Several important events this week

illustration: DNB markets dealingroom in oslo

(11.07.2011) Friday’s weak labour market figures from the USA are likely to affect financial markets also this week, but there are a number of other important events. The discussion on private participation in the second support package for Greece, the release of the stress tests on Friday, the impasse over raising the debt limit and the quarterly earnings season are all likely to influence financial markets this week.

By Maren Romstad, Analyst at DNB Markets

Stocks ended last week in minus and fell markedly on Friday, due to disappointing employment growth. US Treasury yields fell after renewed fears that the economy is slowing. Ten-year government yields fell around 12 basis points and are currently at a low 3.02 per cent. The disappointing job growth in June joins the series of weak macroeconomic indicators in recent months. Employment only grew by 18,000 in June, which was far weaker than expected (90' according to Reuters).

In addition, the labour market report was bad news from beginning to end. Unemployment rose from 9.1 to 9.2 per cent of the workforce. Employment in the private sector, especially manufacturing, disappointed. Furthermore, temporary employment fell, which often is a good indicator of future employment. Average hours worked and the length of the work week was unchanged in June, while the number of temporary lay-offs increased. In light of all these disappointments, it is not surprising that wage growth also slowed.

Friday's figures reveal a weak period for the US labour market, but we believe this only to be temporary. Growth is expected to pick up later in the second half, which also implies an improvement in the labour market. However, persistently high unemployment suggests low rates for a long time. We maintain our forecast that the first rate hike from Fed is due during the spring 2012.  
The dollar weakened on a broad basis after the job data, but has strengthened against the euro during the weekend. Debt turmoil is continuing to weigh on the euro. On Friday, however, it became clear that Greece will receive the next tranche from the IMF. The EUR3 billion stems from the original rescue package and will help Greek to meet liabilities maturing this month.

More important this week is the discussions about private participation in the second planned support package, and the publication of stress tests
for European banks on Friday. 91 banks have been tested this time and markets fear that more banks will fail to satisfy the requirements this time around. The news about the publication time for the stress tests came Friday, and was probably a contributing factor to government bond yields raising several places in the euro zone. Spreads between Italian and German 10-year government bonds hit a euro-area record at 244 basis points.

Furthermore, credit default swaps for the likes of Greece, Portugal and Spain are again widening. Investors fear that even more large banks will fail the stress tests and, thus, are forced to strengthen core capital. According to Reuters, European governments are ready to bail out those banks which fail and cannot raise capital from investors after six months.
The much talked about stress tests are expected to influence currency markets this week, but there are also several other important events. Friday’s disappointing labour market figures are likely to continue affecting the US dollar, but also the dispute over raising the US debt ceiling will be important. In 2010 Congress passed a ceiling on the national debt of 14,300 billion dollars. This ceiling was reached in May and must be raised by 2 August. If not the US will not be able to fund their ongoing expenses and pay their loans. Night to Monday the negotiations was cancelled after 75 minutes and the parties are no closer in reaching an agreement. The deadline for reaching agreement across the parties is set to 22 July and Obama has therefore asked the parties to meet each day going forward.

Other events that may be important this week are the beginning of the quarterly earnings season and Governor Bernanke giving his semi-annual speech to the Congress.

The Norwegian krone will as often be affected by international news, but today's inflation figures may also provide some market reactions. We expect that both core inflation and total inflation remains unchanged at respectively 1.0 and 1.6 percent y/y.