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387 matches for " Debt":
In yesterday's Monitor we suggested that China's profits surge has been party dependent on developers' risky debt issuance practices.
In yesterday's Monitor we set out how government will have to prepare for an increase in debt issuance both to bring debts on-balance sheet and also to issue new debt as government is obliged to run deficits while the corporate sector deleverages.
The federal debt ceiling was re-imposed last week, with no fanfare, and no reaction in the markets. All eyes were focussed instead on the Fed's rate hike and Chair Yellen's press conference.
We've written in previous Monitors about the stabilisation of China's debt ratio. In this Monitor we look at whether this stabilisation is cyclical or a sign that China really has managed to change the structure of its economy to be less reliant on debt.
Today's balance of payments figures for the second quarter likely will underline that the U.K. has financed strong growth in domestic consumption by amassing debts with the rest of the world at a breakneck pace.
China will have to issue a lot of government debt in the next few years. The government will need to continue migrating to its balance sheet, all the debt that should have been registered there in the first place. This will mean a rapid expansion of liabilities, but if handled correctly, the government will also gain valuable assets in the process.
British households are back to their old ways and are piling on debt again. With borrowing costs still falling, consumer confidence high and banks willing to lend, indebtedness will only increase unless the Bank of England acts.
Data this week look set to emphasise that heat is returning to the housing market, again. The Financial Policy Committee--FPC--still has additional tools it could deploy to cool housing demand. But the root cause of surging house prices remains very cheap debt. Alongside the inflation risk posed by the labour market, the case for the MPC to begin to raise interest rates to prevent a widespread debt problem is becoming compelling.
China's total debt stock is high for a country at its stage of development, relative to GDP, but it is sustainable for country with excess savings. China was never going to be a typical EM, where external debtors can trigger a crisis by demanding payment.
We have recently looked at China's capacity to grow its way out of the debt overhang--see here--and whether last year's deleveraging can be sustained; see here.
Treasury Secretary Mnuchin's five-line letter to House Speaker Pelosi on last Friday--copied to other Congressional leaders--which said that "there is a scenario in which we run out of cash in early September, before Congress reconvenes", introduces a new element of uncertainty to the debt ceiling story.
When Park Geun-hye came to power in Korea 2013, it was to cheers of "economic democratisation". At the time, I wrote a report with a list of reforms that would be needed for Korea to "economically democratise".
The Eurozone's current account surplus remained close to record highs at the end of Q1, despite dipping slightly to €34.1B in March, from a revised €37.8B in February. A further increase in the services surplus was the key story.
We have warned that the ECB' decision to add corporate bonds to QE would lead to unprecedented market distortions. Evidence of this is now abundantly clear. The central bank has bought €82B-worth of corporate bonds in the past 11 months, and now holds more than 6% of the market. Assuming the central bank continues its purchases until the middle of next year, it will end up owning 13%-to-14% of the whole Eurozone corporate bond market.
Private non-financial corporations' profits have held up well over the last two years, despite the net negative impact of sterling's depreciation and modest increases in Bank Rate.
The Eurozone's external surplus fell further at the end of Q1, and has now fully reversed the jump at the start of the year.
In our daily Monitors we've talked about the four paths that we see for the Chinese economy over the medium-to-long term. First, China could make history and actively transition to private consumption-led growth.
The Bank kept interest rates unchanged at 1.50% yesterday, but downgraded its inflation forecast for 2018 to 1.6% from 1.7%
This week brings the third anniversary of the first rate hike in this cycle, on December 16, 2015.
The Bank of England's stress tests highlighted that banks have made further progress in strengthening their balance sheets over the last year. But while banks have retreated from taking risk onto their balance sheets, others have stepped in to fill the void.
The danse macabre between Greece and its creditors continued last week, increasing the risk of default and capital controls. Greek citizens don't want to leave the euro and Germany does not want a Grexit, two positions which should eventually form the basis for an agreement.
GDP growth currently is subdued by historical standards, but at least it is not debt-fuelled.
We have to hand it to Italy's politicians. In an economy with a current account surplus of 3% of GDP, a nearly balanced net foreign asset position and with the majority of government debt held by domestic investors, the leading parties have managed to prompt markets to flatten the yield curve via a jump in shortterm interest rates.
This week's uproar over the ECB's purchases of Italian debt in May--or lack thereof--shows that monetary policy in the euro is never far removed from the political sphere.
The two-year budget deal agreed between the administration and the Republican leadership in Congress will avert a federal debt default and appears to constitute a modest near-term easing of fiscal policy. The debt ceiling will not be raised, but the law imposing the limit will be suspended through March 2017, leaving the Treasury free to borrow as much as necessary to cover the deficit. As a result, the presidential election next year will not be fought against a backdrop of fiscal crisis.
Italy's long-term challenges--chiefly, structurally high government debt and deteriorating demographics--remain daunting, but the cyclical picture is improving steadily. Final GDP data last week revealed that growth in the first half of the year was 0.2% better than initially estimated, taking the annualised growth rate to 1.4%, the highest in five years. This is the first sign of a durable business cycle upturn since the sovereign debt crisis crashed the economy in 2012.
The strengthening EZ economy increasingly looks like the tide that lifts all boats. The Greek economy is still a laggard, but recent news hints at a brightening outlook. Last week, S&P affirmed the country's debt rating, but revised the outlook to "positive" from "stable."
In yesterday's Monitor, we laid out how conditions last year were conducive to Chinese deleveraging, and how the debt ratio fell for the first time since the financial crisis.
Debt issuance by Eurozone non-financial firms is soaring, consistent with the ECB's hope that adding private debt to QE would boost supply. Our first chart shows that the three-month sum of net debt sold in the euro area jumped to a new record of €60.3B in May. A short-term decline in issuance is a good bet after the initial euphoria in firms' treasury departments.
Today's consumer credit report for April likely will show that the stock of debt rose by about $15B, a bit below the recent trend. The monthly numbers are volatile, but the underlying trend rate of increase has eased over the past year-and-a-half, as our first chart shows. The slowdown has been concentrated in the non-revolving component, though the rate of growth of the stock of revolving credit--mostly credit cards--has dipped recently, perhaps because of weather effects and the late Easter.
The sovereign debt crisis in the euro area was a macroeconomic horror story
This weeks' IMF's staff report on the Italian economy has increased the urgency for a compromise between the EU and Italy over the country's suffering banks. The report highlighted that financial sector reform is "critical" to the economy, and that the treatment of the significant portion of retail investors in banks' debt structure should be dealt with "appropriately."
We've argued for some time that China faces a massive legacy of bad debt that will either have to be dealt with, or will result in the Japanning of its economy.
AMLO unveiled on Saturday Mexico's budget plan for 2019, calling for a moderate increase in spending, focused mainly on social programs, without raising taxes or the country's debt.
The stubbornly slow rate of decline of public borrowing casts doubt on whether the Chancellor will run a budget surplus before the end of this parliament, as his fiscal rule stipulates. But downward revisions to debt interest forecasts by the Office for Budget Responsibility are likely to absolve him again from intensifying the impending fiscal squeeze in the Budget on March 16.
In the yesterday's Monitor, we presented an exagerated upper-bound for China's bad debt problem, at 61% of GDP. The limitations of the data meant that we double-counted a significant portion of non-financial corporate--NFC--debt with financial corporations and government.
All regulators face the challenge that when you regulate one part of the economy, problems appear somewhere else. For China, the game is particularly intense because liquidity created by previous debt binges continues to slosh around the financial system, with no outlet to the real economy.
Korea watchers appear to be hanging on Governor Lee Ju-yeol's every word, searching for any sign that he'll drop his hawkish pursuit of more sustainable household debt levels and prioritise short-term growth concerns.
Growth in households' disposable incomes has been supported in recent years by falling debt servicing costs. The proportion of households' incomes absorbed by interest payments fell to a record low of 4.5% in Q4 last year, down from 4.7% a year ago and a peak of 10% in 2008.
Investors in euro-denominated corporate debt will be listening closely to Mr. Draghi this week for hints on how the ECB intends to balance QE between public and private debt next year.
The proportion of households' annual incomes absorbed by servicing debt has declined steadily this decade, providing a powerful boost to spending. Indeed, the proportion of annual incomes accounted for by interest payments--mainly on mortgages--edged down a record low of 4.6% in Q1, less than half the share in 2008.
As we reach our deadline--4pm eastern time--media reports indicate that a debt ceiling agreement is close.
