A summer hike is increasingly
likely barring any negative
surprises
USD to strengthen short term
driven by higher US yields
Euro yields supported by QE – to
stay range bound
Moderate improvement in German
sentiment indicators
US regional surveys soft in May
Source: Macrobond Financial, Danske Bank
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Given these developments the probability is rising of a Fed hike in June or July. In this
case there is scope for further repricing at the short end of the US yield curve as a
hike is not fully priced until November and a second hike not fully priced until October
next year. We look for US yields to push higher over the summer and autumn based on
this.
European bonds continue to be supported by the ECB purchases, and 10-year bund
yields are close to the lows despite a rise in US yields recently (see chart). We expect this
to continue in the short term with range trading in German bonds. In H2, though, German
yields will see some upward pressure from a moderate rise in inflation and spill-over from
US yields.
A further rise in US short-end yields is likely to support further USD strength in the
short term. Our equity team has changed to a negative bias for the stock market as
markets are not prepared for further Fed rate hikes and earnings expectations are too high
for 2017.
Moderate improvement in core Europe, Chinese profits grow
German data on PMI and ifo business expectations improved a bit further this week. After
taking a bit hit in early 2016 from the EM turmoil it seems that businesses are somewhat
more optimistic – even despite the uncertainty over the Brexit vote. If – as the current
polls and odds at book makers suggest – the UK stays in the EU, we will likely see a
further improvement in business sentiment over the summer and autumn. Investments are
also likely to pick up in H2 if the UK stays in the EU as businesses are likely to keep
plans in the drawer until there is clarity that the UK is staying within the EU.
German GDP growth for Q1 was confirmed at a robust 0.7% q/q this week and the details
point to strong domestic demand with construction investments in particular being very
strong. However, GDP growth is likely to be slower in Q2 as some of the strength was
probably weather related and due to normal volatility in the numbers. Industrial
production numbers also showed a big decline in March after very strong readings in
January and February. This leaves a low base for the start to Q2.
In China it has been quiet on the data front this week. The only release of interest was
industrial profit growth, which fell to 4.2% y/y in April from 11.1% in March. For the
two months as a whole profits thus grew 7.7% y/y which is the strongest growth rate
since mid-2014. The improvement is driven by higher producer prices and a lift to
activity levels in early 2016. We expect profit growth to stay in moderately positive
territory for the rest of the year, leaving some support to Chinese stock markets.
Sentiment is still quite downbeat around China and worries over the debt development are
hanging like a heavy cloud over the Chinese economy, with foreign investors very
reluctant to put money to work in China. This will likely be the case for a long time.
However, we believe the cyclical recovery over the coming quarters we look for will be
enough to give some lift to Chinese stocks this year. Next week’s PMI’s may, however,
add to the concern, as we look for a further decline as the correction to the very strong
surge in March is probably not over. But we continue to expect a moderate underlying
recovery this year driven by a rise in construction investments as home sales have been
very high and inventory-to-sales ratios are back at normal levels in China as a whole.
Sharp house price increases are also likely to spur more investments in tier-1 and tier-2
cities.
Strong pick-up in US consumption
lately
Source: Macrobond Financial
Sharp drag from US investments
may be fading
Source: Macrobond Financial
German yields close to the lows
despite lift to US yields
Source: Macrobond Financial
German business sentiment
improving despite Brexit risk
Source: Macrobond Financial
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Global market views
Source: Danske Bank Markets
Asset class Main factors
Equities
Short term: sell on rallies
M edium term: moderately negative
Bond market
Core yields: still low Bund yields in Q2, but higher later in the year Higher QE,TLTRO II and 'hunt for yield' but no more rate cuts and higher US yields later this year.
US-euro spread: wider but no t befo re we see F ed hikes We still look for policy divergence in Q4 but for now the 'hunt for yield' supports treasuries.
Peripheral spreads set to tighten further from here QE, improving fundamentals and search for yield. However, a lo t o f event risk at the moment and ultra-long supply.
C redit spreads: neutral Initial ECB-driven rally likely over. Technicals still supportive.
FX
EUR/USD - Lower near-term on relative rates and Brexit fear, then higher Fundamentals support cross in the medium to long term but downside risks short term from Fed and Brexit risks.
USD/JPY - To edge higher near term on monetary and fiscal easing USD/JPY to rise near term but further out to stabilise on valutaion and current account surplus.
EUR/SEK - Broader range of 9.10-9.50 has been re-established Range-trade near term but lower medium term as the Riksbank becomes more confident in inflation fight.
EUR/NOK - Settling in 9.10-9.40 interval now, then lower as cycle turns Relative rates limit short-term downside potential, fundamentals point to lower EUR/NOK in H2 16.
Commodities
Oil price – Consolidation in US oil sector leading to recovery OPEC has lost leverage over o il price; sliding dollar and improved growth outlook to drive o il price higher.
M etal prices – Anticipating recovery in Chinese construction Consolidation in mining industry puts a floor under prices, awaiting support from higher global economic growth.
Gold price – Flat near term Looming Brexit uncertainty, vo latility in o il market may support safe haven demand for gold.
