Softer Trichet, oil price plunge

A Trichet in less of a hurry than envisaged, disappointing US labour market numbers and a dramatic p

(06.05.2011) A Trichet in less of a hurry than envisaged, disappointing US labour market numbers and a dramatic plunge in the oil price, has caused large market movements since yesterday morning. EURUSD has fallen, and the NOK has weakened. International stock markets and long government bond yields have come down as a result of the lacklustre mood.

By Kjersti Haugland, Senior Economist at DNB Markets

EURUSD has fallen by 1.6% since yesterday morning, and is traded at 1.456 at the moment. The steep fall came in the wake of ECB's press conference, where Trichet surprised the marked by not using the code words "strong vigilance" in his statement. Judging from previous experience with the ECB, such a phrase would be code for a hike at next meeting in June. Instead Trichet repeated his message from the April meeting: the inflation development is "monitored very closely". Consequently, market rates pulled down and the pricing now indicates next hike in July. We share that view. At the press conference Trichet denied that the ECB has become less concerned about the second-round effects on inflation of surging food and electricity prices, and stressed that the ECB continues to see a clear upside risk for inflation. Before the meeting markets were disappointed by weak German manufacturing orders, which fell by 4.0% m/m in March.

Ahead of this week's most important macro data – non-farm payrolls – there are traces of renewed pessimism concerning the state of the US labour market. Yesterday's initial claims disappointed the market by jumping to 474' last week, up from upwardly revised 431' the previous week. The number of claims is at its highest level since August 2010. The theory that last week's disappointing rise was due to temporary Easter effects is weakened. For today's labour market statistics consensus is rise of 186' employed (we expect 160'), and an unchanged unemployment rate at 8.8%.

In addition to monetary policy surprises there was a marked correction in commodity prices yesterday. Signs of weakness in the real economy, monetary tightening in China, reduced fear of contagion of political unrest in MENA, as well as the dollar strengthening after the European monetary policy meeting has been held up as explanations. Throughout the day, the oil price fell from 122 to 112 dollar per barrel, where it seems to have stabilised at the moment.

The oil price plunge lead to a broad weakening of the NOK. This is good news for Norges Bank, which is likely to start hiking again next Thursday. There was no seminal news from the enterprises in Norges Bank's regional network when a summary of a phone survey was released yesterday. As we should expect after the weak consumption numbers this year, the development is reported to have been somewhat weaker than expected in the January survey. Also, the cold winter has served to constrain construction activity. Nevertheless, the outlook for future activity has improved, which indicates solid growth in the coming months. Housing starts are rising rapidly, and where almost 40% higher in Q1 than in the same period last year. Given the surging house prices and the evident lack of supply, we expect the improvement to continue.

The outcome of Bank of England's monetary policy meeting was as expected: the key policy rate remained unchanged. Hence, there was no further announcement from the board. The minutes will reveal whether the hawkish committee members have been moved by the disappointing key macro data coming in lately. Yesterday's CIPS (purchasing manager's survey) from the UK service sector was another disappointment, falling by 57.1 in March to 54.3 in April (consensus was 55.7). Next week's Inflation Report may give signals of a reduction in the perceived inflation risk.