Markets have responded strongly to the ECB's announcement that it will be buying corporate bonds as part of QE. Net corporate debt issuance of non-financial firms jumped €16B in March, the biggest monthly increase since January 2014. The 12-month average, however, was stable at €3.6B, and a sustained increase in net debt supply partly depends on firms' appetite for financial engineering
After a 15 year hiatus, Argentina returned to the global credit markets yesterday with the sale of a USD16.5B sovereign bonds, the largest ever dollar offering by a developing country. Argentina boosted the size of its offering to USD16.5B from USD15B after attracting orders worth USD70B. The country sold four tranches: 10-year debt at 7.5%, three- and five year yielding 6.25% and 6.875%, respectively, and 30-year paper at 8.0%.
Economic theory tells us that government spending should be counter-cyclical, but recent experience in the Eurozone tells a slightly different story. The contribution to GDP growth from government spending rose during the boom from 2004 to 2007, and remained expansionary as the economy fell off the cliff in 2008. As the economy slowed again following the initial recovery, the sovereign debt crisis hit, driving a severe pro-cyclical fiscal hit to the economy.
China faces three possible macro outcomes over the next few years. First, the economy could pull off an active transition to consumer-led growth. Second, it could gradually slide into Japan-style growth and inflation, with government debt spiralling up. Third, it could face a full blown debt crisis, where the authorities lose control and China drags the global economy down too
Commodity prices have started the year under further downward pressure. This is yet more negative news for LatAm, as most of the countries have failed to diversify, instead relying on oil or copper for a large share of exports and, critically, tax revenue. Venezuela is the biggest loser in the region from the oil hit, and, together with the worsening political and economic crisis, it has pushed the country even closer to the verge of collapse, threatening its debt payments. Venezuela's central bank last week released economic data for the first time since 2014, showing that inflation spiralled to 141% and that the economy shrank 4.5% in the first nine months of last year.
S&P downgraded Chinese government debt last week to A+ from AA- yesterday, following a Moody's downgrade last May.
Today's preliminary estimate of Q4 GDP likely will show that the Brexit vote has not caused the economy to slow yet. But growth at the end of last year appears to have relied excessively on household spending, which has been increasingly financed by debt. GDP growth likely will slow decisively in Q1 as the squeeze on households' real incomes intensifies.
Investors in Eurozone banks continue to face uncertain times, despite the ECB's best efforts to prop up the economy and financial markets via QE. The latest hit to confidence comes from the bail-in of selected senior debt in Portugal's Banco Espirito Santo. When the troubled lender was restructured in mid-2014, the equity and junior debt were left in a "bad" bank--and were virtually wiped out--while the deposits and senior debt went into the "good" bank Novo Banco. Senior debt holders expecting to recoup their money, however, were startled earlier this month by the decision to "re-assign" five selected bonds with total face value of €2B from Novo Banco to the bad bank, in effect wiping out the investors.
Last week's debt-relief agreement between Greece and its European creditors goes somewhat further than previous instances when the EU has kicked the can down the road.
It is by now a familiar story that the Eurozone has become a supplier of liquidity to the global economy in the wake of the sovereign debt crisis.
The recent deal between Greece and the EU shows that the appetite for a repeat of last year's chaos is low. But investors' attention has turned to whether Portugal is waiting in the wings to reignite the sovereign debt crisis. Complacency is dangerous, but economic data suggest that a Portuguese shock to the Eurozone economy and financial markets is unlikely this year.
Mr. Draghi's pledge in 2012 to do "whatever it takes to preserve the euro," and QE have stymied sovereign debt risk in the euro area. At the same time, the EU's relaxed position over debt sustainability was highlighted earlier this year by the Commission's decision to give France two more years to get its deficit below 3% of GDP. But Moody's downgrade of the French government bond rating last week to Aa2 from Aa1 serves as a gentle reminder to investors of the underlying fundamentals.
The Chancellor is likely to announce plans for additional public sector asset sales in today's Autumn Statement, to help arrest the unanticipated rise in the debt-to-GDP ratio this year. But privatisations rarely improve the underlying health of the public finances, partly because assets seldom are sold for their full value. And the Chancellor is running out of viable assets to privatise; the low-hanging, juiciest fruits have already been plucked.
Is Japan's pending 15-month anything to write home about?
House purchase mortgage approvals by the main street banks jumped to 40.1K in January, from 36.1K in December, fully reversing the 4K fall of the previous two months, according to trade body U.K. Finance.
Eurozone bond traders of a bearish persuasion are finding it difficult to make their mark ahead of Italy's parliamentary elections next weekend.
The Chinese Communist Party looks set to repeal Presidential term limits, meaning that Xi Jinping likely intends to stay on beyond 2023.
The biggest single problem for the stock market is the president.
The landslide victory by anti-austerity party Syriza in Greece this weekend will increase uncertainty in coming months. The coalition between Syriza and the Independent Greeks will prove a tough negotiating partner for the EU as both parties are strongly in favor of pushing the Troika to significant concessions on any future bailout terms this year.
In yesterday's Monitor, we outlined how the government's plans to allow more migrants to register in cities could help counterbalance the effects of aging and put a floor under medium-term property prices.
Recent political and economic developments in Brazil make us more confidence in our forecast of a gradual recovery. On Wednesday, interim President Michel Temer scored his first victory in Congress, winning approval for his request to raise this year's budget target to a more realistic level. Under the new target, Brazil's government plans to run a budget gap, before interest, of about 2.7% of GDP this year.
The ECB's statement following the panic on Friday was brief and offered few details. The central bank said that it is closely monitoring markets, and that it is ready to provide additional liquidity in both euros and foreign currency, if needed. It also said that it is in close coordination with other central banks.
Speculation has grown that the Bank of England will announce measures today to calm the recent strong growth in consumer credit, when it publishes its bi-annual Financial Stability Report.
After years of rapid increase, China appears finally to have stabilised its ratio of private non-financial to GDP ratio.
Households' disposable incomes have been supported over the last eight years by a steady stream of compensation payments for Payment Protection Insurance--PPI--policies that were missold in the 1990s and 2000s.
The latest public finance figures make it virtually inevitable that the Chancellor will scrap the existing fiscal rules when he delivers his first Budget.
The headline in yesterday's detailed Q1 German GDP data was old news, confirming that growth in the euro area's largest economy slowed at the start of the year.
Financial markets' inflation expectations have risen sharply since the spring. Our first chart shows that the two-year forward rate derived from RPI inflation swaps has picked up to 3.8%, from 3.5% at the end of April.
Sometime very soon, likely in the second quarter of this year, the stock of net housing wealth will exceed the $13.1T peak recorded before the crash, in the fourth quarter of 2005. At the post-crash low, in the first quarter of 2009, net housing equity had fallen by 53%, to just $6.2T. The recovery began in earnest in 2012, and over the past year net housing wealth has been rising at a steady pace just north of 10%. With housing demand rising, credit conditions easing and inventory still very tight, we have to expect home prices to keep rising at a rapid pace.
Korean GDP unexpectedly declined in Q4, for the first time since the financial crisis, falling 0.2% quarter-on-quarter after a 1.5% jump in Q3.
Markets currently judge that U.K. interest rates will rise about six months after the first Fed hike. But the Bank of England seldom lagged this far behind in the past. Admittedly, the slowdown in the domestic economy that we expect will require the Monetary Policy Committee to be cautious. But wage and exchange rate pressures are likely to mean six months is the maximum period the MPC can wait before following the Fed's lead.
The PBoC cut the reserve requirement ratio by 0.5pp for almost all banks on Sunday, effective from July 5th.
Over the next 18 months we expect to see interest rates break out further on the upside. Initially, we expect developed market growth to be resilient to that.
Yesterday's sole economic report in the EZ showed that consumer sentiment in Germany improved mid-way through the fourth quarter.
The ECB broadly conformed to markets' expectations today. The central bank maintained its key refinancing and deposit rates at 0.00% and -0.4% respectively, and delivered the consensus package on QE.
As we go to press, it appears that politicians in Italy have agreed on a 2019 budget deficit of 2.4% of GDP.
Recent polls in Argentina suggest that Alberto Fernández, from the opposition platform Frente de Todos, has comfortably beaten Mauricio Macri, to become Argentina's president.
We will be paying special attention today to the EC sentiment survey for Italy, where the headline index has climbed steadily so far this year. It was unchanged at an eight-year high of 106.1 in April, and even if it fell slightly in May--we expect a dip to 105.0--it still points to an upturn in economic growth.
The MPC likely will vote unanimously to keep Bank Rate at 0.75% on Thursday.
