No news from Bernanke

(10.02.2011) Ben Bernanke was not heavily affected by Friday's news of a marked decline in the unemployment rate when he spoke to the Budget Committee yesterday, and contributed to pulling US bond yields down. European yields went the opposite direction and the euro strengthened against the dollar.

By Kjersti Haugland, Analyst at DNB Markets

DNB markets dealingroom in osloIn the absence of other important macro news, Bernanke's testimony to the Budget Committee was followed closely yesterday. Those who had expected Friday's household survey report that showed a decline in the unemployment rate from 9.4% in December to 9.0% in January to lead to a significant change in Fed governor's assessment of the economic outlook were disappointed. The speech was almost identical to the one held a week ago, although some sentences regarding the labor market had been rewritten in a slightly less pessimistic note. There is little doubt that the buying of Treasury bonds will continue, and that it will take considerable time before the Fed starts hiking again.

Bernankes retained speech, along with large demand in a 10-year government debt auction, contributed to a fall in long US government bond yields. European yields ended slightly higher, and a smaller interest rate differential is probably the main contributor to EURUSD trading at a level 0.4% higher than yesterday morning. The euro did plunge after rumors that German hawk Axel Weber is no longer a candidate to succeed Trichet as governor of ECB, but the weakening proved to be temporary.

Oil prices rose above 100 dollars per barrel again yesterday, but could not prevent NOK from weakening on a broad basis. Today's major Norwegian event is January inflation at 9.00 AM GMT. Norwegian inflation has not, as has been the case for many other countries' inflation (including Sweden), been lifted by surging food prises lately. The reason is that Norwegians are heavily protected towards volatile food prices, as a consequence of import duties which are set to equalise the price of the same good in the domestic markets. For January we expect CPI ATE to grow by 1.1% y/y, the same as consensus. Norges Bank has a lower estimate (0.9%), hence interest rates may rise and the NOK strengthen even if the consensus estimate turns out to be correct.

The pound sterling weakened yesterday. December foreign trade displayed a marked increase in the trade deficit that has been on a steady upward trend for a long time. The heavy snowfall in December gets some of the blame for a decline in exports, but it is not obvious why the import seems unaffected and continues to grow solidly. Despite much speculation about whether Bank of England may be forced to premature hikings to curb high inflation, today's interest rate meeting will probably be a non-event. Neither we nor consensus expect Bank of England to hike or signal any new QE programs at this meeting. The minutes released at a later point will be considerably more interesting. In the previous meeting Sentence, who has voted for a 25 basis point hike for many meetings, gained support from a second member (Weale). The discussion that was presented in the minutes showed that a somewhat more hawkish stance of the overall discussion. The meeting took place before the market was shocked by negative Q4 GDP numbers, which is expected to have balanced the risk assessments.

Bank of England's minutes expresses the moments discussed and the arguments presented at the interest rate meetings, without naming the members explicitly. Simular minutes are on the top of Norges Bank Watch wish-list for a further improvement in the central bank's transparency. The annual report from the committee consisting of independent economists evaluating Norges Bank's monetary policy was released yesterday. The Watch Report states (and we agree) that publication of minutes would help clarify how financial variables like house prices and debt growth influence the monetary policy strategy.