No spending spree in Norway

(01.02.2011) Higher inflation is at the centre of the market's attention these days, and higher-than-expected January flash CPI in the euro area caused the strengthening of both the euro and the pound yesterday. In Norway, weak retail trade and moderate credit growth dampened worries that Norwegian consumers have engaged in a debt-financed shopping spree. The oil price has come above 100 USD per barrel.

By Kjersti Haugland, Analyst at DNB Markets

dealingroom DNB markets osloIncreasing inflation has been one of the most dominant market themes this year. High prices on food and energy, to a large extent caused by temporary, weather-related conditions, lead to surprisingly high inflation numbers for several countries in December. This has led to speculations that the ECB and Bank of England may hike already this year.

ECB is known to be very wary of inflation above target. Yesterday's news about a January CPI-growth at 2.4% y/y was another surprise on the upside, which led to a broad strengthening of the euro. Yesterday's flash estimate only contains the headline index. We expect the details, which are released at a later point, to reveal that core inflation (excluding food and energy) stays low in the area which is marked by high unemployment and ample capacity.

In our view it is doubtful that workers in such an environment will have the market power to demand compensation for increased expenses spent on food and energy. As a consequence, the upturn in these prices may dampen demand for other consumer goods, and thus be a further weigh on inflation in the medium term. If we are right, this implicates that the ECB nor will, or should, hike this year.

The upcoming interest rate meeting on Thursday will receive much attention. On the previous occasion Trichet was quite aggressive in his wording, while the press release was considerably more balanced.

The pound sterling keeps strengthening in the wake of the somewhat surprising minutes released last week. Andrew Sentence has gained the support of Martin Weale in voting for a hike in order to curb increasing and long-time-high inflation. The sterling was set temporarily back by Tuesday's very surprising fall in Q4 GDP, but the strengthening continued yesterday, probably influenced by the euro zone CPI.

US private consumption grew by 0.7% m/m in December, stronger than expected (0.5%). The income grew by 0.4% in the same period, and hence the saving rate fell further, to 5.3%. Fed's preferred inflation indicator, the personal consumption deflator excluding food and energy, came down from 0.8% y/y in November to 0.7% in December. This is the lowest number ever reported, and with low wage growth and a weak labour market there is reason to expect it to decline further.

Today's most important key indicator is the January ISM survey from the US manufacturing sector.
The regional indices have shown a mixed picture (yesterday's Chicago PMI was a positive surprise), but the national index is expected to rise.

In Norway, markets have directed their attention towards household demand lately. Strong sales and soaring house prices have led to an increase in FRA rates, indicating sooner and more frequent hikes than implied by Norges Bank's interest rate path.

Yesterday's releases on retail sales and credit growth curbed the upside risk on interest rates.
After a very strong November (+2.1% m/m), retail sales fell more than expected in December (-2.0%). Credit growth to already heavily indebted households only pulled up marginally, from 6.4% y/y in November to 6.5% in December.

FRA rates pulled down slightly and the Norwegian krone weakened significantly after the announcement. The NOK recovered during the afternoon and is now traded at a stronger level than in the morning hours yesterday.

This is most likely a result of the oil price, that has climbed further and that has come over 100 $/brl during the night. Today's announcement of house price growth in January may move markets today. We expect prices to grow by 0.7% m/m, down from 1.0% in December. Should it continue to increase in the same pace as the previous months, this increases the chance of a hastening hiking pace from Norges Bank in the March meeting.