China's Q2 real GDP growth officially slowed to 6.2% year-over-year, from 6.4% in Q1, which already matched the trough in the financial crisis.
The picture for Korean quarterly real GDP growth in Q4 was unchanged in the final reading, published yesterday, showing a contraction of 0.2%, after the 1.4% jump in Q3.
In previous Monitors, we have outlined our base case that the direct impact of tariffs on Chinese GDP will be minimal this year.
We are going to print two days before the July 1 presidential election in Mexico.
Data released last week confirm that the Argentinian economy ended 2017 strongly.
The latest E.C. survey shows the gap between firms' and households' confidence levels has remained substantial.
The Colombian economy was relatively resilient at the end of last year, but economic reports released during the last few weeks indicate that growth is still fragile, and that downside risks have increased. Real GDP rose 1.0% quarter-on-quarter in Q4, pushing the year-over-year rate up to 1.6% from 1.2% in Q3.
Venezuelan bond markets have been on a rollercoaster ride this year, with yields rising significantly in response to heightened political uncertainty and then declining when the government pays its obligations or when protests ease.
In the financial crisis, a squeeze in short-term dollar markets forced banks to sell assets, which were then exposed as soured.
Data and events have gone against the idea of further BoK policy normalisation since the November hike.
China's government overshot its deficit target last year, and probably will overshoot it by at least as much this year
Mr. Draghi's speech yesterday in Portugal, at the ECB forum on Central Banking, pushed the euro and EZ government bond yields higher. The markets' hawkish interpretation was linked to the president's comment that "The threat of deflation is gone and reflationary forces are at play."
Judging by the survey data, German business sentiment remained depressed at the start of the year.
The end of the government shutdown--for three weeks, at least-- means that the data backlog will start to clear this week.
The minutes of the Banxico's monetary policy meeting on February 7, when the board unanimously voted to keep the reference rate on hold at 8.25%, were consistent with the post-meeting statement.
The run of better-than-expected public borrowing figures ended abruptly with the publication of March data yesterday.
So much has changed in China over the last six months that we are taking the opportunity in this Monitor to step back and gain an overview of where the economy is going in the long term.
In recent years only one event has made a material difference to the growth path of the U.S. economy, namely, the plunge in oil prices which began in the summer of 2014. The ensuing collapse in capital spending in the mining sector and everything connected to it, pulled GDP growth down from 2½% in both 2014 and 2015 to just 1.6% in 2016.
A long period of extremely accommodative U.S. monetary policy generated sizable capital inflows and asset price appreciation in EM countries.
Financial markets in Brazil and Argentina have been under pressure this week, following negative news, both domestic and external. In Brazil, the Ibovespa index tumbled nearly 1.8% on Tuesday after a Senate Committee rejected the Government's labour reform bill.
China has undoubtedly been through a credit tightening, commonly explained as the PBoC attempting to engineer a squeeze, to spur on corporate deleveraging.
We sympathize greatly with investors' frustration over endless postponements and new "deadlines" in the negotiations between Greece and its creditors. Syriza delivered a proposal for reforms to the EU and the IMF on Monday morning, welcome d as a "positive step in the right direction" by Eurogroup president Dijsselbloem and Economic and Financial Affairs commissioner Moscovici.
On the face of it, the latest public finance data suggest that the economy has lost momentum.
Brazil's mid-April inflation report delivered more evidence that inflation is decelerating; it fell to 9.3% from 10.0% in March, reaching the slowest pace since July 2015. The unadjusted month-to-month increase surprised marginally to the upside, but the key story is of a declining year-over-year trend. Core inflation, which is a lagging indicator of the business cycle, slowed again, in line with the decline in services and market prices inflation.
The public finances are in better shape than October's figures suggest in isolation. Public sector net borrowing excluding public sector banks--PSNB ex.--leapt to £11.2B, from £8.9B a year earlier.
Yesterday's barrage of survey data in France suggests that business sentiment in the industrial sector remained soft mid-way through Q4, but the numbers are more uncertain than usual this month.
The Eurozone's external surplus rebounded over the summer, reversing its sharp decline at the start of Q3.
It's going to be very hard for Fed Chair Powell's Jackson Hole speech today to satisfy markets, which now expect three further rate cuts by March next year.
The S&P 500 index chalked up a new record on Wednesday by going 3,453 days without a 20% drawdown, making it the longest equity bull-run in U.S. history.
German 10-year yields have been trading according to a simple rule of thumb since 2017, namely, anything around 0.6% has been a buy, and 0.2%, or below, has been a sell.
The EU Commission and Italy's government remain at loggerheads over the country's fiscal plans next year.
The euro area's record-high external surplus has prompted commentators to suggest that the zone has room to loosen fiscal policy to support growth, or at least relax the deficit reduction rules.
The Eurozone's current account surplus extended its decline in May, falling to a nine-month low of €22.4B, from €29.6B in April.
The ECB held fire yesterday and kept its main refinancing and deposit rates unchanged at 0.0% and -0.4%, respectively. The central bank also left the pace of monthly asset purchases unchanged at €80B. The introductory statement overall confirmed the central bank's dovish stance.
The ECB held fire yesterday. The central bank kept its main refinancing rate unchanged at 0.0%, and also maintained the deposit and marginal lending facility rates at -0.4% and 0.25% respectively.
If we are right in our view that the lag between shifts in gasoline prices and the response from consumers is about six months--longer than markets seem to think--then the next few months should see spending surge.
Friday's advance PMI data for the Eurozone added further evidence of stabilisation in the economy after the sharp slowdown in GDP growth since the beginning of last year.
The headline in yesterday's ECB Q2 bank lending survey seemed almost tailor-made for the central bank to deliver a dovish message to markets this week.
Our base case remains that the slowdown in quarter-on-quarter GDP growth to about zero in Q2 is just a blip, and that the economy will regain momentum in Q3 and sustain it well into 2020.
Today's ECB meeting will mainly be a victory lap for Mr. Draghi--it is the president's last meeting before Ms. Lagarde takes over--rather than the scene of any major new policy decisions.
Eurozone consumers' spending jumped in Q2, but we are pretty certain that a slowdown in retail sales constrained growth in Q3.
The Prime Minister's refusal last week to reaffirm her party's 2015 election pledge not to raise income tax, National Insurance or VAT has fuelled speculation that taxes will rise if the Conservatives are re-elected on June 8. Admittedly, Mrs. May asserted that her party "believes in lower taxes", and the tax pledge s till might appear in the Conservatives' manifesto, which won't be published for a few weeks.
The big difference between economic cycles in developed and emerging markets is that recessions in the former tend to be driven by the unwinding of imbalances only in the private sector, usually in the wake of a tightening of monetary policy.
The EZ doom-and-gloom crew has come crawling out of the woodwork again this year. Earlier this month, Nobel laureate Joseph Stiglitz told a German newspaper that Italy and other euro area countries likely will leave the currency union soon.
Bond markets didn't panic when the ECB announced its intention further to reduce the pace of QE this year, to €30B per month from €60B in 2017.
Colombia's recently-released data signal that the economy started the year quite strongly, following a relatively poor end to Q4.
The prospect of fiscal stimulus in the euro area-- ostensibly to "help" the ECB reach its inflation target-- remains a hot topic for investors and economists.
The intensity of the pressure on households' finances was highlighted last week by December's retail sales report, which showed that volumes fell by 1.5% month-to-month, the most since June 2016.
Yesterday's advance consumer sentiment index in the Eurozone confirmed the upside risks for consumers' spending in Q4. The headline index rose to a 17- year high of +0.1 in November, from -1.0 in October.
Gilt yields slid to record lows at many maturities in mid-February, and while equity prices have since rebounded, gilt yields have remained anchored at rock-bottom levels. But with political risks rising and deficit reduction still very slow, gilt yields look primed to spring back soon.
As we write, the Commons appears to be on the verge of voting for the Withdrawal Agreement Bill--WAB--at its second reading but then voting against the government's "Programme Motion", which sets out a very tight timetable for its passage through parliament, in a bid to meet the October 31 deadline and to minimise parliamentary scrutiny.
We think of recessions usually as processes; namely, the unwinding of private sector financial imbalances.
At the halfway mark of the fiscal year, public borrowing has been significantly lower than the OBR forecast in the March Budget.
The Eurozone's external surplus rebounded further over the summer.
Korea's preliminary Q4 GDP report was stronger than nearly all forecasters, including ourselves, expected.
