Strong ISM index

(02.03.2011) Turmoil in the Middle East is still important in the markets. Safe havens like the JPY, CHF and the gold price benefited from this yesterday. The dollar did also strengthen. A relatively upbeat Bernanke and a very strong ISM index may have benefited the dollar.

By Camilla Viland, Analyst at DNB Markets

illustration DNB markets dealingroom in osloFear that the turmoil in Libya will spread to Saudi Arabia and concerns that rising oil prices could hurt the ongoing economic recovery weighed on markets yesterday. US stock markets declined. Stock market losses fuelled demand for safe haven government bonds. Other safe havens like the CHF, JPY and gold also strengthened yesterday.

After several days of declines the dollar strengthened yesterday. The dollar may have benefited from a relatively optimistic Ben Bernanke. In an assessment of the US economy he said that the recent surge in oil prices is unlikely to have a major effect on growth or inflation as long as higher prices do not become sustained. Furthermore he said he saw increasing evidence that the economic recovery has enough momentum to become self supporting. He also believes downside risks to growth have diminished and that the risk of deflation now is negligible. He did however also say that job growth remains far too anaemic, indicating that the quantitative easing programme will continue as planned.

The ISM index did also give reason for optimism yesterday. The index rose from 60.8 in January to 61.4 in February, versus expectations of 61.0. The index is now at its highest levels since May 2004 and consistent with GDP growth of about 6 per cent y/y. The sub indexes for production and employment in particular pulled up. The employment index is now at 64.5, the highest level since January 1973. This level is consistent with job growth in the manufacturing sector of about 80' people per month.

Preliminary inflation figures from the euro area rose, as expected, to 2.4 per cent y/y in February. This is the highest price growth since December 2008. So far details have not been revealed but most likely energy and food prices pulled inflation up. Some tax increases may also have affected the figures. Tomorrow the ECB meets and in light of the recent price developments ECB is expected to strike a hawkish tone. Market participants also increasingly believe that interest rate hikes are nearing. We believe the ECB will see through a period of relatively high inflation and not raise rates until 2012.

Swedish GDP rose 1.2% from Q3 to Q4. This was somewhat better than expected (1.0% according to Reuters) and also better than the forecast from Riksbanken (slightly above 1%). GDP was 7.3% higher than in Q4 2009, also higher than expected (7.0%). Private and government consumption rose 1.0% (q/q) while investments rose 1.7% in Q4. Imports grew somewhat more than exports. GDP was stronger than expected, but considering the uncertainty and possible revisions, we do not think that Riksbanken will turn more aggressive. Hence, a 25 bp hike in the coming meetings still seems most likely.

Norwegian house prices continue to climb. Seasonally adjusted, house prices rose by 0.7 per cent in February. Price growth is high, but abating. We expect this trend to continue going forward. In total we expect house price growth to be 8 per cent in 2011. Norwegian PMI rose from 56 in January to 58.7 in February. This is the highest level since October 2007. It’s a rise in the indexes for employment, production and in particular orders that pull the main index up. The figures indicate that the activity in the Norwegian manufacturing sector will pick up going forward.

Today we get a new report from Norges Bank's Regional network. This report is also likely to show increasing optimism among Norwegian companies. The report is important as it may affect Norges Banks view on the economic outlook, and hence monetary policy.