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505 matches for " bond":
The 20bp increase in 10-year yields over the past month doesn't live up to the hype; bondmageddon it was not.
Strong real M1 growth suggests the cyclical recovery is in good shape. But recent economic data indicate GDP growth slowed in Q4, and survey evidence deteriorated in January. This slightly downbeat message, however, is a far cry from the horror story told by financial markets. The recent collapse in stock-to-bond returns extends the decline which began in Q2 last year, signalling the Eurozone is on the brink of recession.
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.
The Eurozone's sovereign bond markets are dying, and this is a good thing, by and large.
Corporate bonds will not be included in the ECB's monthly QE purchases until the end of Q2, but markets are already preparing. The sale of non-financial corporate debt jumped to €49.4B in March, from about €25B in February, within touching distance of the record set in Q1 last year.
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.
Price action in Italian bonds went from hairy to scary yesterday as two-year yields jumped to just under 3.0%.
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 impasse between Greece and its creditors has roiled Eurozone bond markets, but the ECB is likely ready to restore calm, if necessary. We think a further widening of short-term interest rate spreads would especially worry the central bank, as it would represent a challenge to forward guidance. For now, spreads remain well below the average since the birth of the Eurozone, even after the latest increase.
Last week's QE announcement has made Eurozone inflation prints less important for investors, but the market will still be watching for signs of a turning point in benchmark bond yields. The data are unlikely to challenge bond holders in the short run, however, as the Eurozone probably slipped deeper into deflation in January.
After a 15 year hiatus, Argentina returned to the global credit markets yesterday with the sale of a USD16.5B sovereign bonds, the largest ever dollar offering by a developing country. Argentina boosted the size of its offering to USD16.5B from USD15B after attracting orders worth USD70B. The country sold four tranches: 10-year debt at 7.5%, three- and five year yielding 6.25% and 6.875%, respectively, and 30-year paper at 8.0%.
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.
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.
Friday's detailed October CPI report in Germany confirmed that inflation pressures are steadily rising. Inflation rose to 0.8% year-over-year in October, from 0.7% in September, lifted mostly by a continuing increase in energy prices.
The last few weeks' action in Eurozone financial markets has shown investors that the QE trade is not a one-way street. Higher short-rates could force the ECB to take preventive measures, but we don't think the central bank will be worried about rising long rates unless they shoot much higher.
Inflation in the Eurozone jumped in December, and will surge further in Q1 as base effects from last year's crash in oil prices push energy inflation higher. Higher inflation in the U.S. and surging Chinese factory gate prices indicate that this isn't just a Eurozone story.
Debt issuance by Eurozone non-financial firms is soaring, consistent with the ECB's hope that adding private debt to QE would boost supply. Our first chart shows that the three-month sum of net debt sold in the euro area jumped to a new record of €60.3B in May. A short-term decline in issuance is a good bet after the initial euphoria in firms' treasury departments.
As expected, the ECB made no changes to its policy stance today. The refi and deposit rates were left at 0.00% and -0.4%, respectively, and the pace of purchases under QE was maintained at €30B per month.
The virus outbreak has been relatively limited so far in Argentina, with 820 confirmed cases, but the numbers are rising rapidly.
Predicting which way markets would move in response to potential general election outcomes has been relatively straightforward in the past. But the usual rules of thumb will not apply when the election results filter through after polling stations close on Thursday evening.
We're still trying to get our heads around the amount of stimulus that EZ policymakers have pledged in order to pull the economy through the Covid-19 crisis.
European heads of states will convene tomorrow, virtually, in the Council to continue the debate on a joint and coordinated response to the Covid-19 epidemic. The meeting will progress along two tracks.
Financial markets in the Eurozone will be pushed around by global events today. The Bank of Japan kicks off the party in the early hours CET, and the spectrum of investors' expectations is wide.
From a macroeconomic perspective, the main shift in the ECB's policy stance last week was the change in forward guidance.
Yesterday's final CPI report confirmed that inflation in the euro area increased slightly last month. The headline rate rose to 1.5%, from 1.4% in October, lifted by a 1.7 percentage point increase in energy inflation to 4.9%.