Europeans, who usually save more of their income than Americans, have spent all the windfall from falling gas prices. Americans have not. It is tempting, therefore, to argue that perhaps Americans have come to see the error of their low-saving ways, and are now seeking to emulate the behavior of high-saving Europeans. Undeniably, the plunge in gas prices has given Americans the opportunity to save more without making hard choices.
On the face of it, the Caixin services PMI was unremarkable in May, unchanged at 52.9.
Yesterday's final May PMI data in the Eurozone confirmed the strength of the cyclical upturn. The composite PMI was unchanged at 56.8, in line with the initial estimate.
The Greek polls released Sunday evening indicate a comfortable victory for "no," rejecting the latest EU proposal. This is not a good outcome for the market, and volatility will likely increase substantially today. The result--not confirmed as we go to press but very clearly indicated by the count so far--gives an air of legitimacy to Syriza's brinkmanship, but the creditors' reaction to a "no" vote, which they likely did not expect, is uncertain.
Demand in German manufacturing rebounded strongly midway through the second quarter.
If 2017 really is the year of "reflation", somebody forgot to tell the gilt market. Among the G7 group, 10-year yields have fallen only in the U.K. during the last three months, as our first chart shows.
China's National People's Congress yesterday laid out its main goals for this year, on the first day of its annual meeting.
As we go to press, equities in the Eurozone are having a bad day following the collapse in U.S. and Asian equities earlier.
In terms of one-day moves, the drop in U.S. equities yesterday and Asian equities in the past two days has been pretty bad.
Political risks in the periphery have simmered constantly during this cyclical recovery, but they have increased recently. In Italy, the government is scrambling to find a solution to rid its ailing banking sector of bad loans. But recapitalisation via a bad bank is not possible under new EU rules.
Yesterday's detailed Q3 growth data in the Eurozone offered no surprises in terms of the headline.
The rise in the Markit/CIPS services PMI to a nine-month high of 51.4 in July, from 50.2 in June, isn't a game-changer, though it does provide some reassurance that the economy isn't on a downward spiral.
The Caixin services PMI jumped sharply to 53.9 in December from 51.9 in November. All the PMIs picked up significantly, but we find this hard to believe and suspect seasonality is to blame, though the adjustment is tricky.
The prospect of a Greek parliamentary election on January 25th, following Prime Minister Samaras' failure to secure support for his presidential candidate, weighed on Eurozone assets over the holidays. The looming political chaos in Greece will increase market volatility in the first quarter, but it is too early to panic.
We very much doubt that Fed Chair Powell dramatically changed his position last week because President Trump repeatedly, and publicly, berated him and the idea of further increases in interest rates.
If you were looking just at investor sentiment in the Eurozone, you would conclude that the economy is in recession.
Yesterday's final manufacturing PMIs for October were grim, but they told investors nothing they don't already know.
We've always said that China's first weapon, should the trade war escalate, is to do nothing and allow the RMB to depreciate.
Readers have asked us about the availability of flow-of-funds data in the Eurozone similar to the detailed U.S. reports. The ECB's sector accounts come close and cover a lot of ground, but are also released with a lag. We can't cover all sectors in one Monitor, but the investment data for non-financial firms, excluding construction, suggest that investment growth slowed last year.
In recent months we've been thinking more deeply about the themes for the next economic cycle for China, and its impact on the world.
In some sense, today's ECB meeting will be a sobering one for policymakers.
Yesterday's economic reports in the Eurozone were mostly positive.
The 62K jump in jobless claims for the week ended September 2 is a hint of what's to come. Claims usually don't surge until the second week after major hurricanes, because people have better things to do in the immediate aftermath, so we are braced for a further big increase next week.
The process of refinancing existing mortgages at ever-lower interest rates has been a boon for the economy in recent years.
National accounts data released last week rewrote the recent history of households' saving.
The ECB made no changes to its policy stance yesterday. The central bank left its refinancing and deposit rates at 0.00% and -0.4%, respectively, and maintained the pace of QE at €60B per month. The program will run until December "or beyond, if necessary."
China has a nuclear option in the face of pressure from U.S. tariffs, namely, to devalue the currency.
The sharp fall in markets' expectations for Bank Rate over the last month has partly reflected the perceived increase in the chance of a no-deal Brexit. Betting markets are pricing-in around a 30% chance of a no-deal departure before the end of this year, up from 10% shortly after the first Brexit deadline was missed.
Yesterday's manufacturing data in Germany provided alarming evidence of a much more severe slowdown in the second half of last year than economists had initially expected.
The twists and turns of the French presidential election campaign continue. François Fillon was tipped as favourite after he won the Republican primaries. But Mr. Fillon now is struggling to keep his campaign on track after allegations that he gave high paying "pro-forma" jobs to his wife as an assistant last year. The socialist candidate, Benoit Hamon, has been hampered by the unpopularity of his party's incumbent, François Hollande, and has lost ground to the far-left Jean-Luc Mélenchon.
In our Friday Monitor, we came to the conclusion that prescriptions arising from Modern Money Theory have been designed primarily with the U.S. in mind.
Consumer sentiment in Mexico continues to improve, consistent with tailwinds from the relatively strong labour market and the president's rising approval ratings.
The Monetary Policy Committee of the RBI ventured into the unknown yesterday, cutting its benchmark repo rate further, by an unconventional 35 basis points, to 5.40%.
China's authorities recognised, around the middle of this year, that activity was slowing and that monetary conditions had become overly tight.
One bad month proves nothing, but our first chart shows that October's auto sales numbers were awful, dropping unexpectedly to a six-month low.
Yesterday's detailed Q3 GDP data in the Eurozone confirmed that the economy has gone from strength to strength this year.
The Brazilian Central Bank's policy board--the Copom--voted unanimously on Wednesday to keep the Selic rate on hold at 6.50%.
The Treasury has tried to dampen expectations for Tuesday's Spring Statement, which has replaced the Autumn Statement since the Budget was moved last year to November.
The Chancellor's Budget today looks set to prioritise retaining scope to loosen policy if the economy struggles in future, rather than reducing the near-term fiscal tightening. In November, the OBR predicted that cyclically-adjusted borrowing would fall to 0.8% of GDP in 2019/20, comfortably below the 2% limit stipulated by the Chancellor's new fiscal rules.
The June employment report pretty much killed the idea that the Fed will cut rates by 50bp on July 31.
This week's detailed Q3 GDP data will confirm that the euro area economy is going from strength to strength.
Over the summer, both Chancellor Javid and PM Johnson appeared to be repositioning the Conservatives, claiming that the era of austerity was over and that higher levels of spending and investment were justified.
Fiscal policy is in limbo until a new leader of the Conservative party has been elected on September 9. Shortly after, however, a new Budget--or a Budget disguised as an Autumn Statement--will be held.
Eurozone politicians are likely scrambling for a last gasp return to negotiations before the Greek bailout program ends at the end of today. But progress will likely be limited until we have the result of the planned Greek referendum on Sunday. Voters will be asked essentially on whether they agree with the proposal presented by the institutions. The government will campaign for a "no," but a "yes" looks more likely, based on polls that Greeks want to stay in the Eurozone.
Mexico's trade balance shrank slightly last year, to USD13B, from USD14.6B in 2015. An improvement in the non-energy deficit was the main driver, while the energy gap worsened.
Modern Money Theory has come up at two consecutive BoJ press conferences.
Leading indicators for consumers' spending in France are sending conflicting signals. Survey data suggest that households are in a spendthrift mood. Data yesterday showed that the headline consumer sentiment index was unchanged in March at 100, the cycle high.
Price action in Italian bonds went from hairy to scary yesterday as two-year yields jumped to just under 3.0%.
The news in Brazil on inflation and politics has been relatively positive in recent weeks, allowing policymakers to keep cutting interest rates to boost the stuttering recovery.
Japan's retail sales values jumped 1.2% month-on-month in October, after the upwardly-revised 0.1% increase in September.
China's official manufacturing PMI for May, out tomorrow, will give the first indication of the coming hit from the resumption of its tariff war with the U.S.
On the face of it, the outperformance of gilts compared to government bonds in other developed countries this year suggests that Brexit would be a boon for the gilt market. In the event of an exit, however, we think that the detrimental impact of higher gilt issuance, rising risk premia and weaker overseas demand would overwhelm the beneficial influence of stronger domestic demand for safe-haven assets, pushing gilt yields higher.
We expect China's quarterly real GDP growth in the second quarter to edge down from Q1, but only because Q1 growth was unsustainable. The official data shows real GDP growth at 1.3% quarter-onquarter in Q1.
