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The resilience of the U.K. financial system will be in focus this week. On Tuesday, the Bank of England's Prudential Regulation Authority, the PRA, will publish the results of stress tests of the U.K.'s seven largest banks. Concurrently, the Bank's Financial Policy Committee, the FPC, will publish its semi-annual Financial Stability Report and announce whether it will deploy any of its macroprudential tools.
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.
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."
The strengthening recovery in the euro area is proving to be a poisoned chalice for some of the region's most vulnerable banks. Earlier this month-- see our Monitor of June 8--Spain's Banco Populare was acquired by Banco Santander, and the bank's equity and junior credit holders were bailed-in as part of the deal.
We repeatedly have highlighted Japanese banks' foreign activities as source of rising risk for Japan and the global financial system.
Inflation in Mexico edged higher in the second half, but we expect both the headline and core rates to continue falling, allowing Banxico to keep interest rates on hold.
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.
Turkey has all the problems you don't want to see in an emerging market when the U.S. is raising interest rates.
PPI inflation in Asia looks set to go from bad to worse, following June's poor numbers, which showed that the weakness in commodity prices is feeding through quicker than expected.
The Fed rate hike on Wednesday is fully priced in to LatAm markets, so we expect no significant immediate reaction when the trigger is pulled. But as markets gradually come around to our view that future U.S. rate risk is to the upside, markets will come under renewed pressure.
Major central banks in Asia, particularly those operating in export-oriented economies, have recently been pinning their future policy moves on the prospects of a specific industry, namely semiconductors.
March's public sector borrowing figures brought more signs that the economy has lost considerable momentum this year. Borrowing, on the PSNB excluding public sector banks measure, came in at £5.1B in March, up slightly from £4.3B in March 2016.
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.
The main measure of public borrowing--PSNB excluding public sector banks--came in at £2.6B in December, well below the £5.1B in December 2016 and lower than in any other December since 2000.
Inflation pressures remain under control in most LatAm economies, allowing central banks to keep interest rates on hold, despite the challenging external environment.
Over the weekend, the PBoC cut the RRR for the vast majority of banks. FX reserves data released shortly after suggested that the Bank already is propping up the currency.
It's probably happening a decade too late, but the EU is now moving in leaps and bounds to restructure the continent's weakest banks. Yesterday, the Monte dei Paschi saga reached an interim conclusion when the Commission agreed to allow the Italian government to take a 70% stake in the ailing lender.
LatAm markets and central banks have been paying close attention to developments in the U.S. The FOMC left rates on hold on Wednesday, as expected, but underscored its core view that inflation will rise in the medium-term, requiring gradual increases in the fed funds rate.
Most central banks in LatAm have ended the year in a relatively comfortable position; their economies are improving and inflation is under control or even falling.
Mortgage approvals by the main high street banks rose to a four-month high of 39.7K in October, from 38.7K in September, according to trade body U.K. Finance.
The two major central banks in Asia currently have hugely different aims, causing a policy divergence that won't survive the 2018 rise in external yields.
LatAm markets reacted relatively well to the Fed's rate hike on Wednesday, which was largely priced-in. The markets' cool-headed reaction bodes well for Latam central banks. But it doesn't mean that the region is risk-free, especially as Mr. Trump's inauguration day draws near.
Yesterday's ECB press conference confirmed our view that Mr. Draghi is the periphery's friend, not enemy. Crucially, the central bank agreed to increase emergency liquidity assistance--ELA--to Greek banks by €900M. This is consistent tent with the agreement by the Eurogroup to give Greece €7B bridge financing, and shows the ECB is ready to act on the back of only a temporary truce between Greece and the EU. The increase in ELA is modest, and we doubt a painful restructuring of the banking system can be avoided. But with Greek bond yields falling, the available pool of collateral will go up, allowing the central bank to provide further relief in coming weeks.