The details of next year's Japanese budget are not yet official and the Chinese budget remains unknown. But the main figures of the Japanese budget are available, while China's Economic Work Conference, which concluded yesterday, has set out the colour of the paint for the budget, if not the actual brush strokes.
Last week's ECB meeting--see here--made it clear that the central bank does not intend to jump the gun on rate hikes next year, even as QE is scheduled to end in Q4 2018.
Markets' reaction last week to the ECB's October meeting accounts--see here--shows that investors are beginning to take seriously the idea of an inflection point in Eurozone monetary policy.
Storm clouds gathered over Eurozone financial markets last week. The sell-off in equities accelerated, pushing the MSCI EU ex-UK to an 11-month low.
Argentina's financial markets and embattled currency have been under severe pressure in recent weeks, with the ARS hitting a new record low against the USD and government bonds sinking to distress levels.
Bond markets in the euro area have been a calm sea recently relative to the turmoil in equities, credit and commodities. Following the initial surge in yields at the end of second quarter, 10-year benchmark rates have meandered in a tight range, recently settling towards the lower end, at 0.5%. Our outlook for the economy and inflation tells us this is to o low, even allowing for the impact of QE.
Selling pressure in LatAm markets after Donald Trump's election victory eased when the dollar rally paused earlier this week. Yesterday, the yield on 10- year Mexican bonds slipped from its cycle high, and rates in other major LatAm economies also dipped slightly.
The violence of recent bond market weakness likely has been driven mainly by reduced liquidity, and a squeeze in crowded positions. But we also think that it can be partly explained by an adjustment to higher inflation expectations. The latest ECB staff projections assume the average HICP inflation will be 0.3% this year, up from the zero predicted in March. Allowing for a smooth increase over the remainder of the year, this implies a year-end inflation rate of 0.8%.
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 presumption in markets is that the French presidential election is the last hurdle to be overcome in the EZ economy. As long as Marine Le Pen is kept out of l'Élysée, animal spirits will be released in the economy and financial markets. We concede that a Le Pen victory would result in chaos, at least in the short run. Bond spreads would widen, equities would crash and the euro would plummet. But we also suspect that such volatility would be short-lived, similar to the convulsions after Brexit.
Mr. Draghi's speech yesterday in Portugal, at the ECB forum on Central Banking, pushed the euro and EZ government bond yields higher. The markets' hawkish interpretation was linked to the president's comment that "The threat of deflation is gone and reflationary forces are at play."
Bond yields in the Eurozone took another leg lower yesterday.
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.
Investors active in the government bond market will be awaiting today, at 07:30 BST, the publication by the Debt Management Office of its updated Financing Remit for the upcoming three months. The new Remit will show that gilt sales, net of redemptions, will be lower in Q3 than in Q2.
Mr. Macron will be in Berlin today with the message that France wants a strong Eurozone and a tight relationship with Germany. Friendly overtures between Paris and Berlin are good news for investors; they reduce political uncertainty while increasing the chance that the economic recovery will continue. But it is too early to get excited about closer fiscal coordination, let alone a common EZ fiscal policy and bond issuance.
The decision by the ECB to remove the waiver for including Greek government bonds in standard refinancing operations changes little in the short run, as the banking system in Greece still has full access to the ELA. It does put additional pressure on Syriza, though, to abandon the position that it will exit the bailout on February the 28th, effectively pushing the economy into the abyss.
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.
Italian bond yields have remained elevated this week, following the release of the government's detailed draft budget for 2019.
December's money data brought clear signs that the economy's growth spurt in the second half of 2016 is about to come to an abrupt end. Growth in households' money holdings and borrowing slowed sharply in December, and the pick-up in corporate borrowing shortly after the MPC cut interest rates and announced corporate bond purchases, in August, has run out of steam already.
EZ bond markets were stung earlier this week by a Bloomberg story suggesting that the ECB, in principle, has agreed on a QE exit strategy which involves "tapering" purchases by €10B per month. The story also specified, though, that the central bank has not discussed when tapering will begin.