Predictably, the Bank of England's estimate that GDP would plunge by 8% in the first year after a disorderly no-deal, no transition Brexit and that interest rates would need to rise to 5.5% to contain inflation grabbed the headlines yesterday.
BoJ Governor Kuroda has piqued interest with his recent comments on the "reversal rate", the rate at which easy monetary policy becomes counterproductive, due to the negative impact on financial intermediation.
Headline money supply growth in the Eurozone accelerated further at the start of Q2.
Money supply growth in the Eurozone quickened last month, by 0.3 percentage points to 3.9% year- over-year, but the details were less upbeat.
The Monetary Policy Board of the Bank of Korea will tomorrow hold its final meeting for the year.
Yesterday's sole economic report in the Eurozone confirmed that the economy slowed further at the end of 2018.
China is set to ease reserve requirements for banks lending to small businesses. In a statement after the State Council meeting yesterday, Premier Li Keqiang said that commercial banks would receive a cut in their RRR , from 17% currently, based on how much they lend to businesses run by individuals.
While we were out, data released in Mexico added to our downbeat view of the economy in the near term, supporting our base case for interest rate cuts in the near future.
Chinese industrial profits continue to surge, rising 27.7% year-over-year in September, up from 24.0% in August.
A dovish speech by external MPC member Michael Saunders was the primary catalyst for a renewed fall in interest rate expectations last week.
The current momentum in house prices partly reflects a dearth of homes offered for sale by existing homeowners. This scarcity reflects a series of constraints, which we think will ease only gradually. Further punchy gains in house prices therefore look sustainable and we expect average prices to rise by about 8% next year.
Final October PMI data today will confirm the Eurozone's recovery remains on track. We think the composite PMI rose to 54.0 from 53.6 in September, in line with the consensus and initial estimate. Data on Monday showed that manufacturing performed better than expected in October, and the composite index likely will enjoy a further boost from solid services. The PMIs currently point to a trend in GDP growth of 0.4%-to-0.5% quarter-on-quarter, the strongest performance since the last recession.
The economic and political backdrop to this week's Monetary Policy Committee meeting is significantly more benign than when it last met on September 19.
The news-flow in the Eurozone was almost unequivocally bad over the summer.
We sympathise if readers are sceptical of our opening gambit in this Monitor.
Yesterday's data showed that the euro area PMIs were a bit stronger than initially estimated in November.
The MPC's package of stimulus measures, which exceeded markets' expectations, demonstrates that it is currently placing little weight on the inflation outlook. Even so, if inflation matches our expectations and overshoots the 2% target by a bigger margin next year than the MPC currently thinks is acceptable, it will have to consider its zeal for more stimulus.
Companies' profit margins have fared relatively well during this recovery, and on many measures, they are back to pre-crisis levels. But looking ahead, corporate profitability is set to be squeezed as labour takes a larger share of national income and the Government gets to grips with the budget deficit by increasing corporate taxation.
At the start of the year, #euroboom was the moniker used in financial media to describe the EZ economy.
Implied volatility on the euro is now so low that we're compelled to write about it, mainly because we think the macroeconomic data are hinting where the euro goes next.
The recent narrowing of the Conservatives' opinion poll lead suggests that investors, particularly in the gilt market, now must consider other parties' fiscal proposals.
The Prime Minister achieved a rare victory yesterday, when the Commons passed the government-backed Brady amendment.
December's money and credit figures suggest that households are in no fit state to step up and drive the economy forwards this year.
Defaults by Chinese companies have been on the rise lately. Most recently, China Energy, an oil and gas producer with $1.8B of offshore notes outstanding, missed a bond payment earlier this week. We've highlighted the likelihood of a rise in defaults this year, for three main reasons.
Was this an isolated occurrence, connected to the graft investigation into Chinese billionaire Xiao Jianhua, and his financial conglomerate?
The clear message from the fourth quarter's national accounts, released last week, is that the economic recovery rests on unsustainable foundations. The U.K. has returned to bad habits and is financing expenditure today by borrowing. As this undermines future spending, it is only a matter of time before the U.K.'s recovery loses steam.
Gilt yields have shot up over the last couple of months, despite ongoing bond purchases authorised by the MPC in August. Ten-year yields closed last week at 1.47%, in line with the average in the first half of 2016.
Households' willingness to save a smaller fraction of their incomes goes a long way to explaining why the U.K. economy hasn't lost too much momentum since the Brexit vote.
Industrial profits in China dropped 3.7% year-over- year in April, after surging 13.9% in March, according to the officially reported data.
May's money and credit data indicate, reassuringly, that the economy still is growing at a steady, albeit unspectacular, rate, despite the endless uncertainty created by Brexit.
Brazil's consumer recession seems never-ending. Retail sales fell 0.8% month-to-month in October, pushing the headline year-over-year rate down to -8.2% in October, from -5.7% in September. Recent financial market volatility, credit restrictions and the ongoing deterioration of the labour market continue to hurt consumers.
We are easily excitable when it comes to monetary policy and macroeconomics, but we are not expecting fireworks at today's ECB meetings.
Korean credit markets have begun tentatively to recover after the rise in global interest rates at the end of last year.
The broad strokes of yesterday's ECB meeting were in line with markets' expectations. The central bank left its main refinancing and deposit rates unchanged, at 0.00% and -0.4% respectively, and maintained the same forward guidance.
Bond investors in the Eurozone are licking their wounds following a 40 basis point backup in 10-year yields since the end of last month. Nothing goes up in a straight line, but we doubt that inflation data will provide much comfort for bond markets in the short term.
Construction accounted for the entire 1.1% quarter-to- quarter expansion of the Korean economy in Q1, but the sector is now set to slow.
China's headline trade numbers appear to paint a picture of an economy in rude health but scratch the surface and the story is quite different. The trade surplus rose to$42.8B in June from $40.8B in May, hitting consensus.
Data released yesterday in Brazil are consistent with our view that private consumption will continue to drive the recovery over the second half, offsetting the ongoing weakness in private investment.
PM Abe last week asked the cabinet to put together a package of measures in a 15-month budget aimed at bolstering GDP growth through productivity enhancement, in addition to the shorter-term goal of disaster recovery.
We suspect that today's ECB meeting will be a sideshow to the political chaos in the U.K., but that doesn't change the fact that the central bank's to-do list is long.
Mexico has been one of LatAm's highlights in terms of financial markets and currency performance in recent months.
Revisions to Japan's real GDP growth, on Monday, left Q2 blisteringly hot.
Storm clouds gathered over Eurozone financial markets last week. The sell-off in equities accelerated, pushing the MSCI EU ex-UK to an 11-month low.
Population ageing is, arguably, the most important long-term socioeconomic trend in the Eurozone. The demographic transition did not end in the 1970s as fertility hit replacement levels, contrary to the prediction by the stylised models of population change.
Monthly manufacturing and retail sales data point to upside risk to the consensus expectation of 0.4% quarter-on-quarter in Q1 Eurozone real GDP growth. Advance country data indicate that industrial production was unchanged month-to-month in March, equivalent to a 0.9% increase quarter-on-quarter.
Yesterday's data showed that industrial production in the Eurozone accelerated at the end of spring. Output, ex-construction, jumped 1.3% month-to-month in May, much better than the downwardly-revised 0.3% rise in April; the rise pushed the year-over-year rate up to a six-year high of 4.0%.
The Chancellor kept his word and made only trivial policy changes in the Spring Statement, but he hinted at higher spending plans in the Autumn Budget.
As expected, the Chancellor kept his powder dry in the Spring Statement, preferring instead to wait for the Budget in the autumn to deploy the funds technically available to him to support the economy.
Equities in the Eurozone are off to a strong start in Q2, building on their punchy 12% gain in the first quarter.
The New York Times called the China trade agreement reached Friday "half a deal", but that's absurdly generous.
At the end of last year, we highlighted a tail risk that strain in currency basis swaps markets signalled looming yen appreciation.
The big difference in this round of stimulus is in the complete lack of easing on the shadow banking side.
"Is EZ fiscal stimulus on the way?" is a question that we receive a lot these days.
Political risks have returned to the Eurozone with the decision by Greek Prime Minister Samaras to initiate the election of a president, raising the risk of a Greek parliamentary election early next year.
It has been clear for some months now that China's housing market is refusing to quit, and July's data showed the phoenix rising strongly from the ashes.
Yesterday's final CPI estimate in Germany confirmed that inflation fell to a 15-month low of 1.4% year-over-year in February, down from 1.6% in January.