The Fed's insistence this week that U.S. rates will rise only twice more this year helped to ease pressures on LatAm markets this week, particularly FX. The way is now clear for some LatAm central banks to cut interest rates rapidly over the coming months, even before U.S. fiscal and trade policy becomes clear. We expect the next Fed rate hike to come in June, as the labor market continues to tighten. If we're right, the free-risk window for LatAm rate cuts is relatively short.
Rising inflation is pressuring some LatAm central banks to take a cautious stance at a time when growth is subpar, particularly in the two biggest economies of the region.
Central banks in Chile, Peru, and Mexico hogged the market spotlight last week. Chile left its main interest rate at 3.0% on Thursday, for the fourth consecutive meeting.
The MPC's asserted its independence in the minutes of December's meeting, firmly stating that there is "no mechanical link between UK policy and those of other central banks". Markets have interpreted this as supporting their view that the MPC won't be rushed into raising interest rates by the Fed's actions. Investors now expect a nine-month gap between the Fed hike we anticipate next week, and the first move in the U.K.
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.
Chief U.K. Economist Samuel Tombs on U.K. Mortgage approvals
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.
LatAm's economies are gradually rebounding, boosted by easier monetary policy in most countries, falling inflation, and a relatively calm external backdrop.
With a no-deal Brexit still a potential outcome and just over five weeks to go until the U.K. is scheduled to leave, it's about time we put some numbers on how high inflation could get in this worst-case scenario.
The Brazilian Central Bank's policy board, COPOM, left the Selic rate at 6.50% on Wednesday, as widely expected.
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.
As widely expected, the ECB held fire yesterday. The central bank left its main refi rate unchanged at zero, and also kept the pace of QE unchanged at €80B a month. The deposit and marginal lending facility rates were also left unchanged at -0.4% and 0.25% respectively. The formal end-date of QE is still Q1 2017, but the press release repeated the message that QE can continue "beyond [Q1 2017], if necessary, and in any case until it sees a sustained adjustment in the path of inflation consistent with its inflation aim."
Growth in South America disappointed last year, but prospects are gradually improving on the back of rising commodity prices and the global manufacturing rebound. These factors will help to ease the region's external and fiscal vulnerabilities, particularly over the second half of the year. On the domestic front, though, the first quarter has proved challenging for some countries, hit by temporary supply factors such as a mine strikes, floods, and wildfires.
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.
July's mortgage approvals data from the BBA brought clear evidence that households have held off making major financial commitments as a result of the Brexit vote. Following a 5% month-to-month fall in June, approvals fell a further 5.3% in July, leaving them at their lowest level since January 2015 and down 19% year-over-year.
Advance PMI data indicate a slow start to the first quarter for the Eurozone economy. The composite index fell to 53.5 in January from 54.3 in December, due to weakness in both services and manufacturing. The correlation between month-to-month changes in the PMI and MSCI EU ex-UK is a decent 0.4, and we can't rule out the ide a that the horrible equity market performance has dented sentiment. The sudden swoon in markets, however, has also led to fears of an imminent recession. But it would be a major overreaction to extrapolate three weeks' worth of price action in equities to the real economy.
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.
Public borrowing has continued to fall more rapidly than anticipated in the latest official plans.
The ECB will deliver a carbon copy of its December meeting today, at least in terms of the main headlines.
August inflation surprised to the downside across most of LatAm, as food price surges proved transitory, and the lagged effect of the FX depreciations last year faded. Brazil appeared to be the exception last month, but the underlying trend in inflation is downwards.
Yesterday's public finance figures brought more good news for the Chancellor.
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.
The EU Commission and Italy's government remain at loggerheads over the country's fiscal plans next year.
The PBoC late on Wednesday announced measures to provide medium-term funding for smaller businesses.
A bad year is threatening to become a catastrophic one for Eurozone equity investors.
Equities in the Eurozone are off to a strong start in Q2, building on their punchy 12% gain in the first quarter.
Japanese M2 growth slowed sharply in December, to 3.6% year-over-year, from 4.0% in November, with M3 growth weakening similarly. It is tempting to ask if the BoJ's stealth taper finally is damaging broad money growth.
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.
