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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.
Brazilian assets were hit in Q3 by global external challenges, while domestic fundamentals gradually improved.
The coronavirus outbreak and its associated movements in asset prices have radically changed the outlook for CPI inflation, which ultimately the MPC is tasked with targeting.
LatAm markets reacted well to the U.S. Fed's decision to increase the funds rate by 25bp, to 1-to-1¼%, on Wednesday. Currencies moved only slightly after the decision and asset markets were relatively stable. Yesterday, some currencies retreated marginally as investors digested the relatively hawkish message from the Fed and Chair Yellen's press conference.
The U.S. Presidential election will set the tone for LatAm's markets this week. Hillary Clinton's dwindling lead over Donald Trump in recent polls has unleashed pressure on EM assets.
The Brazilian presidential election has remained in the spotlight in recent days and is the main driver of asset price volatility.
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.
LatAm's relatively calm market environment has been thrown into disarray over the last few weeks.New fears of a slowdown in China, political turmoil in the U.S. and, most importantly, the serious corruption allegations facing Brazil's President, Michel Temer, have triggered a modest correction in asset markets and have disrupted the region's near-term policy dynamics.
China's industrial production growth downtrend worsens. China's retail sales dragged down by autos but boosted as people spend more at home. China's fixed asset investment growth slows despite greater support from infrastructure.
Investors will have to keep their wits about them following the close of polls at 22:00 BST on Thursday. Sterling and other asset prices will move sharply when the likely result of the U.K.'s E.U. referendum is discernible, but exactly when that point will come during the night is uncertain.
The benchmark MSCI EU ex-UK equity index was down a startling 17% year-over-year at the end of February. A disappointing policy package from the ECB in December initially put Eurozone equities on the back foot, and the awful start to the year for global risk assets has since piled on the misery.
The establishment of the Fed's commercial paper funding facility, announced yesterday, replicates the first wave of asset purchases undertaken after the crash of 2008.
We agree with the majority of economists that the MPC will announce on Thursday another £100B of asset purchases, primarily of gilts, once it has completed the £200B of purchases it authorised on March 19.
Mexican asset prices and sentiment have been helped in recent weeks by less-harsh rhetoric from the Trump administration. The headline consumer confidence for February, reported yesterday, rose to 75.7 from 68.5 in January; all the sub-components improved. The data are not seasonally adjusted, so most local analysts look at the data in year-over-year terms.
Friday's weekly report on the assets and liabilities of U.S. commercial banks will complete the picture or March and, hence, the first quarter. It won't be pretty. With most of the March data already released, a month-to-month decline in lending to commercial and industrial companies of about 0.7% is a done deal. That would be the biggest drop since May 2010, and it would complete a 1% annualized fall for the first quarter, the worst performance since Q3 2010. The year-over-year rate of growth slowed to just 5.0% in Q1, from 8.0% in the fourth quarter and 10.3% in the first quarter of last year.
The U.K.'s dependence on large inflows of external finance was laid alarmingly b are last week, when "hard" Brexit talk by politicians caused overseas investors to give sterling assets a wide berth. Investors now are demanding extra compensation for holding U.K. assets, because the medium-term outlook is so uncertain.
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.
The sell-off in equity markets and increases in volatility have put EM assets under pressure. EM equities and bonds, however, have been outperforming their U.S. and global market counterparts.
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.
What to expect from the ECB as Ms. Lagarde takes the seat as new president?
Are there any signs of a Chinese recovery yet? Freya Beamish discusses
The German economy finished last year on the back foot.
China's September activity data, released at the end of last week, back up our claim that GDP growth weakened in Q3, on a quarter-on-quarter basis.
After many years in which the phrase "twin deficits" was never mentioned, suddenly it is the explanation of choice for the weakening of the dollar and the sudden increase in real Treasury yields since the turn of the year, shortly after the tax cut bill passed Congress.
The MPC's meeting last week was notable not just for its glass half-full interpretation of the latest data, but also for its updated guidance on when it likely will begin to shrink its bloated balance sheet.
Yesterday was a watershed moment for investors.
We believe China is going through a paradigm shift in its economic policy, away from GDPism-- the obsession with GDP growth targeting--to environmentalism, setting widespread environmental targets on everything, from air to water to waste.
In our view, the chances of a no-deal Brexit on October 31 have not surged just because Boris Johnson has become Prime Minister and is gesticulating wildly at the Despatch Box.
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.
The run of better-than-expected public borrowing figures ended abruptly with the publication of March data yesterday.
The public finances are in better health than appeared to be the case a few months ago.
Yesterday's consumer sentiment data in the two major euro area economies were mixed, but they still support our view that a rebound in EZ consumption growth is underway.
After falling close to 5% last week, the Ibovespa rallied about 3.5% yesterday. Investors reacted positively to President Bolsonaro's expression of support for his Economy Minister, Paulo Guedes, after market concerns about tensions between them.
