Another yes

illustration: figures

(01.07.2011) Yesterday's Greek vote ended with another a yes. Along with encouraging macroeconomic figures the vote contributed to rising stock markets and lower treasury prices. Today the important ISM index from the US is being published, as well as several Norwegian figures.

By Maren Romstad, Analyst at DNB Markets

The second vote in the Greek Parliament ended as one had hoped. After the tax reform and budget cuts were approved Wednesday, the sale of state assets and implementation of the savings plan got approval yesterday. Now it’s likely that the next tranche of EUR 12 billion from the original rescue package will be paid out at the beginning of this month. The decision is likely to happen over the weekend, as EU finance ministers meet to discuss the payment.

A growing chance that Greece will meet their short-term funding requirements helped to lift stock markets for the fourth straight day. In addition, good macroeconomic figures helped increase optimism in financial markets. Chicago PMI surprised on the upside and rose sharply in June. Consensus awaited in advance further decline, as most macroeconomic figures have disappointed and showed signs of abating recently. The index rose, however, from 56.6 to 61.1 and, thus, points to solid growth ahead.

The positive market reactions following the release were most likely due to its leading qualities for the important ISM index published later today. Like other macro figures, the index has performed poorly lately. Consensus expects another weak month and the index is expected to fall from 53.5 in May to 51.8 in June. According to different regional indices this seems reasonable. Both NY Fed and Philly Fed fell markedly in June to levels consistent with declining production.
In the foreign exchange market the euro strengthened somewhat yesterday. NOK has weakened versus the euro and the Swedish krone. One contributing factor could be Norges Bank announcing yesterday that they will purchase foreign exchange equivalent to NOK 400 million per day in July. This is the same amount as in June and the third month in a row with FX purchases for the Government Pension Fund Global. Intuitively this should affect the flows in the Norwegian FX market in a negative manner and, thus, be a negative driver for the krone. However, the effect on NOK from the central bank’s FX purchases is uncertain, since the amount is announced in advance and is relatively small compared to overall turnover.  
After a weak start this year, retail sales surprised on the positive side in May. Turnover increased by 1.2 per cent from April to May, far stronger than the 0.5 per cent expected. For a long time high electricity bills have weighed on consumption growth, but this negative effect seems to be abating. Norges Bank expects that consumer demand will grow by 3.5 per cent this year. With the weak development so far this year Norges Bank need consumption to pick up.

After today’s figure the trend is slightly upward. We expect the strong growth to continue and expect the second half year to be stronger than the first. Hence, Norges Bank is expected to follow the rate path from last Wednesday and hike the monetary policy rate five times over the next twelve months. Rate hikes are expected in August, October, December, March and June.

Today several Norwegian key figures are being published
. First, we get gross unemployment and the unemployment rate for June. The labour market has steadily been improving and was one of the factors emphasised by Norges Bank when they published their new rate path on Wednesday last week. In their assessment the Executive Board gave weight to signs of a tightening labour market, even though inward migration is high. In other words, employment growth is strong and wage growth is rising slightly more than expected. Hence, developments in the labour market may be an important factor for the interest rate development going forward. Today’s figures, however, are not expected to change the overall picture. The unemployment rate is expected to remain unchanged at 2.5 per cent. The PMI index and housing prices are also published today.