Yesterday's second batch of Q3 GDP data in the euro area provided further evidence of a strong and stable cyclical upturn in the economy.
Markets initially objected to last week's ECB package, but the tune has since changed. The decision to focus on direct credit easing to the domestic economy, via more attractive TLTROs and corporate bond purchases--rather than by lowering rates further--is now seen by many analysts as a stroke of genius.
Markets are becoming more sensitive to rumours about changes in ECB policy. The euro and yields jumped on Friday after a Bloomberg report that the central bank has discussed raising rates before QE ends.
Negotiations between the Italian government and the EU on how to fix the problem of non-performing loans in the banking sector have been predictably slow. Earlier this year the government announced that it will provide a first-loss guarantee on securitised loans sold to private investors.
The PBoC has left rates unchanged, so far, in the wake of the Fed hike.
Chinese monetary policymakers can rely on several different instruments to affect market and broad liquidity, ranging from various forms of open market operations to interest rates to FX intervention. The tool kit is constantly changing as the PBoC refines its operations.
The Eurozone's sovereign bond markets are dying, and this is a good thing, by and large.
GDP growth currently is subdued by historical standards, but at least it is not debt-fuelled.
The BoJ yesterday published its semi-annual Financial System Report, which often gives insights into the longer-term thinking driving BoJ policy.
December's public finance figures suggest that borrowing is on track to come in a bit below the forecasts set out in the Autumn Statement in November. But we caution against expecting the Chancellor to unveil a material reduction in the scale of the fiscal consolidation set to hit the economy in his Budget on 8th March.
Opinion polls suggest that the Italian population will reject Prime Minister Matteo Renzi's constitutional reform on Sunday. Undecided voters could still swing it in favour of Mr. Renzi, but the "No" votes have led the "Yes" votes by a steady margin of about 52% to 48% since October.
The half-way point of the quarter is not, alas, the half-way point of the data flow for the quarter.
Economic data released on Wednesday underscored that Brazil was struggling at the end of the first quarter, strengthening our case that Q1 GDP fell 0.2% quarter-on-quarter, the first contraction since Q4 2016.
The Andean economies have been punished with high inflation triggered by currency depreciation and El Niño. Under these circumstances, Peru's central bank, the BCRP, admitted defeat yet again in the face of these temporary inflationary effects, increasing interest rates by 25bp to 4.0% last Thursday, the third hike in five months. Inflation in Peru remains stubbornly high, climbing to 4.4% year-over-year in December from 4.2% in November, and the upside risks remain elevated.
At the end of last year, after October's Party Congress, the Chinese authorities came out with significant new directives and regulations on an almost weekly basis.
We would be astonished if the FOMC meeting starting today does not end with a 25bp rate hike.
Evidence that households are not benefiting much from the Monetary Policy Committee's easing measures mounted yesterday, after the release of August data on advertised borrowing rates. Our first chart shows the drop in swap rates and average quoted mortgage rates since the end of last year.
The Brazilian Central Bank's policy board--the Copom--met expectations on Wednesday, voting unanimously to keep the Selic rate on hold at 6.50%.
The U.K.'s balance of payments leaves little room for doubt that sterling would sink like a stone in the event of a no-deal Brexit.
Last week's national accounts confirmed that the economy lost momentum abruptly in Q1, with net trade and investment failing to offset weaker growth in households' spending.
In principle, predicting the interest rate policies of an inflation-targeting central bank should be simple. Our first chart shows a standard Taylor Rule rate for the Eurozone based on the ECB's inflation target of 2%, the long-run average unemployment rate and a long run "equilibrium interest rate" of 1.5%. This framework historically has been a decent guide to ECB policy.
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.
We are not concerned by the very modest tightening in business lending standards reported in the Fed's quarterly survey of senior loan officers, published on Monday.
Industrial profits in China dropped 3.7% year-over- year in April, after surging 13.9% in March, according to the officially reported data.
Brazil's current account deficit rose to USD6.9B in April, from USD5.8B in March. The deficit totaled USD100.2B, or 4.5% of GDP on a 12-month rolling basis, marginally better than 4.6% in March; the underlying trend is flat. The services and income accounts improved slightly compared to April last year.