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.
Speculation that the MPC will abandon its aversion to negative rates has increased, following recent comments by Committee members.
QE and a gradually strengthening economy will remain positive catalysts for equities in the euro area this year. But with the MSCI EU ex -UK up almost 24% in the first quarter, the best quarterly performance since Q4 1999, the question is whether the good news has already been priced in.
Brazil's recovery has been steady in recent months, and Q1 likely will mark the end of the recession. The gradual recovery of the industrial and agricultural sectors has been the highlight, thanks to improving external demand, the lagged effect of the more competitive BRL, and the more stable political situation, which has boosted sentiment.
The Covid-19 outbreak has rattled equity markets, but has not had a major bearing on DM currencies, yet.
Headline M3 money supply growth in the Eurozone was steady as a rock at around 5% year-over-year between 2014 and the end of 2017.
February's retail sales figures highlighted that consumers' spending was flagging even before the Covid-19 outbreak.
The recovery in the composite PMI to 52.4 in January, from 49.3 in December, should convince a majority of MPC members to vote on Thursday to maintain Bank Rate at 0.75%.
The Chancellor used the Autumn Statement to shift the composition of the fiscal consolidation slightly away from spending cuts and towards tax hikes. But in overall macroeconomic terms, he changed little. The fiscal stance is still set to be extremely tight in 2016 and 2017, ensuring that the economic recovery will lose more momentum.
The consensus for today's first post-apocalypse jobless claims number, 1,500K, looks much too low.
The ECB will keep its main refinancing and deposit rates unchanged at 0.00% and -0.4% today, but we think the central bank will satisfy markets' expectations for more clarity on the QE program next year.
The Covid-19 scare can be split into two stages, the initial outbreak in China, concentrated in Wuhan, and the now-worrying signs that clusters are forming in other parts of the world, primarily in South Korea, the Middle East and Italy.
The Eurozone's external surplus rebounded further over the summer.
Last week's GDP figures illustrated that the economy is extremely vulnerable to a slowdown in households' spending. Our chart of the week, on page three, shows that consumers were alone in making a significant positive contribution to GDP growth last year.
New BoE Governor Andrew Bailey will be reaching for his letter-writing pen soon, to explain to the Chancellor why CPI inflation is more than one percentage point below the 2% target.
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.
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%.
The Eurozone's external surplus rebounded slightly at the start of Q3.
The latest balance of payments figures, released Wednesday, look set to show that the current account deficit widened in Q3, underlying the U.K.'s vulnerability to a sudden change in overseas investor sentiment. The risk of a full-blown sterling crisis, however, is lower than the enormous current account deficit would appear to suggest.
Manufacturing confidence in France remained resilient in the fourth quarter. The INSEE sentiment index rose to 103 in December from 102 in November, lifted by a jump in firms' own production expectations, and a small increase in the new orders-to-inventory ratio. We think production will increase in Q4, lifted by energy output, but the recent jump in the year-over-year rate is unlikely to be sustained, even if we factor in the marginal increase in new orders this month.
Today's advance EZ PMIs will be watched more closely than usual.
Catalonia goes to the polls today, and it will be a close call. Surveys point to a hung parliament in which neither the pro-separatists nor the unionist coalition will secure an absolute majority.
On the official gauge, China's real GDP growth fell minimally to 6.8% year-on-year in Q3, from 6.9% in Q2. Growth edged down to 1.7% quarter-on-quarter from an upwardly revised 1.8% in Q2.
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.
Inflation in the Eurozone eased at the start of Q3.
The BoJ yesterday published its semi-annual Financial System Report, which often gives insights into the longer-term thinking driving BoJ policy.
One of the most surprising features of the economic recovery has been that households have not responded to the surge in house prices by releasing housing equity to fund consumption. Housing equity rose to 4.2 times annual disposable incomes in 2015, up from 3.7 in 2012. It has more than doubled over the last two decades.
Construction in the euro area stumbled at the end of last year. Output fell 0.2% month-to-month in December, but the year-over-year rose to 2.4%, from a revised 1.6% in November.
Eurozone current account data yesterday provided further evidence of stabilisation in the economy despite a headline deterioration. The adjusted current account surplus fell to €18.1B in November from a revised €19.5B in October, but the decline was mainly driven by an increase in current transfers; the core components remain solid.
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.
Once again, Chinese January data released so far suggest that the Phase One trade deal was the dominant factor dictating activity for the first two- thirds of the month, with the virus becoming a real consideration only in the last third.
The Eurozone's current account surplus almost surely fell further in Q4.
The EU Commission and Italy's government remain at loggerheads over the country's fiscal plans next year.
October's surprise jump in public borrowing is not a material setback for the Chancellor, who will stick to his new Budget plans for modest fiscal stimulus next year.
