Risk on After ISM

illustration: DNB markets dealingroom

(04.07.2011) An unexpected rise in the ISM index boosted markets with increases for stocks and the Euro and decline for long-term Treasuries.

By Kyrre Aamdal, Senior Economist at DNB Markets

S&P500 increased 1.4 per cent Friday and 10 year Treasury yields increased (only) 3 basis points. Today stock markets in Asia have followed up the increase with Nikkei 225 up 1 per cent. Today U.S. Markets are closed for celebrating the Independence Day.

The Euro has appreciated only 0.3 per cent versus the USD from Friday morning, but EURUSD was up 0.8 per cent from just before the ISM figures to the close of the U.S. markets. Norwegian kroner have been quite stable versus the Euro from Friday morning, but the EURSEK has declined 0.7 per cent.

Risk indicator for the markets as the VIX volatility index and the put/call-index for the U.S. markets have decline. The "risk-on" sentiment in the market was also based on the temporary solution for Greece that has avoided an immediate debt failure.

During the week-end the euro zone finance ministers approved the next tranche from last year's bail-out package. The IMF will meet on July 8 to approve the loan tranche, which is expected to be handed over by July 15 and allow Greece to avoid the immediate threat of debt default. But the country still needs the second rescue package. EU officials will now look at how private creditors can be involved voluntarily so that rating agencies do not declare the rescue a "credit event". A French initiative has outlined how banks voluntary could roll over a major part of the maturing debt. But today Standards & Poor's rating agency said the debt rollover plan for Greece may put the country in "selective default".
 
In the U.S. the ISM index for June increased after a marked decline in May. Analysts had forecasted a further decline and the markets were thus surprised by the increase. The level seems to be consistent with a 4 per cent year on year growth in GDP. All sub indices of the headline index increased and the employment index ended just below 60, a quite high level, indicating improved non-farm payrolls on Friday. The index for paid prices continued to fall and thus dampened the fear for inflation.
 
In Norway registered unemployment decreased by 100 persons (seasonally adjusted) in June. The decline was less than in the previous months. Gross unemployment (incl. persons on labour market measures) increased by roughly 900, due to more people on labour market training than usual. The unadjusted unemployment was unchanged at 2.5 per cent, in line with expectations. The June data confirm that the labour market is improving, but there are signs of stabilizing. Norges Banks has already taken into account a decrease in unemployment in its forecasts. The unemployment rate is expected to drop from 2.9 per cent in 2010 to 2.5 per cent in 2011 (and 2¼ per cent next year). Hence, Friday's figures should not affect the central bank’s policy assessments significantly and there were no significant market reactions.
 
The Norwegian PMI index fell from 56.8 to 56.1 in June, somewhat weaker than expected. PMI in Norway has for a long time been lower than corresponding indices in other countries. But with the global recovery gradually slowing, the Norwegian index is among the highest. The employment index in PMI fell. This is in line with the signals from The Norwegian Labour and Welfare Administration that the demand for employment is lower than in previous months.
 
Existing home prices increased 0.1 per cent m/m in June. This was lower than in the previous months. But the increase in May was revised from 1.1 to 1.3 per cent. The June figures were probably affected by that the Ascension Day and Whit Monday both fell in June. Both days are days off in Norway and the open houses normally attract fewer customers those weekends.