Last week's balance of payments showed that the U.K. has made significant progress in reducing its reliance on overseas finance.
Modern Money Theory has come up at two consecutive BoJ press conferences.
Our Chief Eurozone Economist, Claus Vistesen, is covering the Italian situation in detail in his daily Monitor but it's worth summarizing the key points for U.S. investors here.
Growth in the broad money supply slowed further in September, providing more evidence that the economy is losing momentum.
January's money supply figures continued the nerve-jangling flow of data on the economy's momentum.
The economic recovery disappointed in Chile during most of the first half of the year, despite relatively healthy fundamentals, including low interest rates, low inflation and stable financial metrics.
December's money and credit figures suggest that households are in no fit state to step up and drive the economy forwards this year.
News that the U.K.'s departure from the E.U. has been delayed by six months, unless MPs ratify the existing deal sooner, appears to have done little to revive confidence among businesses.
Investors have concluded that Italy's political crisis will compel the U.K. MPC to increase interest rates even more gradually than they thought previously.
Chinese industrial profits continue to surge, rising 27.7% year-over-year in September, up from 24.0% in August.
A long period of extremely accommodative U.S. monetary policy generated sizable capital inflows and asset price appreciation in EM countries.
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.
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."
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.
House prices continue to struggle for momentum, instilling caution among households. Admittedly, Halifax reported yesterday that its index jumped by 1.5% month-to-month in May.
Mr. Draghi and his colleagues erred on the side of maximum dovishness yesterday.
Eurozone bond traders of a bearish persuasion are finding it difficult to make their mark ahead of Italy's parliamentary elections next weekend.
When you read between the lines of its public statements on Brexit, the Government appears to be prioritising controlling immigration over maintaining unfettered access to the single market, much to the chagrin of the financial sector.
In yesterday's Monitor, we suggested that China's monetary policy stance is now easing.
We remain optimistic on the scope for sterling to appreciate this year, reflecting our views that a deal for a soft Brexit will be reached soon and that the MPC will resume its tightening cycle later this year.
Data from trade body U.K. Finance show that mortgage lending has remained unyielding in the face of heightened economic and political uncertainty.
In the midst of heightened and potentially longerlasting Brexit uncertainty, the MPC revised down its forecast for GDP growth sharply yesterday and came close to endorsing investors' view that the chances of a 25bp rate hike before the end of this year have slipped to 50:50.
Yesterday's figures from trade body U.K. Finance showed that January's pick-up in mortgage approvals was just a blip.
Since the Party Congress last month, China has made a number of bold moves in multiple policy fields, with a regularity that almost implies the authorities are working through a list.
Figures yesterday from U.K. Finance--the new trade body that has subsumed the British Bankers' Association--showed that the mortgage market recovered over the summer.
Friday's advance Eurozone PMI reports capped a fine quarter for the survey. The composite PMI jumped to a 80-month high of 56.7 in March, from 56.1 in February, rising to a cyclical high over Q1 as a whole.
Recent data have confirmed that growth in the Andean economies--Colombia, Chile and Peru--faced downward pressure in Q1, but some leading indicators and recent hard data suggest that we should expect better news ahead.
In some sense, today's ECB meeting will be a sobering one for policymakers.
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 U.K.'s political situation is extremely fluid, so it would be risky automatically to assume that the U.K. is heading for Brexit. Although the Prime Minister has resigned, his attempt to hold out until October to begin the formal process of exiting the E.U. signals that he may be seeking to engineer a revised deal, or at least to force his successor to make the momentous decision of whether to trigger Article 50, to begin the leaving process.
Andean inflation remains under control, due to subpar growth, modest pressures on prices for nontradeables, and broadly stable currencies.
Central bankers globally are full of market- appeasing but conditional statements.
Brazilian inflation hit its lowest rate in almost seven years in March, while Mexico's rate is the highest since July 2009. Yet we expect Mexico to tighten policy only modestly in the near term, while Brazil will ease rapidly.
