News from DNB Markets

Strong Chinese growth

(20.01.2011) Strong growth in industrial production and retail sales pulled Chinese growth up in the fourth quarter. The annual growth rate was at 9.8 per cent. Inflation remains high and is expected to increase going forward. Thus, the pressure on the Chinese central bank to keep raising interest rates is rising.

By Camilla Viland, Analyst at DNB Markets

grafChinese growth is accelerating and was at 9.8 per cent in the fourth quarter of 2010. This was higher than expected. Both industrial production and retail sales increased and pulled growth up. Inflation eased somewhat in December, but was still higher than expected. Increasing food- and energy prices is expected to pull price growth up in January. The strong economic development is also likely to pull inflation up going forward.

Thus, the pressure on the Chinese central bank to keep hiking rates is rising. Rates were last raised in December, to 5.81 per cent. China may also allow more gains in the yuan to contain consumer prices. Such a move would also help to ease tensions between the US and China. This topic is gaining a lot of attention now as the Chinese President, Hu Jiantao, is visiting the US. President Obama yesterday said the Chinese currency remains undervalued. He did however admit there had been movement, but not fast enough.

The Swiss franc was one of the best performing currencies last year. Swiss authorities are not comfortable with the strong currency and fear it will have negative effects on growth and cause inflation to fall to very low levels. Yesterday, the countries economy minister said he was concerned about the currency's strength. Last week the President of the Swiss National Bank (SNB) said the franc now poses an extraordinary challenge to some exporters. He did however refuse to say whether SNB was considering intervention in currency markets. The SNB intervened for more than a year, up to June last year, to weaken the franc. The central bank has said they will take measures necessary if a deflation threat emerges. Inflation has been on a downward trend lately and the currency is far stronger than when they last intervened, thus a new round of interventions cannot be ruled out. 

The euro has strengthened significantly since the ECB president, Jean-Claude Trichet, last week said they would act if necessary to control the risk of inflation. Signs that concerns over the European sovereign debt crisis seem to have eased somewhat has also been positive for the currency. The euro first strengthened yesterday, but fell back again as EU commissioner Olli Rehn said the priority was not to increase the European stability mechanisms current 440 billion euro limit.

Weak key figures weighed on the dollar yesterday. The number of people continuing to receive jobless benefits rose last week. Furthermore housing starts declined 4.3 per cent to an annual rate of 529,000 in December. These figures were weaker than expected. Given the weak development in the labour- and housing market, future interest rate expectations have been lowered.

Today we will get more information regarding the US housing market when existing home sales figures in December are released. In general house sales have been very low since the tax incentives were removed last fall. In November 4,680' existing houses very sold, many of which were forced sales. In comparison 5,471' monthly house sales have been the average over the last 15 years. Other important key figures from the US today are the weekly labour market figures and Philadelphia Fed business sentiment index.