Today's Key Points

Daily Forex Fundamentals | Written by Danske Bank | Jul 10 08 07:34 GMT |

* Fear and loathing on the financial markets. Treasury yields down, equities down, EUR/USD up
* Light data calendar in the US and Euroland. Bank of England meeting without rate change to be expected
* In Scandinavia we will see inflation figures. We see upside risks in Sweden and Norway

Markets Overnight

Torn between hope and despair continues to be the theme of the market. And it is also clear that absence of data is no indication of a quiet market. Once again we find 2yr Treasury yields below 2.40% -a level last visited in the wake of speculations on Monday that Freddie Mac and Fannie Mae would have to raise 75bn USD in capital.

Now it seems that although the head of OFHEO has reassured the market that both GSEs are well capitalised the market has its doubts. Yesterday Fannie Mae had to pay 74bp above Treasuries. The highest spread to government bonds since it started issuing 2yr bonds. The Freddie Mac share dropped to 10.26 USD, which is well below the previous low on Monday.

The S&P500 ended yesterday with a 2.3% drop and Nasdaq fell by 2.6%. Asian indices are mostly in negative territory this morning, buy only marginally so.

EUR/USD rose on the back of renewed jitters on the fixed income market and has established itself around 157.7. Both EUR/NOK and EUR/SEK have remained very stable ahead of the inflation data due out today at 8.05 and 9.45 respectively.

Finally, we note that the oil price has picked up somewhat after yesterday's decline and presently trades around 136.5 USD/barrel.
Global Daily

We start yet another day with a light data calendar and will most likely instead take the lead from gyrations resulting from the fears and hopes regarding the fate of the US GSEs. There is, of course, also a rate announcement from Bank of England (unchanged rate), which could offer some further clues as to how central bankers are dealing with the current stagflationary environment, but we expect no fireworks. In the US there will be jobless claims and chain store sales, two tier 2 data sets that could offer some guidance as to the trend in non-farm payrolls and retail sales
Scandi Daily

A lot of interesting data out in Sweden today. Inflation will of course be most important and we are a notch above market expectations and a couple of notches above the Riksbank. The difference is probably due to new information on mortgage interests and fuels (ring a bell, anyone?). In addition we receive the activity index, which is set to come in low, and unemployment statistics from the labour market board, which are expected to rise due to seasonal factors. All in all, the higher than expected inflation should be taken seriously since we see high risks of the Riksbank not just doing what they have said, but also of an additional hike. Swing factors are of course fuel and food, and there is a definitive chance of outcomes higher than what the Riksbank expects. Markets have tended to pay more heed to weak growth over the past few weeks and we think this might be wise - on the longer term. In the short term, markets might be in for some nasty surprises to the upside.

The big event in the Norwegian market today will be the June inflation numbers. We expect the core inflation measure CPI-ATE to rise from 2.3% y/y to 2.5% y/y. In May core inflation dropped surprisingly from 2.4% to 2.3%. However, this was mainly due to a very peculiar drop in airline fares that is expected to reverse in June. In fact, there is a risk that airline ticket prices have risen even more markedly in June due to additional fuel charges.

Food prices are, of course, another uncertain sub-index. We think the risk here is on the upside. We know for sure that wholesale prices rose on 1 July due to a price agreement with the Norwegian farmers. These price rises come on top of the upside price pressure from imported food. Hence, there is certainly a risk that Norwegian food prices have been hiked more in June than we expected. Incidentally, June is one of the months when clothing and shoe sales may blur the picture. We have used the same seasonal drop in prices of 1.7% m/m for this sub-indice as last year. All in all, there is a risk that the core inflation measure may rise to 2.6%. Looking at core inflation in the coming months, we still think it will be at approx. 2.7% for the rest of 2008. Our forecast is 0.2 percentage points above the Norges Bank forecast.

Headline CPI is expected to rise to 3.5% y/y from 3.1%. The main reason is higher petrol prices, whereas electricity prices are expected to stay low. However, also here we might be in for a surprise as the latest price hikes in spot prices might have fed into consumer prices earlier than we expected. The current spot prices point to significantly higher electricity prices in July. Although these prices are not monitored by the central bank, they will add to inflationary pressure in the Norwegian economy.

Also remember that the two alternative indicators of underlying inflation, CPI-Trimmed and CPI Weighted median, will now be published by Norges Bank half an hour later at 10.30 CET (www.norges-bank.no). These indicators were running at 3.3% and 3.0% in May. We have no exact forecast for these indicators, but they are in general expected to rise 0.2 percentage points. The other alternative inflation indicator, CPIEX, is not published today. From a strategic point of view we still recommend to position for wider spreads in the short end of the swap curve, e.g. in the 2 or 3 segments. We still like this view ahead of the CPI release as we see s risk of an upside surprise. Also consider an outright long position in DEC08 NOK 3M FRA or MAR09 3M FRA. An upside risk will certainly favour such a position as it will make it much more likely that we shall see more rate hikes in Norway and the timing for a rate cut should be postponed further

Danske Bank
http://www.danskebank.com/danskeresearch