We think Japanese monetary policy easing essentially is tapped out, both theoretically and by political constraints.
The recent FX depreciation and falling oil prices are driving the dynamics of inflation across the Andean economies.
The MPC went against the grain last month by forecasting that CPI inflation would overshoot the 2% target if it raised Bank Rate as slowly as markets anticipated.
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.
The first round of Brazil's presidential elections will take place this Sunday, followed by a probable runoff on October 28.
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.
Final Italian Q4 GDP data on Friday confirmed that the economy stumbled at the year-end. Real GDP rose 0.1% quarter-on-quarter in Q4, slowing from 0.2% in Q3, in line with the initial es timate. But the details were better than the headline. Inventories shaved off a hefty 0.4 percentage points, reversing boosts in Q3 and Q2, so final demand rose a robust 0.5%. Consumption added 0.2pp, while public spending contributed 0.1pp.
The Eurozone's TARGET2 system is a clearing mechanism for the real-time settling of large payments between European financial intermediaries. It's an important piece of financial architecture, ensuring the smooth flow of transactions. But we struggle to see these flows containing much information for the economy.
Economic survey data have been upbeat recently, but key Eurozone data releases yesterday suggest the ECB will be under pressure to increase monetary policy stimulus further this month. The advance inflation estimate showed that the euro area slipped back into deflation in September, as inflation fell to -0.1% year-over- year, from +0.1% in August. The fall was mainly due to a 8.9% collapse in energy prices, though, and we are very confident the relapse is temporary.
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.
The ECB made no changes to its policy stance yesterday.
Many analysts argue that the MPC inevitably will raise interest rates at its May 10 meeting because markets have fully priced-in a 25bp uplift.
The EZ government bond market has been in a holding pattern for most of 2017. The euro area 10- year yield--German and French benchmark--is little changed from a year ago, though it is at the lower end of its range.
Two years ago markets believed that the institutional setup of the Eurozone would be a straitjacket on the ECB, preventing QE. Aggressive policy actions since then have proven this hypothesis wrong. But inflation remains low and sentiment data weakened ominously in the first quarter.
Japan's tertiary index fell further in December,by 0.3% month-on-month, after the downwardly- revised 0.4% drop in November.
Yesterday's economic data in Brazil suggest that retailers suffered in the second quarter, hit by the effect of the truckers' strike, but private consumption remains somewhat resilient.
Last week, the Chinese authorities were out in force, talking up the economy and markets, and bearing measures to support private firms.
One of the main conclusions we drew from last week's ECB meeting was that the QE program is here to stay for a while. If the economy improves, the central bank could reduce the pace of purchases further. But we struggle to come up with a forecast for growth and inflation next year that would allow the ECB to signal that QE is coming to an end.
On the face of it, small business have taken quite a hit over the past few months. The headline index from the NFIB survey of small businesses has dropped to a nine-month low of 95.2 in March from 100.4 in December. As a result, the gap between the NFIB and the ISM manufacturing indexes, which had been narrowing, has widened again.
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.
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.
Emmanuel Macron's victory in France has lifted investors' hopes that the good times in the Eurozone economy and equity markets are here to stay. On the face of it, we share markets' optimism. Mr. Macron and his opposite number in Germany--our base case is that Ms. Merkel will remain Chancellor--will form a strong pro-EU axis in the core of the Eurozone.
LatAm economies are being battered by high inflation triggered by currency sell-offs and El Niño supply shocks, so rates have had to rise despite the challenging global environment. Peru's central bank, the BCRP, was forced to increase interest rates by 25bp to 4.25% last Thursday, the fourth hike in six months, as inflation is far above the central bank's 1-to-3% target range.
We look for the Fed to increase rates today by 25bp to a range of 0.25%-to-0.50%. The FOMC will likely say that policy remains very accommodative and that rate hikes will be slow. Unfortunately, this will provide only temporary relief to LatAm. According to our Chief Economist, Ian Shepherdson, faster wage gains next year in the U.S. will disrupt the Fed's intention to move gradually. If wages accelerate as quickly as we expect, the Fed will need to raise rates more rapidly than it currently expects, which is also faster than markets anticipate. That, in turn, will put EM markets and currencies under further pressure.