China's real GDP growth officially slowed to 6.5% year-over-year in Q3, from 6.7% in Q2.
The MXN remains the best performer in LatAm year-to-date, despite some ugly periods of high volatility driven by external and domestic threats.
Yesterday's public finance figures brought more good news for the Chancellor.
The Eurozone's total external surplus hit the skids at the start of the year. Yesterday's report showed that the seasonally adjusted current account surplus plunged to a two-year low of €24.1B in January, from a revised €30.8B in December.
We still don't have the complete picture of what happened to EZ consumers' spending in Q1, but the initial details suggest that growth acceleretated slightly at the start of the year.
Money supply dynamics in the Eurozone continue to signal a solid outlook for the economy. Headline M3 growth eased marginally to 4.9% year-over-year in January, from 5.0% in December; the dip was due to slowing narrow money growth, falling to 8.4% from 8.8% the month before. The details of the M1 data, however, showed that the headline chiefly was hit by slowing growth in deposits by insurance and pension funds.
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.
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%.
The Eurozone's external surplus recovered a bit of ground mid-way through the third quarter.
Investor sentiment data still indicate that EZ PMIs are set for a significant rebound at start of the year.
Brazil's central bank looked through the recent dip in the BRL and left interest rates at 6.50% at Wednesday's Copom meeting, in line with the consensus.
The data tell an increasingly convincing story that the Eurozone's external surplus rose further in the second half of last year.
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.
All seven of Britain's major banks passed the Bank of England's stress test this year, in the first clean sweep since the annual test began in 2014.
The post-election run of upbeat business surveys was extended yesterday, with the release of the final Markit/CIPS services PMI for January.
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.
Taken at face value, the retail sales data in the euro area suggest that consumers' spending hit a brick wall at the end of 2018.
Governor Bailey signalled a potential shift in the Bank of England's approach to withdrawing monetary stimulus--whenever the time comes--last month in an article for Bloomberg Opinion.
Chancellor Sunak faces a tough first gig on Wednesday, when he delivers the long-awaited Budget.
Data released on Wednesday, along with the BCB's press release on Tuesday, supported our longstanding forecast of further rate cuts in Brazil in the very near term.
The ECB took another big step yesterday in assuring markets that it won't waver in the fight against Covid-19.
The majority of headlines from last week's advance Q4 GDP data in the Eurozone--see here--were negative.
The MPC won't stand idly by on Thursday, despite having moved decisively to support the economy in March.
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.
Global monetary policy divergence has returned with a vengeance. In the U.S., despite recent soft CPI data, a resolute Fed has prompted markets to reprice rates across the curve.
Brazil's December industrial production report, released yesterday, confirmed that the recovery was stuttering at the end of last year.
The Budget on March 11 will be the first time that the new government's ambition and bluster collide with reality.
China's unadjusted current account was effectively in balance in Q2, after the deficit in Q1.
Hopes that GDP growth will strengthen following the general election, which has eliminated near- term threats of a no-deal Brexit and a business- hostile Labour government, were bolstered yesterday by the release of December's Markit/ CIPS services survey.
The verdict is not yet definitive, but prudence dictates we must now assume victory for Donald Trump. The immediate implication of President Trump is global risk-off, with stocks everywhere falling hard, government bonds rallying, alongside gold and the Swiss franc. The dollar is the outlier; usually the beneficiary when fear is the story in global markets, it has fallen overnight because the risk is a U.S. story.
The headline changes in yesterday's ECB policy announcement were largely as expected. The central bank left its main refinancing and deposit rates unchanged at 0.00% and -0.4% respectively, and maintained the pace of QE at €60B per month. The central bank also delivered the two expected changes to its introductory statement. The reference to "lower levels" was removed from the forward guidance on rates, signalling that the ECB does not expect that rates will be lowered anytime soon.
Chinese production surprises in April, as catch-up growth and inventory build continue; Disappointing sales headline in China masks respectable short-term trends; Recovery in secondary investment in China still lagged behind tertiary capex; PPI deflation has largely bottomed out, but don't expect a quick exit
Judgement pending on Chinese industrial production. Chinese retail sales buoyed by inflation. Chinese FAI growth stable through Q4; local government spending better managed this year. China's housing market still not reached a bottom. Japan's tertiary index plunge is more tax hike than typhoon. Japan's PMIs underline damage from tax hike.
Steady Q4 GDP growth in China masks respectable q/q rebound. Signs of recovery in China's industrial complex, but for how long? China's households continue to struggle. China's FAI growth shows rebuilding confidence around the Phase One deal. Japan's November tertiary index suggests October plunge was more tax than typhoon. January sees the first of many BoK "holds" this year.
China's retail sector is on its knees at best. China's IP data suggest that the horrendous PMIs underplayed the carnage. A damning FAI report... tertiary capex should rebound, but the hit to global demand will hold back the secondary industry. China's property market grounds to a halt in February. The Bank of Korea steps in with an emergency cut, despite falling new infections locally.
