High levels of aluminium exports and falling import volumes brought the trade balance into a surplus in June. We expect this surplus to continue in July. The Q2 results of the three large commercial banks have also been published, with no negative surprises and largely in line with expectations. The effective interest rate differential has also been increasing in recent days on rising swap-rates. As a result, the ISK has been able to reverse some of its earlier losses.       

The week in review - 1 August 2008

A welcome trade surplus
The trade balance returned an ISK 2.3 bn surplus in June on high exports and falling import volumes. This is discussed in detail "In focus" on page 3. The preliminary figures for July will be published Wednesday, 6 August. We expect the data to show a continued surplus. The improving external position helped the ISK gain 2.5% this week.   

Confidence at an all-time low
The Capacent Gallup's consumer confidence index reached its lowest level in June since it was first measured in 2001. Confidence in labour market prospects is low, as well as in the economy six months from now. Consumer confidence is highly correlated with developments in the ISK and further with private consumption. Although high-frequency data point to falling private consumption, the economy is still faced with underlying inflation pressures as indicate by a 0.3% MoM increase in domestic goods in the
producer price index.

Good opportunities in longer Treasury notes
Landsbanki Research published a new benchmark bond yields forecast this week. We expect rate cuts by year-end, pushing yields down substantially. Yields on HFF bonds will remain low, but could jump after few months if inflation falls. We expect low HFF bond yields next year, although yields on the longer series are likely to remain above the current level. The full report is available at www.landsbanki.com.