Still gloomy markets

Markets are still gloomy in the wake of a series of poor US macro news lately. Today's speech by Ben

(07.06.2011) Markets are still gloomy in the wake of a series of poor US macro news lately. Today's speech by Ben Bernanke will be high on investors' radars today.

By Kjersti Haugland, Senior Economist at DNB Markets

In the absence of new information the repercussions of Friday's disappointing payrolls were weighing on the markets yesterday. Investors' appetite for risk was low, which led to declining stock markets and a stronger Swiss franc. Long government bond yields pulled up, however, with investors awaiting new auctions of US Treasuries.

The euro weakened temporarily against the dollar yesterday
, after a spokesperson from the German Ministry of Finance said that the new financial aid package to Greece was not yet a done deal. Also, Eurogroup leader Jean-Claude Juncker said that he considered the euro to be overvalued at today's level. During the night EURUSD has strengthened again, and is now traded around 1.46. Today's euro zone retail trade and German industrial orders will provide us with further information on whether the strong growth among (the large) EMU member states is about to slow down.
 
Today's most important event will probably be Ben Bernanke's speech at a banking conference in Atlanta tonight. His comments to the wave of weak US macro data lately will be scrutinized. We do not expect any signals about QE3, but we do expect a clear message that the key policy rate will not be hiked for a long time yet. FOMC inflation hawk Plosser said in a speech yesterday that his view on the outlook for the US economy is not fundamentally changed, and that he still thinks it may be possible to start tightening already by end-2011.
 
In Norway, the parties in the financial services industry agreed on this year's wage settlements during the night, avoiding a bank strike. We expect 3-month NIBOR to come slightly down going forward, after ample demand lately for NOK forwards due to fears of an upcoming strike.
 
The Norwegian krone has weakened on a broad scale since yesterday morning, which is probably due to the reduced risk appetite and a lower oil price. So far this year, EURNOK has traded within an interval between 7.70 and 8.00, and we expect it to continue within this range.

Our forecasts are in the lower end (7.70 in 12 months), partly due to our negative view on the euro, and partly due to expectations that Norges Bank will hike more than the market expects at the moment. The market seems to price in two to three hikes during the next 12 months (August, October and March). During the next two years the market seems to expect about 125 basis points, three to four fewer hikes than implied by Norges Bank's own interest rate path (9 hikes, each 25 basis points). Given the tightening of the labor market and the increasing wage growth we believe that Norges Bank will hike in the meetings in September, December and March, and thereafter proceed quicker than indicated by the market pricing.
 
Yesterday's expectation survey, conducted by Perduco on behalf of Norges Bank, signaled a marked increase in wage growth expectations. Economists and the social partners now expect wage growth to be 4% this year, which is about a half percentage point higher than reported in the previous survey. For 2012 wage growth is expected to be between 4% and 4.5%, which is also higher than before. The survey shows a marginal decline in inflation expectations one, two and five years ahead. The main impression is that inflation expectations are stable, and well in line with the inflation target (2.5%). The central bank is surely also relieved that a steadily increasing share of the households expects higher interest rates going forward (80% at the moment).
 
Expectations of higher interest rate costs are probably an important explanation behind the slight decline in Norwegian consumer confidence, from 29.5 in Q1 to 28.5 in Q2. There was a decline in confidence in the nation's economy as well as in the private economy. However: Confidence remains well above its historical average. Coming up today: gross registered unemployment in May is expected to decline further, by 1 000 persons this time.