If you had predicted at the start of the year that the ECB balance sheet would leap by just over €1.5T in H1, you would have been laughed out of the room.
The hard data in Germany took a turn for the worse at the start of Q4. The outlook for consumers' spending was dented by the October plunge in retail sales--see here-- and on Friday, the misery spilled over into manufacturing.
So far, the MPC has been more timid with unconventional stimulus than other central banks. At the end of May, central bank reserves equalled 29.7% of four-quarter rolling GDP in the U.K., compared to 32.7% in the U.S. and 46.7% in the Eurozone.
Yesterday's economic reports in the Eurozone were mostly positive.
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.
China was in lockdown ahead of the 70th Anniversary last week, as is typical around important political events.
We aren't convinced that China's recovery is in train just yet.
At the start of the year, #euroboom was the moniker used in financial media to describe the EZ economy.
The economy would have ground to a halt last year had households not reduced their saving rate sharply.
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.
Industrial profits in China dropped 3.7% year-over- year in April, after surging 13.9% in March, according to the officially reported data.
We understand the desire of investors and individuals to see the economy re-opening as soon as possible, but the data right now support only a limited opening in some parts of the country and, hence, a limited late spring/summer rebound in the economy.
Our analysis of the Q3 activity and GDP data in yesterday's Monitor strongly suggests that China's authorities will soon ready further stimulus.
The data in LatAm were all over the map while we were out.
Monetary policy usually is the first line of defence whenever a recession hits.
Money supply dynamics in the Eurozone were broadly stable last month. M3 rose 5.0% year-over-year in May, accelerating slightly from a 4.9% increase in April, in line with the trend since the middle of 2015.
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.
Money supply growth in the Eurozone firmed last month. Broad money--M3--rose 5.0% year-overyear in August, after a tepid 4.5% rise in July.
China's official real GDP growth slowed to 6.0% year-over-year in Q3, from 6.2% in Q2 and 6.4% in Q1. Consecutive 0.2 percentage points declines are significant in China.
The MPC likely will vote unanimously to keep Bank Rate at 0.75% on Thursday.
The real Boris Johnson will have to stand up this year.
Money supply data in the EZ continue to suggest that headline GDP growth will slow soon.
Something of a debate appears to be underway in markets over the "correct" way to look at the coronavirus data.
Most of the time, sterling broadly tracks a path implied by the difference between markets' expectations for interest rates in the U.K. and overseas. During the financial crisis, however, sterling fell much further than interest rate differentials implied, as our first chart shows.
Was this an isolated occurrence, connected to the graft investigation into Chinese billionaire Xiao Jianhua, and his financial conglomerate?
The national accounts look set to show that GDP growth in the fourth quarter was even stronger than previously estimated. Earlier this month, quarter-on-quarter growth in construction output in Q4 was revised up to 1.2%, from 0.2%. As a result, construction's contribution to GDP growth will rise by 0.07 percentage points.
Colombia's central bank has found a relatively sweet spot.
Brazil's December industrial production and labour reports, released late last week, confirmed that the recovery was struggling at the end of last year.
Data yesterday showed that Momentum in the EZ retail sector stumbled through middle of Q2.
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.
The modest overshoot to consensus in September's core PCE deflator won't trouble any lists of great economic surprises, but it did serve to demonstrate that the PCE can diverge from the CPI, in both the short and medium-term.
Yesterday's economic reports in the euro area were mixed.
Money supply data in the euro point to a cyclical peak in GDP growth this year. Headline M3 growth fell to 4.8% year-over-year in July, from 5.0% in June, chiefly due to a slowdown in narrow money. M1 growth declined to 8.4%, from 8.7%, as a result of weaker momentum in overnight deposits and currency in circulation.
The 0.18% increase in the core PCE deflator in December was at the lower end of the range implied by the core CPI. It left the year-over-year rate at just 1.5%.
The coronavirus outbreak, by definition, will fade eventually, but we suspect the measures to combat it will be more long-lasting. In terms of sheer scale, EZ governments and the ECB are throwing the kitchen sink at the virus, but that's only half the story.
The economic downturn and the Chancellor's unprecedented fiscal measures mean that public borrowing likely will be about four times higher, in the forthcoming fiscal year, than anticipated in the Budget just over two weeks ago.
The resilience of the banking system will be in focus today when the results of this year's Bank of England stress test are published alongside its Financial Stability Report.
"Disappointing" is probably the word that most EZ equity investors would use to describe their market so far this year.
China's Q2 official GDP growth, to be released on Monday, likely slowed to 6.2% year-over-year, from 6.4% in Q1.
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
We expect May's consumer prices report, released on Wednesday, to show that the headline rate of CPI inflation fell to a four-year low of 0.4% in May, from 0.8% in April.