This week's Monetary Policy Committee meetings in Chile, Mexico and Colombia look set to dominate market events in LatAm. On Friday, we expect Mexico's Banxico to keep rates on hold at 3.75%, after its unexpected 50bp increase in mid-February. At that time, the board cited growing concerns about financial markets, Mexico's weakened currency, and the country's fiscal situation, as reasons for its move.
Chile and Peru faced similar growth trends in 2018, namely, a solid first half, followed by a poor second half, particularly Q3.
Interest rate expectations continued to fall sharply last week.
The Andean economies were in the middle of a perfect storm in the first half of the year, suffering slow recoveries, accelerating inflation and plunging commodity prices and currencies. Under these circumstances it was no surprise that Chile and Peru last week left their main interest rates on hold, close to their lowest levels in four years. The pressure coming from their plummeting currencies, however, means their next moves likely will be rate hikes, but not this year.
The BoJ kept monetary policy unchanged yesterday, as expected, with the signal coming through loud and clear: Japan's central bank will continue its aggressive easing policy until the inflation cows come home...
LatAm's growth outlook is deteriorating, despite decent domestic fundamentals and political transitions toward more market-oriented governments in some of the region's main economies.
Inflation appears no longer to be an issue for Mexican policymakers. The annual headline rate slowed to 3.0% year-over-year in February from 3.1% in January, in the middle of the central bank's target range, for the first time since May 2006.
Colombia's peso has been one of the most battered currencies in LatAm this year, due mainly to the sharp fall in oil prices, the country's primary export. The COP has dropped about 23% this year against the USD. At the same time, other temporary factors, most notably the impact of El Niño on food prices, have done a great deal of inflation damage too. October's food prices increased 1.4% month-to-month, pushing the year-over-year rate up to 8.8% from an average of 6.6% in the first half of the year. Overall inflation has jumped to 5.9% in October from 3.8% in January, forcing BanRep's board to act aggressively.
Three of the big LatAm economies-- Brazil, Colombia and Chile--released October inflation last week; the data are still showing the pass-through effects of currency depreciation during the first half of the year into prices, though, at different degrees. LatAm currencies have been hit by the weakness in commodity prices and negative sentiment towards EM generally.
Recent inflation numbers across LatAm have surprised, in both directions. On the upside, Brazil's IPCA index rose 0.2% month-to-month in September, above the market consensus forecast of 0.1%.
Chile's Central Bank left its main interest rate unchanged last week at 3.0%, for the seventh month in a row. The press release maintained its neutral tone, as in previous recent meetings, as the BCCh acknowledged that the economy is growing at a moderate pace, with some indicators suggesting less dynamic growth "at the margin".
Last week's data supported our view that monetary policy across LatAm will continue to diverge in the short term. Brazil will have to prolong its monetary tightening cycle, while economies such as Colombia and Chile will remain on hold despite the recent slowdowns in their economic cycle.
Colombia's August inflation rate exceeded BanRep's 2-to-4% target range yet again, rising to a six-year high of 4.7%, from 4.5% in July. The signs of stabilization over the previous couple of months proved to be temporary. Core inflation has jumped above the upper bound of the inflation target too, climbing to 4.2%--the highest rate since 2009--in August from 4.0% in July, suggesting that the pass-through from the depreciating currency into consumer prices is starting to hurt. Inflation in tradables jumped in August to 5.2% from 4.7%, underscoring the hit from the COP's drop.
The Colombian economy--the star of the previous economic cycle in LatAm--is now slowing significantly, due mostly to strong external headwinds. Exports plunged by 40% year-over-year in January, down from -29% in December, with all of the main categories contracting in the worst performance since 1980.
