USD keeps weakening

The markets were not sure how to react to the news about Bin Laden's death yesterday, and the immedi

(03.05.2011) The markets were not sure how to react to the news about Bin Laden's death yesterday, and the immediate strengthening of the dollar was reversed after a while. Today's meeting between EU/IMF officials and the Greek government will probably receive attention today.

By Kjersti Haugland, Analyst at DNB Markets

The upturn for the dollar and the stock markets in the wake of the news of Bin Laden's death proved to be short-lived. After pausing for thought, stock markets and long US government bond yields tended down, and the dollar weakened. The oil price, that initially fell, instead climbed further.

Increased risk of retaliatory action is named as a possible explanation. Hence, the smaller-than-expected decline in US manufacturing ISM (from 61.2 in March to 60.4 in April) was not enough to support the dollar. Despite the fall: The level is very strong. The sub index for paid prices came up to 85.5, the highest level in three years. The purchasing managers' comments referred in the survey shows that the strong rise in commodity prices is now hitting profitability.

Markets remain convinced by Bernanke's assurance that US interest rates (in contrast to European) will be kept at record-low levels for a long time. Euro zone PMI came up to a level even higher than the previously published flash estimate in April. 58.0 is well above the long-term pre-crisis average of 54.6. The divergence story remains intact: The indices of Germany and France keeps rising, while Italy and Spain's indices pulls down. Meanwhile, the debt issue continues to haunt Europe: Representatives from IMF and EU arrive in Athens today to meet with the Greek authorities and inspect the new austerity measures. The Greek finance minister said yesterday that he hoped that Greece would be granted an even longer repayment period.

Norwegian house prices fell by 1.0% m/m in April, after 7 months of brisk monthly growth (on average 1.1%). We suspect that the fall is due to temporary factors, in particular the late Easter holiday, and doubt that we will see a further decline in the months ahead. Nevertheless, we expect the growth pace to moderate somewhat, as the price level is high and interest rates on their way up.

Norway's April's PMI reading at 55.6 is strong, even though it was weaker than consensus. Like the SCB's business tendency survey, PMI paints a relatively bright picture of the situation for Norwegian manufacturers, and both show that employment is picking up as production is growing. Friday's release of manufacturing production in March should start to show similar signs of rise, after having remained more or less flat since summer 2010.

The outcome of wage negotiations for those employed by the government and municipalities this weekend indicates that wage growth will end up higher than anticipated by Norges Bank. The settlement has a framework agreement of 3.9% and 4.3% respectively in 2011, significantly higher than the 3.7% obtained by the manufacturing sector, which traditionally has been the important front-runner for all sectors in the Norwegian wage setting model, set up to conserve Norwegian competitiveness. In total, Norwegian wage growth could come up from 3¾% in 2010 to 4¼% this year, which is higher than Norges Banks' estimate (4%). This will in isolation imply a higher trajectory for domestic price growth, and - as a consequence - more rapid hikes.

The Swedish PMI was somewhat stronger than expected in April, which served to strengthen the SEK yesterday. Although the index remains well above its historical average, it has tended steady but slowly downwards since summer 2010. There are several signs that the buoyant Swedish recovery is about to enter a more "normal" phase. In particular, declining retail sales, constrained household credit growth and moderation on the housing market, indicate that Swedish households are feeling the effect of the Riksbank hikes. Today's minutes from the monetary policy meeting in April will reveal whether the Riksbank committee are recognising these signs of moderation.