China's M2 growth stabilised in November, at 8.0% year-over-year, matching the October rate.
The U.K. general election is the main event in today's European calendar, but the first official ECB meeting and press conference under the leadership of Ms. Lagarde also deserves attention.
We expect the Budget today to underwhelm investors who are eager to see a quick and powerful government response to the coronavirus outbreak.
China's unadjusted trade surplus collapsed in February, to just $4.1B, from $39.2B in January.
The MPC's pause for breath last week disappointed a majority of investors, who thought that it would at least tweak aspects of the support programmes put in place in March.
It's hard to find anything to dislike in the February employment report.
The Andean countries were quick to implement significant measures in response to the initial stage of the pandemic, adopting a broad range of economic and social policies to ease the effects.
Claims abound that sterling's sharp depreciation since the start of the year--to its lowest level against the dollar since May 2010--partly reflects the growing risk that the U.K. will vote to leave the European Union in the forthcoming referendum. We see little evidence to support this assertion. Sterling's decline to date can be explained by the weakness of the economic data, meaning that scope remains for Brexit fears to push the currency even lower this year.
Official, real GDP growth was low in Q1, at 1.4% quarter-on-quarter, down from 1.6% in Q4.
Mexico's industrial recovery, which began in late Q4, lost momentum at the start of the second quarter.
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.
China's October activity data showed signs of the infrastructure stimulus machine sputtering into life. Consensus expectations appear to hold out for a continuation into November, but we think the numbers will be disappointing.
Next week is a big one for China. The five yearly Party Congress opens on Wednesday, and on Thursday, the monthly raft of activity data is published, along with Q3 GDP.
China's money and credit numbers were once again unspectacular in August. M2 growth edged up to 8.2% year-over-year, from 8.1% in July.
The ECB and Ms. Lagarde played it safe yesterday.
This has been a very complicated week for LatAm policymakers, who are particularly uneasy about the performance of the FX market.
The latest IPCA inflation data in Brazil show the year-over-year rate fell to 8.8% in June from 9.3% in May. This is the slowest pace since May 2015, with inflation pulled lower by declines across all major components, except food. Indeed, food prices were the main driver of the modest 0.4% unadjusted monthto-month increase, rising by 0.7%, following a 0.8% jump in May. The year-over-year rate rose to 12.8% in June from 12.4%.
On the face of it, the timing of the drop in the E.C.'s measure of consumers' confidence, to its lowest level since July 2016 in April, is peculiar.
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.
The more headline hard data we see in the Eurozone, the more we are getting the impression that 2019 is the year of stabilisation, rather than a precursor to recession.
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.
Investors currently think that official interest rates are more likely to fall than rise this year. Overnight index swap markets are factoring in a 30% chance of a rate cut by December, but just a 1% chance of an increase by year-end. The case for expecting looser monetary policy, however, remains unconvincing.
Samuel Tombs has more than a decade of experience covering the U.K. economy for investors. At Pantheon, Samuel's research is rigorous, free of dogma and jargon, and unafraid to challenge consensus views. His work focuses on what matters to professional investors: The links between the real economy, monetary policy and asset prices. He has a strong track record of getting the big calls right. The Sunday Times ranked Samuel as the most accurate forecaster of the U.K. economy in both 2014 and 2018. In addition, Bloomberg consistently has ranked Samuel as one of the top three U.K. forecasters, out of pool of 35 economists, throughout 2018 and 2019. His in-depth knowledge of market-moving data and his forensic forecasting approach explain why he consistently beats the consensus. Samuel's work on Brexit goes beyond simply reporting developments and is always analytical and unbiased, enabling investors to see through the noise of the daily headlines. While his analysis points to a particular path that politicians will take, he acknowledges the inherent uncertainty and draws out the economic and financial market implications of all plausible Brexit scenarios. Samuel holds an MSc in Economics from Birkbeck College, University of London and an undergraduate degree in History and Economics from the University of Oxford. Prior to joining Pantheon in 2015, he was Senior U.K. Economist at Capital Economics. In 2011, Samuel won the Society of Business Economists' prestigious Rybczynski Prize for an article on quantitative easing in the UK. He is based in London but frequently visits our other offices. Recent key calls include: 2018 - Correctly forecast that GDP growth would slow and inflation would undershoot the MPC's initial forecast, prompting the Committee to shock investors and almost other economists by waiting until August to raise Bank Rate, rather than pressing ahead in May. 2017 - Argued that the MPC was wrong to expect CPI inflation to stay below 3% following sterling's depreciation. He also highlighted that economic indicators pointed to the Conservatives losing their outright majority in the snap general election.
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.
The consensus view that the recovery won't lose more momentum this year seems to assume that the U.K. economy is better placed to deal with the intensification of the fiscal squeeze than earlier this decade. We do not share this optimism.
China's official and Caixin manufacturing PMIs have diverged in the last couple of months.