The slowdown in households' income growth since the referendum has not pushed up mortgage default rates, so far. Employment grew by just 0.2% quarter-on-quarter in Q3 and 0.1% in Q4, well below the 0.5% average rate seen in the three years before the referendum.
In our Monitor May 15 we described the initial government program in Italy, drafted by the leadership of the Five-Star Movement and the League parties, as a "macroeconomic fairytale."
China's monetary conditions remain tight, pointing to a substantial downtrend in GDP growth this year and next.
Following this week's 25bp Fed hike, the PBoC hiked the main interest rates in its corridor by... 5bp. The move was unexpected so the RMB strengthened modestly; commentary is full of how this means the deleveraging drive is serious.
Markets' reaction last week to the ECB's October meeting accounts--see here--shows that investors are beginning to take seriously the idea of an inflection point in Eurozone monetary policy.
The Chancellor has prepared the public and the markets for a ratcheting-up of the already severe austerity plans in the Budget on Wednesday. George Osborne warned on Sunday that he would announce "...additional savings, equivalent to 50p in every £100 the government spends by the end of the decade", raising an extra £4B a year.
China's industrial production grew at an annualised 7.2% rate by volume in Q1, according to our estimates, up from an average 5.9% rate in the six quar ters through mid-2016.
The Board of the Bank of Korea will meet again in less than a week's time for this year's penultimate meeting.
We struggle to see how the pro-separatist movement in Catalonia can move forward from here.
MPC member Michael Saunders, who has voted to raise interest rates at the last two MPC meetings, argued in a speech yesterday that tighter monetary policy is required now partly because it affects the economy with a long lag.
Yesterday's aggregate economic data for the euro area showed that inflation rose slightly in August. The headline rate rose to a four-month high of 1.5% in August from 1.3% in July. The rate was lifted mainly by energy inflation, rising to 4.6% from 2.2% in July, but we think the rebound will be short-lived.
The Brazilian Central Bank's policy board-- COPOM--voted unanimously on Wednesday to cut the Selic rate by 50bp to 5.00%, as expected.
The distortions in European fixed income markets have intensified following the initiation of the ECB's sovereign QE program. In the market for sovereigns, German eight-year bond yields are within a touching distance of falling below zero, and this week Switzerland became the first country ever to issue a 10-year bond with negative yields.
2015 is set to be another grim year for Venezuela, and we have no hope things will improve further down the road, barring huge changes in policy.
The headline index in today's NFIB small business survey probably won't quite converge with the ISM manufacturing index, but it will come v ery close. To close the gap completely, for the first time since the crash, the NFIB needs to rise to just over 102, from 100.4.
China's FX reserves rose to $3,062B in November, from $3,053B on October. On the face of it, the increase is surprising.
The Office for Budget Responsibility has decided to press ahead with the publication of new fiscal forecasts on November 7, despite the government's decision to postpone the Budget until after the next election.
China's official manufacturing PMI implies a modest gain in momentum in Q2, at 51.4, compared with 51.0 on average in Q1.
While we were out, Brazil's economic, fiscal and political position continued to deteriorate further. The recession deepened in the fourth quarter, with Brazil's economic activity index surprising yet again to the downside in October, falling for the eight consecutive month. The index fell 0.6% month-to-month and 6.4% year-over-year, the biggest contraction since the index began in 2004. And the prospects for first quarter consumption and industrial output have deteriorated substantially. Unemployment increased further in November, and inflation continues to rise, with the mid-month CPI--the IPCA-15 index-- increasing 1.2% month-to-month in November, after a 0.9% increase in October.
Brazil's recession has been severe, triggered by the downturn in the commodity cycle, which revealed the underlying structural weaknesses in the economy. This set off an acute shock in domestic demand, but it has bottomed in recent months and we now expect a gradual recovery to emerge.
Last week's official data unequivocally indicated that the Brexit vote has not had a detrimental impact on the economy yet.
A looming rate lift-off at the Fed, chaos in Greece, and a renewed rout in commodities have given credit markets plenty to worry about this year. The Bloomberg global high yield index is just about holding on to a 0.7% gain year-to-date, but down 2.5% since the middle of May. The picture carries over to the euro area where the sell-off is worse than during the taper tantrum in 2013.
We agree wholeheartedly with the consensus view that the economy would enter a recession in the event of a no-deal Brexit on October 31.
China's PMIs surprised the consensus forecasts to the downside for February. The manufacturing PMI dropped to 50.3 in February from 51.3 in January, while the non-manufacturing PMI fell to 54.4 from 55.3 in January.
Yesterday's advance Q4 GDP data in the Eurozone confirmed that growth slowed significantly in the second half of 2018.
Our base case remains a 10bp cut in the deposit rate, to -0.5%, in September.
China's money and credit numbers for April were a mixed bag. M2 growth merely inched down, to 8.5% year-over-year, from 8.6% in March, keeping its gradual uptrend intact.
China's M2 growth stabilised in November, at 8.0% year-over-year, matching the October rate.
Chinese monetary conditions show signs of a temporary stabilisation. M2 growth picked up to 9.1% year-over-year in November from 8.8% in October, though largely as a correction for understated growth in recent months.
This year, Brazil has been the perfect example of all the problems faced by EM countries over the last few decades. A long and deep recession, high inflation, fiscal crisis, political chaos, a commodity price crunch, sharp currency depreciation and lack of confidence have all worked together to hammer the economy and investor confidence. These factors all contributed to S&P downgrading Brazil to junk status on Wednesday.
In yesterday's Monitor, we lamented the lack of growth in the French economy. The outlook is not much brighter in Italy. We think Italian GDP was unchanged quarter-on-quarter in Q4, slightly better than the -0.1% consensus but still very soft.
The debate about the ECB's policy trajectory is bifurcated at the moment. Markets are increasingly convinced that a rapidly strengthening economy will force the central bank to make a hawkish adjustment in its stance.
Financial assets of all stripes are, by most metrics, expensive as we head into year-end, but for some markets, valuations matter less than in others. The market for non-financial corporate bonds in the euro area is a case in point.
It would take nothing short of a catastrophe in coming months for the ECB to alter its plan to end QE via a three-month taper between September and December.
This week, Mexico's government unveiled its 2020 fiscal budget proposal.
Japan's official seasonally adjusted current account surplus rose to ¥2.27T in August from ¥2.03T in July. But we don't trust the seasonals, and our adjustment model shows the surplus fell slightly, to ¥1.91T in August. A further small decline likely is coming in Q4.
German manufacturing snapped back at the end of summer. Industrial production jumped 2.6% month-to-month in August, pushing the year-over- year rate up to 4.7% from a revised 4.2% in July.
Since the protests in Hong Kong began, we've become increasingly convinced that China is backing away from a comprehensive trade deal with Mr. Trump.
Japan's August balance of payments data, released yesterday, offer the first overview of financial flows since the BoJ "tweaks" at the end of July.
Data yesterday suggest that EZ investor sentiment is on track for a modest recovery in Q3.
Fears over a Eurozone banking crisis have compounded market volatility recently, and sent bank equities into a tailspin. Deutsche Bank has been the focus of the attention, probably due to its systemic importance and opaque balance sheet. DB's stock price is down a staggering 38% year-to-date, and earlier this week, the German finance minister had to assure markets that he has no worries about the bank's position.
President Xi Jinping yesterday reiterated China's commitment to reform and the opening of its economy at a highly-anticipated speech at the Boao forum.
The starting gun for the "Brexit" referendum will be fired this week if E.U. leaders, who meet for a two-day summit starting Thursday, agree to the draft reform package assembled by Prime Minister and E.U. President Donald Tusk.
Friday's data added further colour to the September CPI data for the Eurozone.
August's money and credit figures show that households' incomes remain under pressure, indicating that the recent pick-up in growth in consumers' spending likely won't last.
Brazil's GDP growth slowed to just 0.1% quarter- on-quarter in Q4, from an upwardly-revised 0.2% in Q3. This pushed the year-over-year rate up to 2.1%, from 1.4%, but this was weaker than market expectations.
We suspect that euro area investors have one question on their mind as we step into 2019.
Argentina's economic and financial situation has deteriorated significantly in recent weeks and the outlook is becoming increasingly bleak.
The Chinese authorities have been out in force in the last few days, aiming to reassure markets and the populace that they are ready and able to support the economy, after abysmal trade data on Monday.
The Eurozone's external accounts were extremely volatile at the end of Q4.
The euro area's current account surplus stumbled at the end of 2017, falling to €29.9B in December from an upwardly-revised €35.0B in November.