EM risk sentiment remains grim as the Trump administration dispenses protectionist trade measures. LatAm's biggest economies, Brazil and Mexico, have been hit the hardest, with their currencies falling 3.3% and 2.2% respectively in the last week, the most in the EM world.
Banxico is one of the few central banks in LatAm to have hiked rates in 2016, and we expect it to remain relatively hawkish in the face of external risks.
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.
Central banks in Chile and Peru kept their reference rates unchanged last week, as expected, as inflation pressures in both countries are starting to ease. But different economic outlooks are emerging. Chile's economy continues to disappoint, while Peru's is picking up. Indeed, Peru is the only country in the region with clear positive momentum.
The ECB's negative interest rate policy--NIRP--has come under the spotlight following the violent selloff in Eurozone bank equities. Mr. Draghi reassured markets and the EU parliament earlier this week that new regulation, stronger capital buffers, and common recognition of non-performing loans have made Eurozone banks stronger.
We doubt that this week will see the MPC joining the list of other major central banks that have abandoned plans to raise interest rates this year.
Unlike other central banks, the MPC has stuck to its message that "an ongoing tightening of monetary policy over the forecast period" likely will be required to keep inflation close to the 2% target, provided a no-deal Brexit is avoided.
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.
Central banks in Mexico and Colombia kept their main interest rates on hold last week, due to recent volatility in the currency markets. Policymakers acknowledged the downside risks to growth, particularly from low commodity prices, but inflation fears, triggered by currency weakness, mean they will not be able to ease if growth slows.
Central banks in Mexico, Colombia and Chile raised interest rates last week in tandem with the Fed, underscoring the almost mystical importance of the FOMC's actions in Latin America. In Colombia and Chile, their decisions were also helped by rising inflation pressures, due mainly to pass-through effects from currency depreciation.
Everyone heard San Francisco Fed president Williams's suggestion Monday that central banks could raise their inflation targets in response to the sustained slow growth and lower-than-expected inflation of recent years. It's not clear, though, that markets grasped the scale of the increase he thinks might be appropriate.
We don't know how Europe will look on Monday. If European officials are to be believed, Greece will either have agreed to bail-out terms to keep it inside the Eurozone, or it will be on its way out. "Deadlines" have come and gone for Greece, but this time really is different, because the banks are bust without further support from the ECB, and that will not be forthcoming without a bail-out deal.
November's money and credit figures brought welcome news that the recovery in bank lending is strengthening. This revival should continue, now that banks have completed most of the work required to improve their capital positions. But we doubt lending will recover quickly enough to prevent the economic recovery slowing in 2016, as the downward pressure on growth from the fiscal squeeze and the strong pound builds.
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.
Public borrowing continues to falling at a very slow pace, despite the major fiscal consolidation implemented this year. Public sector net borrowing excluding public sector banks--PSNB ex.--was £10.5B in August, only 8.1% less than the £11.5B borrowed a year ago.
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.
Pantheon Macroeconomics Founder and Chief Economist Ian Shepherdson discusses his outlook for the economy, equities and European banks. He speaks on "Bloomberg Surveillance."
Inflation in the Andes remains in check and the near term will be benign, suggesting that central banks will remain on hold over the coming months.
The big story in financial markets at the moment is the idea that major global central banks are about to embark on a policy easing cycle.
The two major central banks of Asia have chosen hugely divergent policies. The BoJ has chosen to fix interest rates, while the PBoC appears set on preventing a meaningful depreciation of the currency.
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.
July's money and credit figures provided more evidence that firms have become reluctant to invest following the Brexit vote. Lending by U.K. banks to private non-financial companies--PNFCs--rose by just 0.2% month-to-month in July, below the average 0.5% increase of the previous six months.
Multiple factors have shaken LatAm financial markets this week. China's market turmoil, commodity price oscillations, currency volatility, and political mayhem in every corner of the region, have all conspired against markets. But market chaos has also driven some central banks to rethink their monetary policy plans. For EM, in particular for LatAm, the stance of the Federal Reserve is key, given the region's close ties to the U.S., and the dollar.