The U.K.'s still-large current account deficit makes us nervous that sterling will need to depreciate further over the medium-term and would collapse if Brexit talks fail, causing international investors to take flight.
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 U.S. reached a trade agreement with Canada on Sunday, adding its northern neighbour to the pact sealed a month ago with Mexico.
Manufacturing in France remained on the front foot at the start of Q4.
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.
We're now starting to see clear signs in unofficial data that households are slashing their expenditure on discretionary services, in order to minimise their chances of catching the coronavirus.
The early Q4 hard data in Germany recovered a bit of ground yesterday.
German exporters stumbled at the end of last year. The seasonally adjusted trade surplus in Germany dipped to €18.4B in December, from €21.8B in November, hit by a 3.3% month-to-month plunge in exports. Imports were flat on the month. The fall in exports looks dramatic, but it followed a 3.9% jump in the previous month, and nominal exports were up 2.5% over Q4 as a whole. Advance GDP data next week likely will show that net trade lifted quarter-on-quarter growth by 0.2 percentage points, partly reversing the 0.3pp drag in Q3. Real imports were held back by a jump in the import price deflator, due to rebounding oil prices.
China's FX reserves were little changed in June, at $3,112B.
Yesterday's ECB meeting was a tragedy in two acts. Markets were initially underwhelmed by the concrete measures unveiled, and they were then shell-shocked by Ms. Lagarde's performance in the press conference.
The rebound in GDP growth in the second quarter seems not to have been enough to prevent year-over-year productivity growth slowing to about zero. The consensus forecast for the first estimate of Q2 productivity growth, due today, is a 1.6% annualized increase, pushing the year-over-year rate down to 0.3% from 0.6% in the first quarter, but we think this is too optimistic.
Market-implied expectations of negative rates through 2021, and bund yields plunging below -0.1%, are an accident waiting to happen, but the main story is clear as rain.
The headlines of China's August activity data are missing the real story in recent months.
China's real GDP growth was unchanged at 6.4% year-over-year in Q1, above the consensus for a slowdown to 6.3%.
We lack an adjective sufficiently strong to describe China's February activity data.
Latin American markets and policymakers are bracing for another complicated week, after the second, and more aggressive, Fed emergency move over the weekend.
China's GDP data--to be published on Monday-- are likely to report that growth slowed to 1.4% quarter-on-quarter in Q4, from 1.6% in Q3. A 1.4% increase would match the series low of Q1 2016.
Chinese real GDP growth reportedly edged down to 6.7% year-over-year in Q2, from 6.8% in Q1.
The Bank of Japan yesterday kept its -0.10% policy balance rate and ten-year yield target of "around zero", as expected.
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.
Growth in EZ car sales slowed further at the beginning of Q4. New registrations in the euro area fell 1.2% year-over-year in October, down from a 7.2% increase in September.
The BoE has lived up to its reputation again as one of the most unpredictable central banks.
China's property market continued to slow in August, with prices rising by just 0.2% month-on- month seasonally adjusted, half the July pace.
The NY Fed's announcement yesterday restarts QE. The $60B of bill purchases previously planned for the period from March 13 through April 13 will now consist of $60B purchases "across a range of maturities to roughly match the maturity composition of Treasury securities outstanding".
It is a known axiom among EZ economists that the ECB never pre-commits, but yesterday's speech by Mr. Draghi in Sintra--see here--is as close as it gets.
Mexico's central bank, Banxico, capitulated in the face of the rapidly depreciating MXN and unexpectedly increased interest rates by 50bp to 3.75% on Wednesday, following an unscheduled meeting the day before. The decision was a unanimous, brave step, showing that policymakers are extremely worried about the FX sell-off, despite growth still running below potential.
Brazil is back on global investors' radar screens. Financial market metrics capture a relatively robust bullish tone, especially since the presidential election.
Data later today will likely show that the Eurozone's external balance remained firm last quarter at a record 2.5% of GDP. We think the seasonally adjusted current account surplus rose to €20.0B in December from €18.1B in November, with positive momentum in the key components continuing.
Friday' second Q4 GDP estimate revealed that the EZ economy barely grew at the end of 2019. The report confirmed that GDP rose by 0.1% quarter-on-quarter in Q4, slowing from a 0.3% rise in Q3, but the headline only narrowly avoided downward revision to zero, at just 0.058%
The idea that the ECB will use its forthcoming strategic policy review to include a measure of real estate prices in its inflation target has been consistently brought up by readers in recent meetings.
The Fed was more hawkish than we expected yesterday.
The ECB will leave its main refinancing and deposit rates unchanged at 0.00% and -0.4%, respectively,
Nobody has a monopoly on "the truth".
We've already raised a red flag for today's second Q4 GDP estimate in the Eurozone, but for good measure, we repeat the argument here.