The economic calendar in the euro area was relatively quiet over Christmas, and broadly conformed to our expectations.
The PMI survey continues to send a downbeat message on growth in the euro area despite signs of improvement in other sentiment data: The final manufacturing PMI in the Eurozone fell to 50.1 in November from 50.6 in October.
The upturn in the Eurozone construction sector likely paused in Q3. Yesterday's August report showed that output fell 0.2% month-to-month, pushing the year-over-year rate down to +1.6%, from a revised +2.8% in July.
A sharp increase in unsecured borrowing has played a big role in supporting consumers' spending over the past year. The stock of unsecured credit, excluding student loans, increased by 8.2% year-over-year in September--the fastest growth since February 2006--boosting the funds available for households to spend by around 1%.
Italy's economy is still bumping along the bottom, after emerging from recession in the middle of last year.
Italian bond yields have remained elevated this week, following the release of the government's detailed draft budget for 2019.
Brazil's economy surprised to the upside in early Q3, despite downbeat data released in recent days.
With campaigning for the general election intensifying last week, it was unsurprising that October's money and credit release from the Bank of England received virtually no media or market attention.
We were happy to see the small increase in the March ISM manufacturing index yesterday, following better news from China's PMIs, but none of these reports constitute definitive evidence that the manufacturing slowdown is over.
Prospects for further rate cuts in Brazil, due to the sluggishness of the economic recovery and low inflation, have played against the BRL in recent weeks.
Yesterday's headline economic data in the euro area were solid across the board, though the details were mixed.
The risk of political change in Venezuela is coming to a boil, following President Maduro's plans for a new constituent assembly that has the power to rewrite the constitution and scrap the existing National Assembly.
The Eurozone's current account surplus almost surely fell further in Q4.
The markets' favorite story of the moment, aside from the Fed, seems to be the idea that overstretched corporate finances are an accident waiting to happen. When the crunch comes, the unavoidable hit to the stock market and the corporate bond market will have dire consequences, limiting the Fed's scope to raise rates, regardless of what might be happening in the labor market. We don't buy this. At least, we don't buy the second part of the narrative; we have no problem with the idea the finances of the corporate sector are shaky.
German producer price inflation fell last month, following uninterrupted gains since the beginning of this year. Headline PPI inflation fell to 2.8% year-over- year in May, from 3.4% in April, constrained by lower energy inflation, which slipped to 3.0%, from 4.6% in April. Meanwhile, non-energy inflation declined marginally to 2.7%, from 2.8%.
Last week's ECB meeting--see here--made it clear that the central bank does not intend to jump the gun on rate hikes next year, even as QE is scheduled to end in Q4 2018.
China reportedly has offered President Trump a $200B reduction in its annual trade surplus with the U.S., engineered by increasing imports of American products, among other steps.
The perfect world for equities is one in which earnings and valuations are rising at the same time, but in the Eurozone it seems as if investors have to make do with one or the other.
We have had something of a rethink about the likely timing of the coming cyclical downturn. Previously, we thought the economy would start to slow markedly in the middle of next year, with a mild recession--two quarters of modest declines in GDP-- beginning in the fourth quarter.
We still don't have the complete picture of what happened to the EZ construction sector in Q2, but we have enough evidence to suggest that it rolled over.
The EZ's current account surplus was stung at the end of Q3, falling to a three-year low of €16.9B in September, from a revised €23.9B in August.
The current account surplus in the Eurozone is well on its way to stabilising above 3% of GDP this year. The seasonally adjusted surplus rose to €29.4B in September from a revised €18.7B in August, lifted by a higher trade surplus, thanks to rebounding German exports. The services balance was unchanged at €4.5B in September, while the primary income balance edged higher to €4.8B from €4.0B. The improving external balance has been driven mostly by a surging trade surplus with the U.S. and the U.K., as our first chart shows.
The media and markets are waking up to the idea that the housing market has peaked in the face of higher mortgage rates and slightly--so far--tighter lending standards.
The Eurozone's external surplus rebounded slightly at the start of Q3.
The PBoC's reformed one-year Loan Prime Rate was published yesterday at 4.25%, compared with 4.31% on the previous LPR, and below the benchmark lending rate, 4.35%.
Bloomberg reported on Monday that the PBoC is drafting a package of reforms to give foreign investors greater access to the China's financial services sector. This could involve allowing foreign institutions to control their local joint ventures and raising the 25% ceiling on foreign ownership of Chinese banks.
Demand for new cars in the Eurozone rebounded last month. New car registrations jumped 10.3% year-over-year in May, reversing the 5.1% decline in April. The headline was boosted by solid growth in all the major economies.
The EZ's current account surplus is solid as ever, despite falling slightly in February to €35.1B, from an upwardly-revised €39.0B in January.
We are still waiting for the promised rebound in EZ car sales.
Reporting on German CPI data has been like watching paint dry in recent months, but that will change in the first half of the year.
China's March money and credit data, published last Friday, showed that conditions continue to tighten, posing a threat to GDP growth this year.
Consumers' demand for cars slowed in the Eurozone at the end of the second quarter. New car registrations in the euro area rose 3.0% year-over-year in June, slowing dramatically from a 10.3% rise in May.
The Eurozone's sovereign bond markets are dying, and this is a good thing, by and large.
China's activity data yesterday made pretty uncomfortable reading for policymakers.
China's activity data for May were a mixed bag, but they broadly paint a consistent picture of a slowdown in economic growth from the first quarter.
We are fairly sanguine that government bond markets in the Eurozone will take the end of QE in their stride.
Brazil's government announced on Monday spending cuts and new tax increases, aiming to generate a 0.7% of GDP primary surplus, and so restore market confidence and avoid further credit rating downgrades. The plan is to reduce expenditure by BRL26B next year--or 0.4% of GDP--mainly through freezing public sector salaries and slashing social projects. These measures, especially the latter, will likely meet strong resistance in Congress. The salary freeze has more of a chance of passing, but reducing or closing some Ministries is a cost-cutting exercise with an extremely high political price.
Today's ZEW investor sentiment report in Germany will kick off a busy week for Eurozone economic survey data, which likely will be tainted by the U.K. referendum result. We think the headline ZEW expectations index fell to about five in July, from 19.2 in June, below the consensus forecast, 9.2. Our forecastis based on the experience from recent "unexpected" shocks to investors' sentiment.
Swap markets currently price-in RPI inflation falling to 3.0% this time next year, from 3.2% in November, before recovering to 3.8% at the start of 2020.
Wednesday's money data confirmed that Chinese households have continued to borrow into Q2 but at a slower rate than in 2016. The slowdown will really set in during the second half, and into 2018. Households have done a sterling job of taking over the borrowing baton from corporates, but they can't do everything.
The new fiscal projections in the Budget today likely will be based on implausible economic projections, which assume that wage growth will accelerate soon, lifting inflation, but that interest rates won't rise for three more years. You can coherently forecast one or the other, but not both.
We have been quite bullish on U.S. economic growth this year.
Mr. Macron will be in Berlin today with the message that France wants a strong Eurozone and a tight relationship with Germany. Friendly overtures between Paris and Berlin are good news for investors; they reduce political uncertainty while increasing the chance that the economic recovery will continue. But it is too early to get excited about closer fiscal coordination, let alone a common EZ fiscal policy and bond issuance.
Evidence of slowing growth in Brazil consumers' spending continues to mount.
Financial markets and economic data don't always go hand-in-hand, but it is rare to find the divergence presently on display in Italy.
It would be a serious mistake to conclude from July's retail sales figures that consumers' spending will be immune to the fallout of the Brexit vote. Households have yet to endure the hiring freeze and pay squeeze indicated by surveys of employers, or the price surge signalled by sterling's sharp depreciation. The real test for consumers' spending lies ahead.
The MPC took an unprecedented step last week to pave the way for an interest rate rise.
China's monetary and credit data--released yesterday, two days behind schedule--suggest that monetary conditions are loosening at the margin, while credit conditions have remained stable, but easier than in the first half.
Brazil is back on global investors' radar screens. Financial market metrics capture a relatively robust bullish tone, especially since the presidential election.
Data today will show that the EZ construction sector finished 2017 on a decent note.
Mortgage applications appear to have recovered from their reported February drop, which was due mostly to a very long-standing seasonal adjustment problem
Investors in the euro area demand to know whether their equities can climb--in local currency terms-- even as the euro appreciates.
Venezuela's fundamentals continue to deteriorate, economic chaos is increasing and the social/political situation remains fragile.