The mortgage market still is defying gravity. U.K. Finance initially reported yesterday that house purchase mortgage approvals by the main high street banks collapsed to 35.3K in February, from 39.6K in January.
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.
Yesterday's public finance figures showed that the public sector, excluding public sector banks, ran a surplus of £0.2B in July, a modest improvement on borrowing of £0.4B a year ago.
LatAm currencies have risen against the USD so far this year, easing the upward pressure on imported good prices and allowing most central banks to cut interest rates. The first direct effects of stronger currencies should be felt by firms which import high-turnover intermediate or final goods.
The MPC's interest rate cut in August, and the continued willingness of banks to lend, bolstered the housing market immediately after the referendum. But the latest indicators suggest that the market is slowing again, as the financial pressures on households' incomes intensify.
Divergence between central banks and the reach for yield will remain dominant themes for Eurozone fixed income markets next year, but a lot has already been priced in.
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.
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.
The Eurozone is on the brink of its first exit this week after the ECB refused to offer incremental emergency liquidity to Greek banks, forcing the start of bank holiday through July 7--two days after next weekend's referendum--and beginning today. We have no doubt that if the banks were to open, they would soon be bust; bank runs have a habit of accelerating beyond the point of no return very quickly.
Progress in reducing the budget deficit has ground to a virtual halt, despite the ongoing fiscal consolidation. Public sector net borrowing excluding public sector banks--PSNB ex.--was £10.6B in September, exceeding the £9.3B borrowed in the same month last year.
Robust demand in the ECB's final TLTRO auction was the main story in EZ financial markets yesterday. Euro area banks--474 in total-- took up €233.5B in the March TLTRO, well above the consensus forecast €110B. To us, this strong demand is a sign that EZ banks are taking advantage of the TLTROs' incredibly generous conditions.
On the face of it, the trend in public borrowing deteriorated sharply late last year. In the three months to December, borrowing on the main "PSNB ex ." measure, which excludes banks owned by the public sector, was a trivial £0.3B, or 1.6%, lower than in the same months of 2017.
Markets are trading like Emmanuel Macron has already moved into the Élysée Palace. Eurozone equities soared at the open yesterday, lead by the French banks, 10-year yields in France plunged, and the euro jumped. This makes sense given the signal from the polls. They were correct in their prediction of Mr. Macron's victory on Sunday, and they have been consistently forecasting that he will comfortably beat Mrs. Le Pen in the runoff.
Mortgage approvals by the main high street banks dropped to a five-month low of 38.5K in September, from 39.2K in August, according to trade body U.K.Finance.
House purchase mortgage approvals by the main high street banks continued to recover in June, rising to a nine-month high of 40.5K, from 39.5K in May. June approvals, however, merely matched their postreferendum average, and the chances of a more substantial recovery are slim.
Mortgage approvals by the main high street banks collapsed to 36.1K in December--the lowest level since April 2013--from 39.0K in November, according to trade body U.K. Finance.
The PBoC cut the reserve requirement ratio by 0.5pp for almost all banks on Sunday, effective from July 5th.
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.
The Federal Reserve said Wednesday it would keep short-term interest rates near zero until at least the middle of the year. The central bank's policy committee also signaled caution about low inflation and nodded to overseas uncertainty by including new language that it would monitor international developments. Here's how economists reacted
The U.S. housing market stumbled into 2015 as a leading indicator of home sales dipped in December
The Federal Reserve kept its options open on Wednesday, signaling that it would not raise short-term interest rates any earlier than June, while leaving unresolved how much longer it might be willing to wait before lifting its benchmark rate from near zero, where the central bank has held it for more than six years
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Claus Vistesen on the Greek election results impact on the Eurozone
Chief U.K. Economist Samuel Tombs on U.K. Mortgage Approvals
US home prices rose in November from October but the underlying trend continued to point to a slowdown in price gains, according to the S&P/Case-Shiller index released Tuesday
Pantheon Macroeconomics' Chief Economist Dr. Ian Shepherdson provides unbiased, independent economic intelligence to financial market professionals.
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