Norges Bank lowers path

The stock markets continue to rebound and so does the euro, after the vote of confidence to Prime Mi

(22.06.2011) The stock markets continue to rebound and so does the euro, after the vote of confidence to Prime Minister Papandreo in the Greek parliament yesterday. Today's main events are monetary policy decisions in the US and Norway.

By Kjersti Haugland, Senior Economist at DNB Markets

Prime Minister Papandreo survived the confidence vote in the Greek parliament yesterday, and is ready to implement the disputed austerity measures. The news gave a further boost to the euro, and EURUSD is at the moment traded around 1.44.

The market shrugged off the news that the German ZEW index fell more than expected in June, to negative territory.
This means that the majority of the investors asked expect a deterioration of the economic situation in Germany during the next 6 months. We agree with the market on this one: with the impressive growth speed during the last year, there is all reason to expect a slower growth pace ahead. Nevertheless, with ECB in a hiking mode, further signs of slowdown in Europe's most important growth force will contribute to a softer attitude from Trichet & co.
 
Yesterday's US home sales were bad, as expected, and reached its lowest level in six months in June. With falling housing prices and soaring foreclosure sales it will be a long time before housing investment can serve as a significant growth contributor, as it has in previous upturns.

Tonight at 16:30 GMT the decision from Fed's two-day long monetary policy meeting is made public, and nobody expects the ultra low fed funds rate to be touched.
The press release is likely to emphasize that the economic activity has dampened further, but that the main explanation is temporary, negative effects of bad weather, high energy prices and the catastrophe in Japan. The previous press release (from the meeting in end-April) showed growing concern regarding upside risks to inflation, due to higher headline inflation in the wake of rising energy and commodity prices. The wording on this matter will probably be upheld.

Many have asked if QE3 is approaching, but we do not expect any signals regarding this.
The minutes from the April meeting made it clear that it will take a serious deterioration of the economic outlook to trigger another round of quantitative measures, as the trade-off (costs vs benefits) has worsened since last summer. Long government bond yields are already very low, and core inflation is on the rise. Bernanke will nevertheless be clear on the point that it will be a long time before the fed funds rate is hiked when he meets the press at 18.15 GMT.
 
Today's monetary policy decision from Norges Bank is accompanied by the second Monetary Policy Report (and hence an updated interest rate path) of the year. The March path indicated a hike in either May or June, and then four 25 basis point hikes in a row from October and onwards. The key policy rate was hiked in May, and nobody expects any changes in the key policy rate at today's meeting.
 
On the contrary: Since the March report, several factors point to slower hiking pace going forward. Most importantly: interest rate expectations for Norway's most important trading partners have fallen significantly. This has been one of the contributing factors to a stronger-than-expected NOK. Keeping the March interest rate path in the new environment with lower international rate expectations would contribute to an even stronger krone, and hence an even stronger fall in import prices ahead. Also, the decline in international rates is the result of renewed worry about the global upturn. This also pulls in the direction of increased caution in Norway.