China is a collection of hugely disparate provinces and cities. Managing all these cities with one interest rate is always difficult but in this cycle it is proving to be nearly impossible.
China's real GDP growth was unchanged at 6.4% year-over-year in Q1, above the consensus for a slowdown to 6.3%.
Argentinians are heading to the polls on Sunday October 27 and will likely turn their backs on the current president, Mauricio Macri.
Japan's July adjusted trade surplus rebounded to ¥337.4B from ¥87.3B in June, far above consensus. On our seasonal adjustment, the rebound is slightly smaller but only because we saw less of a drop in June.
We have argued consistently since oil prices first began to fall that U.S. consumers would spend most of their windfall, so real spending would accelerate even as nominal retail sales growth was dragged down by the drop in the price of gas and other imported goods. At the same time, we argued that capital spending in the oil business would collapse, and that exports would struggle in the face of the stronger dollar.
China's investment slowdown went from worrying to frightening in October. Last week's fixed asset investment ex-rural numbers showed that year- to-date spending grew by 5.2% year-over-year in October, marking a further slowdown from 5.4% in the year to September.
Comments by Mr. Draghi in Washington last week point to a high bar for an adjustment to the QE program. The ECB president noted that while asset purchases and negative interest rates have driven a notable improvement in confidence and asset prices, the real key to the central bank's policies' success is a lasting boost to investment, consumption and inflation.
Chinese residential property prices appear to be staging a comeback, with new home prices rising 1.1% month-on-month in June, faster than the 0.8% increase in May.
The Portuguese economy has faltered recently. In the year to Q2, real GDP rose only 0.8%, down from a 1.5% increase in the preceding year. Slowing growth in investment has been the key driver, but consumers' spending has weakened too.
The first exit poll published at 18.00 CET on Sunday evening points to a landslide victory for Syriza, and the real possibility that the party could form a majority government. Counter-intuitively, the prospects for Syriza here depend upon how the smaller parties do.
Greece's exit from eight years of near constant bail-out programs raises as many questions as it answers.
In yesterday's Monitor, we laid out the prime causes of China's weekend announcement, cutting the reserve requirement ratio.
Korea's business survey index rose for a second straight month in March, to 75 from 73 in February, on our adjustment.
The recovery in the French economy since the sovereign debt crisis has been lukewarm. Growth in domestic demand, excluding inventories, has averaged 0.4% quarter-on-quarter since 2012. This comp ares with 0.8%-to-1.1% in the two major business cycle upturns in the 1990s and from 2000s before the crisis.
The ECB's decision to go all-in and buy sovereign debt has three key consequences for U.S. markets. First, Treasuries will no longer benefit from safe-haven flows, because shorting Eurozone government debt has just become a fantastically risky proposition.
The U.S. household sector carries substantial gross debts, even after the sustained deleveraging since the crash of 2008. The gross debt-to-income ratio stood at 105.3% in the second quarter of this year, down from the 135% peak in late 2007 but still well above the 88% average recorded in the 1990s, which was not a decade of restraint on the part of consumers.
The BoK kept rates unchanged at 1.50% yesterday. We thought a hike was open to consideration, as the authorities had professed to be on a mission to reduce dependency on exports and household debt. But we remain more bearish than the BoK on the outlook for the rest of the year.
The cyclical recovery in Italy likely strengthened in the second quarter. Real GDP rose 0.3% quarter-on-quarter in Q1, and we think the e conomy repeated, or even slightly, beat this number in Q2. This would mark the strongest performance in four years, but it will take more than a business cycle upturn to solve the Italian economy's structural challenges. Government and non-financial corporate debt has risen to 220% of GDP since 2008, and non-performing loans--NPLs--have sky rocketed.
The recent cyclical upturn in the EZ began in the first quarter of 2013. GDP growth has accelerated almost uninterruptedly for the last two years to 1.5% year-over-year in Q3, despite the Greek debt crisis and slower growth in emerging markets. Overall we think the recovery will continue with full-year GDP growth of about 1.6%. But we also think the business cycle is maturing, characterised by stable GDP growth and higher inflation, and we see the economy slowing next year.
The Budget on March 16 is set to mark the end of Chancellor George Osborne's lucky streak. Without corrective action, his self-imposed debt rule-- one of the two specified in the 'legally-binding' Charter for Budget Responsibility--looks set to be breached.
Yesterday's money supply data gave some respite after last month's disappointing slowdown. Broad money growth--M3--rose to 5.0% year-over-year, from 4.7% in December, but the details were less encouraging. The rebound was solely due slower declines in medium-term deposits, short-term debt issuance, and repurchase agreements.
Investors in the gilt market would be wise not to take the new official projections for borrowing and debt issuance at face value. The forecast for the Government's gross financing requirement between 2017/18 and 2021/22 was lowered to £625B in the Budget, from £646B in the Autumn Statement.
We expect the BoK to hike this month, believing that it's necessary to curtail household debt growth now, in order to prevent a sharper economic slowdown as the Fed hiking cycle continues, China slows, and trade risks unfold.
The sell-off in bonds and equities continued yesterday, but the reaction bears no resemblance, so far, to the sovereign debt crises in 2012 and 2010. The first evidence from sentiment data in July also points to surprising stability. The headline Sentix index rose to 18.5, up slightly from 17.1 in June, but the expectations index fell marginally, to 22.3 from 22.5.
The fall in the cost of new secured credit has played a key role in reinvigorating the economy over the last couple of years. Mortgage interest payments were 3.7% lower in Q3 than in the same quarter a year previously, even though the stock of secured debt was 2% larger. As a result, the percentage of household disposable incomes taken up by mortgage interest payments fell to 4.8% in the third quarter of 2015--the lowest proportion since records began in 1987--from 5.2% a year before.
November's money and credit figures showed that households increasingly turned to unsecured debt last year in order to maintain rapid growth in consumption. Unsecured borrowing, excluding student loans, rose by £1.7B in November alone, the most since March 2005. This pushed up the year- over-year growth rate of unsecured borrowing to 10.8%--again, the highest rate since 2005--from 10.6% in October.
The ECB's corporate bond purchase program began yesterday with purchases concentrated in utilities and telecoms, according to media sources. This is consistent with the structure of the market, and the fact that bond issues by firms in these sectors are the largest and most liquid. But debt issued by consumer staples firms likely also featured prominently.
On all accounts, the ECB announced a significant addition to its stimulus program yesterday. The central bank cut the deposit rate by 0.1%, to -0.3%, and extended the duration of QE until March 2017. The ECB also increased the scope of eligible assets to include regional and local government debt; decided to re-invest principal bond payments; and affirmed its commitment to long-term refinancing operations in the financial sector for as long as necessary. The measures were not agreed upon unanimously, but the majority was, according to Mr. Draghi, "very large".
Corporate bonds will not be included in the ECB's monthly QE purchases until the end of Q2, but markets are already preparing. The sale of non-financial corporate debt jumped to €49.4B in March, from about €25B in February, within touching distance of the record set in Q1 last year.
Monetary dynamics in the Eurozone were virtually unchanged last month. M3 growth rose trivially to 5.0% year-over-year in March from a revised 4.9% in February. It was lifted by stronger growth in medium-term deposits and issuance of short-term debt.
The second quarter is over but it is too early to give a reliable forecast of the pace of Brazilian GDP growth. However, an array of leading and coincident indicators points to a steep contraction in Q2 and a bleak second half of the year. Unemployment is leaping higher, along with inflation and household debt, and the ongoing monetary and fiscal tightening will further hurt the real economy ahead.
Bullish money supply data last week added to the evidence that the Eurozone's business cycle is strengthening. Broad money growth--M3--rose to 5.3% year-over-year in October from 4.9% in September. Most of the increase came from a surge in short-term debt issuance, rising 8.4% year-over-year, following an inexplicable 1.4% fall in September.
Two fiscal deadlines are on the near-horizon.
Discussing the dangers if Greece defaults on its debt, with Ian Shepherdson, Pantheon Macroeconomics.
Banca Monte dei Paschi di Siena SpA will step up efforts to win investors for an expanded debt-to-equity swap over the coming days, pressing ahead with a 5 billion-euro ($5.3- billion) capital increase as its options to avoid a state rescue dwindle. Pantheon Macroeconomics Chief Euro Zone Economist Claus Vistesen weighs in on "Bloomberg Daybreak: Americas."
Provocative notes from Ian Shepherdson, the Chief Economist at Pantheon Macroeconomics
Chief Eurozone Economist Claus Vistesen on Eurozone GDP
Why is the EZ current account surplus rising and net exports falling at the same time?
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