Car registrations, French inflation, advance PMIs and a central bank meeting make up today's substantial menu for investors in the euro area.
Japan's Ministry of Finance yesterday admitted falsifying documents submitted to the country's parliament during a corruption probe last year.
We had expected the batch of Chinese data released at the end of last week to disappoint.
Investors in the euro area have mostly been focused on downside risks this year, and the spectre of Turkey spinning out of control has done little to change that.
Eurozone investors should by now be accustomed to direct intervention in private financial markets by policymakers.
The ECB disappointed slightly on the big headlines in yesterday's policy announcements, but it delivered shock and awe with the details
China's main activity data for October disappointed across the board, strengthening our conviction that the PBoC probably isn't quite done with easing this year.
China's July activity data pretty categorically wiped out any false hopes of a V-shaped recovery, after the June spike.
On the face of it, December's flash Markit/CIPS PMIs warrant the MPC cutting Bank Rate at its meeting on Thursday.
At the end of last year, we highlighted a tail risk that strain in currency basis swaps markets signalled looming yen appreciation.
German 10-year government bond yields jumped at the end of 2016, but have since been locked in a tight range around 0.4%, despite a steady inflow of strong economic data.
The headlines of China's main activity gauges paint a dreary picture of the start of the year, implying a slowdown.
Members of the Monetary Policy Committee have signalled that January's flash Markit/CIPS composite PMI, released on Friday 24, will have a major bearing on their policy decision the following week.
The PBoC has left rates unchanged, so far, in the wake of the Fed hike.
Ian Shepherdson, Pantheon Macroeconomics, and Erik Knutzen, Neuberger Berman, provide insight to the markets ahead of the FOMC meeting.
The U.S. Federal Reserve didn't quite deliver the shock-and-awe yield curve control this week which some observers had been expecting, but the message was clear enough.
Financial markets have put maximum pressure on the ECB going into today's meeting, but we doubt it will be enough to spur the governing council into action so soon after announcing additional stimulus in December. We think the central bank will keep its refi and deposit rate unchanged at 0.05% and -0.3% respectively, and maintain the pace of asset purchases at €60B a month.
LatAm assets and currencies had a bad November, due to global trade war concerns, the USD rebound and domestic factors.
We would be very surprised if the Fed were to raise rates today. The Yellen Fed is not in the business of shocking markets, and with the fed funds future putting the odds of a hike at just 22%, action today would assuredly come as a shock, with adverse consequences for all dollar assets.
The MPC has wasted no time in seeking to counter this week's undesirable pick-up in gilt yields, which reflects investors dumping assets for cash.
The ECB sent a strong signal yesterday that it is ready to fight deflation with a full range of unconventional monetary policy tools. Asset purchases, including sovereigns, to the tune of €60B per month will begin in March, and will run until end-September 2016, but Mr. Draghi noted that purchases could continue if the ECB is not satisfied with the trajectory of inflation.
We doubt there will ever be a fail-safe leading indicator of when a recession is about to hit, but asset prices can help us to assess the risks, at least.
Weakness across EM asset markets returned after the April FOMC minutes, released last week, suggested that a June rate hike is a real possibility. The risks posed by Brexit, however, is still a very real barrier to Fed action, with the vote coming just eight days after the FOMC meeting.
Investors looking for more QE and rate cuts will be disappointed by ECB inaction today. We think the Central Bank will keep its main interest rates unchanged, and also maintain the pace of asset purchases at €60B a month. We do, however, look for a slight change in language, hinting that QE is likely to continue beyond September next year.
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.
Investors will increase their focus on exchange rates as the US presidential election and the Fed's next rate hike approach. Markets are becoming concerned that a surge in the USD could trigger another spike in LatAm currency volatility, depressing the good year- to-date performance of most local market assets.
Eurozone capital markets have been split across the main asset classes this year. Equity investors have had a nightmare. The MSCI EU ex-UK index is down 10.6% year-to-date, a remarkably poor performance given additional QE from the ECB and stable GDP growth. Corporate bonds, on the other hand, are sizzling.
A reader sent us last week a series of five simple feedback loops, all of which ended with the Fed remaining "cautious". For example, in a scenario in which the dollar strengthens--perhaps because of stronger U.S. economic data--markets see an increased risk of a Chinese devaluation, which then pummels EM assets, making the Fed nervous about global growth risks to the domestic economy.
Yesterday's ECB meeting was a much more assured affair, compared to the March calamity. The central bank left its key refinancing and deposit rates unchanged, at 0.00% and -0.5%, respectively, and also maintained the pace and guidance on its two asset purchase programs.
Political uncertainty has been a key theme in our recent conversations with clients, with many readers asking if it is time to step away, temporarily, from Eurozone assets. Valuations provide some support for that position.
Evidence that U.K. asset prices still are depressed by Brexit risk has become harder to find.
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.