Agriculturals – Upside risks, spillover from rally in palm oil price Attention has turned to La Niña weather risks in H2 16.
Key drivers for our stance are: 1) The Fed will hike soon (our house call says September) and equity markets are simply
not ready for this, 2) Earnings expectations for 2017 with increases of 10-15% compared to 2016 are too optimistic.
Slashing of earnings expectations will make equities trade lower given that multiples are at highs, 3) M acro
environment is stable and 4) Central banks (other than Fed) will have an easing bias in their stance, but the question is
whether low rates are sufficient to spur earnings growth ahead on equities from here.
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Scandi update
Denmark – labour market continued to improve in March
The monthly employment statistics showed a seasonally adjusted increase of 3,800 people
in work from February to March, despite a decrease of 800 in the public sector. This goes
to show that firms are continuing to take on more and more staff, as they have been ever
since April 2013. The improvement in the labour market can also be seen in
unemployment and wages: the jobless rate is now down to 4.2% and the latest wage data
from the Confederation of Danish Employers show growth of 2.2% y/y in Q1. With
inflation over that same period running at 0.3%, it means that Danish workers have seen a
significant increase in their real wages.
Sweden – last minute revisions
A couple of weeks ago we sent out what we thought would be our final estimate of
Swedish Q1 GDP growth. At the time, bar production side data, our indicators pointed
mostly above 4% y/y (vol., and calendar adjusted). However, with the last iteration of
international trade data, we now have a clearer and unfortunately also considerably more
negative view on GDP Q1, especially from the demand side of GDP. This said, it is also
important to remember that some indicators are still strongly positive, reaching as high as
5% y/y. Now, with a range of outcomes stretching from 2.5% y/y all the way up to 5.0%
y/y, a high degree of uncertainty is obvious. Nonetheless, we have decided to keep our
forecast of 4% y/y but instead of most risks pointing to the upside, we now see a more
balanced, perhaps even negative, skew of risks to Q1 GDP.
Elsewhere, data outcomes have been mildly negative and the Swedish FSA’s stability
report was an exercise in pre-committing to measures that, in our view, will almost
certainly push the housing market into recession – that is given the unlikely event that the
suggestions come to pass in parliament.
Norway – oil investment as expected
Statistics Norway’s oil investment survey contained a marginal upward revision of the
estimate for 2016 from NOK164bn to NOK165bn and a first estimate for 2017 of
NOK153bn, which was marginally more than we had predicted. All in all, the survey
indicates that investment will continue to fall but somewhat more slowly than this year.
This means that the headwinds from the oil sector regarding the rest of the Norwegian
economy will, as expected, ease in 2017. Together with highly expansionary monetary
and fiscal policy, this means that economic growth should pick up and that
unemployment should peak in the next few months. The results of the survey should also
be in line with Norges Bank’s assumptions in the March monetary policy report and so
have little impact on future interest rate decisions. However, along with higher oil prices
the results reduce the downside risk to the Norwegian economy. Given the slightly
stronger macro data of late, only a significantly stronger krone would now trigger lower
interest rates.
Employment up further in March
Source: Statistics Denmark
A more complete picture of external
trade points to downside risks to GDP
Note: The dashed lines are National Accounts
data and the solid lines are from the exports and
imports statistics
Source: Macrobond Financial, Statistics Sweden.
Danske calculations
Decline in oil investment easing
Source: Macrobond Financial
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Latest research from Danske Bank Markets
26/ 5/16 Russian output and demand - waiting for green shoots
Russia's output is recovering on strengthening local production.
20/5 Brexit Monitor No. 4: GBP rallied sharply this week supported partly by big lead for
'remain' in biased phone polls
Opinion polls continue to signal a close race but ‘remain’ is still ahead in most polls.
Most notable was the Ipsos MORI poll published two days ago, which showed a 55% to
14:30 USD Average hourly earnings, non-farm m/m|y/y May 0.2%|2.5% 0.2%|2.5% 0.3%|2.5%
14:30 USD Private payrolls 1000 May 157 171
14:30 USD Manufacturing payrolls 1000 May 0 4
14:30 USD Average weekly hours Hours May 34.5 34.5
14:30 USD Trade balance USD bn Apr -41.9 -40.4
15:45 USD Markit service PMI, final Index May 51.4 51.2
15:45 USD Markit composite PMI, final Index May 50.8
16:00 USD Capital goods orders, non-defense ex air, final % Apr -0.8
16:00 USD Factory orders m/m Apr 0.8% 1.5%
16:00 USD Durable goods orders, final m/m Apr 3.4%
16:00 USD ISM non-manufacturing Index May 55.2 55.3 55.7
18:30 USD Fed's Brainard (voter, dovish) speaks
The editors do not guarantee the accurateness of figures, hours or dates stated above
For furher information, call (+45 ) 45 12 85 22.
16 | 27 May 2016 www.danskeresearch.com
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Disclosures This research report has been prepared by Danske Bank Markets, a division of Danske Bank A/S (‘Danske
Bank’). The author of this research report is Morten Helt, Senior Analyst.
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