China 2nd largest in the world

(14.02.2011) Mubarak's resignation led to increased appetite for risks in markets Friday afternoon, and contributed to lifting stock markets. The dollar keeps strengthening versus the euro and the yen.

By Kjersti Haugland, Analyst at DNB Markets

dealingroom DNB markets in osloMubarak's resignation as a president of Egypt has lifted global stock markets. The oil price fell immediately after the announcement, but has recovered afterwards. Today's budget proposal from the Obama administration for the fiscal year of 2012 will attract attention. With prolonged fiscal stimuli in 2011 (and growing deficits), the US government must show the market that it has the will and the ability to tighten next year. In the meantime: unrest surrounding European budgets has increased again, weighing on the euro. Italy and Spain are going to raise funds this week, and the results from the debt auctions will be monitored closely.

Japanese yen has weakened against dollar so far in February, and Friday was no exception. During the night we got the confirmation that the Japanese economy shrank in Q4. The 0.3% q/q decline was somewhat smaller than expected (-0.5%), and the yen reacted by a slight strengthening. Private consumption, amounting to 60% of the demand side of GDP, was the largest drag on growth, falling by 0.7% q/q. Net exports pulled growth down by 0.1 percentage point, while investments contributing positively. Bank of Japan's interest rate meeting, taking place today and tomorrow, is unlikely to lead to new signals on monetary policy.

With Japanese GDP numbers in place, it is now finally official that China surpassed Japan in 2010 as the second largest economy in the world. The Chinese has been heavily criticised for keeping its currency artificially weak, resulting in beneficial conditions for exporters and a delayed development towards heavier reliance of domestic demand forces. That China's trade surplus fell more than expected in January, driven by very strong imports, may contribute to dampen this criticism. Imports grew by 51.0% y/y, while exports grew by 37.7% in the same period. The Chinese authorities struggle with high inflation, and have tightened by various measures lately. January inflation, released next night, is expected to increase from 4.6% in December to 5.3% in January.

The pound sterling continued to strengthen on Friday, driven by expectations that Bank of England will hike already this year to curb high and increasing inflation. Friday's news about high producer price inflation (input costs: 1.7% m/m, output costs: 1.0%) was not comforting in this sense, and January inflation released tomorrow is expected to show a further rise. Wednesday's release of Bank of England's Inflation Report will make it clear how long the bank's economists expect inflation to stay above target. We still expect Bank of England to see through temporary effects of food, energy and VAT-increases, and hold further hikes until next year.

Tomorrow's Riksbank meeting will almost certainly result in another 25 basis point hike, to 1.5 per cent. The question is rather whether the repo rate path will be lifted, which the majority of analysts expect. We expect the repo path to be unchanged from the December meeting. In our view, the strong development in the real economy is in line with the central bank's expectations. Slightly higher inflation than projected (caused by surging food and energy prices) is counterbalanced by a stronger SEK. If we are right about the repo rate path, the SEK could weaken after the announcement.

Norwegian Q4 national accounts are released on Thursday. We expect them to show that the mainland economy grew by 1.1% q/q, up from 0.9% in Q3. On the same night Norges Bank's new governor Øystein Olsen delivers his first Annual Address. Although the speech will not contain new signals on the interest rate settings, all sentences that signals anything on Olsen's balancing between strong house prices and a strong NOK will be followed closely by the market.