With Russia and some other emerging economies now in full panic mode, the financial market story is sharply divided between two narratives. Either the plunge in global energy prices acts as positive catalyst by boosting real incomes and allowing most central banks to run easier monetary policy or it is a sign that risk assets are about to hit a deflationary wall.
LatAm assets did well in Q1, on the back of upbeat investor risk sentiment, low volatility in developed markets and a relatively benign USD.
The BoJ left its policy levers unchanged at the Monetary Policy Committee meeting on Friday. At the press conference, Governor Kuroda was repeatedly asked about the status of the ¥80T annual asset purchase target and what the exit strategy would be.
LatAm assets have done well in recent weeks on the back of upbeat investor risk sentiment, low volatility in developed markets and a relatively benign USD. A less confrontational approach from the U.S. administration to trade policy has helped too.
LatAm assets have struggled in recent days as it has become clear that the Fed will hike next week. But we don't expect currencies to collapse, as domestic fundamentals are improving and the broader external outlook is relatively benign.
The ECB will keep interest rates on hold later today, and the commitment to monthly asset purchases of €60B--of which €50B will be sovereigns--until September next year will also remain unchanged. Sovereign QE should begin formally next week, but it has already turned bond markets upside down.
The sell-off in risky assets intensified while we were away, driven by China's decision to loosen its grip on the currency, and looming rate hikes in the U.S. The Chinese move partly shows, we think, the PBoC is uncomfortable pegging to a strengthening dollar amid the unwinding investment boom and weakness in manufacturing.
LatAm assets and currencies enjoyed a good start to the week, following the agreement between the U.S. and China to pause the trade war.
Growth momentum in Mexico has improved marginally over the last few months after the soft patch during the first quarter, with business and households gaining confidence in the economic recovery. But the upswing has been rather modest, due to the volatility in global financial markets and the challenging external environment. The outlook for the global economy has deteriorated over recent months due to China's problems, and commodity prices remain under pressure. All these factors are now weighing on investors' confidence and hurting EM across asset classes.
China's FX reserves rose to $3119B in November from $3109B in October. But the increase is explained by simultaneous yen, euro and sterling strength, which raises the dollar value of assets denominated in these currencies.
As it became clear that Donald Trump would beat Hillary Clinton to win the U.S. presidency, EM currencies came under severe pressure, fearing his economic and immigration policies. Some of the initial pressure is easing as markets digest the news and following Mr. Trump's conciliatory tone in his victory speech. But the proposals have been made and the MXN and other key LatAm assets likely will remain very stressed in the near term.
Eurozone investors will be looking anxiously across the pond overnight as the results of U.S. elections come in. Our assumption is that Hillary Clinton will be elected president and that risk assets will celebrate accordingly today.
Yesterday's ECB meeting left investors with a lot of thinking to do. The central bank kept its key interest rate unchanged, but extended and tweaked its asset purchase program. QE was extended until December 2017, but the monthly pace of purchases will be reduced by €20B per month to €60B starting April next year.
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".
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.
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.
Brazilian financial assets lately appear to be responding only to developments in the presidential election race and external jitters.
Weakness in risk assets turned into panic yesterday with the Eurostoxx falling over 6%, taking the accumulated decline to 19% since the beginning of August, and volatility hitting a three-year high. Market crashes of this kind are usually followed by a period of violent ups and downs, and we expect volatile trading in coming weeks. Following an extended bull market in risk assets, the key question investors will be asking is whether the economic cycle is turning.
It's always dangerous when risk assets rally strongly into an ECB meeting, but we doubt that investors have much to fear from today's session in Frankfurt. We think the central bank will leave its main refinancing and deposit rates at 0.00% and -0.4% respectively.
Monitoring bond markets in the Eurozone has been like watching paint dry this year. Yields across fixed income markets in the euro area were already low going into QE, but they have been absolutely crushed as asset purchases began in February.
Federal Reserve Chair Janet Yellen's testimony this week reinforced our view that the first U.S. rate hike will be in June. The transition to higher U.S. rates will require an unpleasant adjustment in asset prices in some LatAm countries.
A long period of extremely accommodative U.S. monetary policy generated sizable capital inflows and asset price appreciation in EM countries.
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.
In the financial crisis, a squeeze in short-term dollar markets forced banks to sell assets, which were then exposed as soured.
Claus Vistesen has several years' experience in the independent macro research space, as a freelancer, consultant and, latterly, as Head of Research of Variant Perception, Inc. He holds Master's degrees in economics and finance from the Copenhagen Business School and the University of Hull.
Why is the EZ current account surplus rising and net exports falling at the same time?
Senior International Economist Andres Abadia on Latam currency risks.
Chief Eurozone Economist Claus Vistesen on the latest action from the ECB
Pantheon Macroeconomics' Chief Economist Dr. Ian Shepherdson provides unbiased, independent economic intelligence to financial market professionals.
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