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.
Gilt yields have risen sharply over the last month, even though the Monetary Policy Committee is just one-third of the way through the £60B bond purchase programme announced in August. Government bond yields in other G7 economies also have increased, but not as much as in Britain.
Recent bond market volatility has left a significant mark on Eurozone credit markets. The recent slide in the Bloomberg composite index for Eurozone corporate bonds is the biggest since the U.S. taper tantrum in 2013. The prospect of a Fed hike later this year and rising inflation expectations in the Eurozone have changed the balance of risk for fixed income markets.
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.
The Bank of England won't set markets alight today. We expect another 9-0 vote to leave rates unchanged at 0.25%, and to continue with the £50B of gilt purchases and $10B of corporate bond purchases announced in August. This is not to say, though, that everything is plain sailing for the Monetary Policy Committee.
Investors are busily fitting narratives to the sudden reversal in global bond markets. We think a correction was long overdue, but a combination of three factors provides a plausible rationale for the rout, from an EZ perspective.
Venezuelan bond markets have been on a rollercoaster ride this year, with yields rising significantly in response to heightened political uncertainty and then declining when the government pays its obligations or when protests ease.
Friday's final EZ inflation report of 2017 sent a dovish signal to bond markets.
The MPC must be very disappointed by the impact of its £60B government bond purchase programme. Gilt yields initially fell, but they now have returned to the levels seen shortly before the MPC's August meeting, when the purchases were announced.
We are fairly sanguine that government bond markets in the Eurozone will take the end of QE in their stride.
We think that the higher inflation outlook means that the MPC will dash hopes of unconventional stimulus on August 4 and instead will opt only to cut Bank Rate to 0.25%, from 0.50% currently. The minutes of July's MPC meeting show, however, that the MPC is mulling all the options. As a result, it is worth reviewing how a QE programme might be designed and what impact it might have on bond yields.
The gap between U.K. and U.S. government bond yields has continued to grow this year and is approaching a record.
Mr. Draghi's pledge in 2012 to do "whatever it takes to preserve the euro," and QE have stymied sovereign debt risk in the euro area. At the same time, the EU's relaxed position over debt sustainability was highlighted earlier this year by the Commission's decision to give France two more years to get its deficit below 3% of GDP. But Moody's downgrade of the French government bond rating last week to Aa2 from Aa1 serves as a gentle reminder to investors of the underlying fundamentals.
Bond yields in Italy remain elevated, but volatility has declined recently; two-year yields have halved to 0.7% and 10-year yields have dipped below 3%.
In the years before the crash of 2008, if you wanted to know what was likely to happen to the pace of U.S. economic growth, all you needed to know was what happened to corporate bond yields a year earlier. The correlation between movements in BBB industrial yields--not spreads--and the changes in the rate of GDP growth, lagged by a year, was remarkably strong from 1994 through 2008, as our first chart shows. Roughly, a 50 basis point increase in yields could be expected to reduce the pace of year-over-year GDP growth--the second differential, in other words--by about 1.5 percentage points.
We have warned that the ECB' decision to add corporate bonds to QE would lead to unprecedented market distortions. Evidence of this is now abundantly clear. The central bank has bought €82B-worth of corporate bonds in the past 11 months, and now holds more than 6% of the market. Assuming the central bank continues its purchases until the middle of next year, it will end up owning 13%-to-14% of the whole Eurozone corporate bond market.
The markets' favorite story of the moment, aside from the Fed, seems to be the idea that overstretched corporate finances are an accident waiting to happen. When the crunch comes, the unavoidable hit to the stock market and the corporate bond market will have dire consequences, limiting the Fed's scope to raise rates, regardless of what might be happening in the labor market. We don't buy this. At least, we don't buy the second part of the narrative; we have no problem with the idea the finances of the corporate sector are shaky.
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.
The ECB will keep its refinancing and deposit rates unchanged today, at 0.0% and -0.4% respectively. We also think the pace of QE will be held at €80B per month. Attention will turn instead to the details and implementation of the measures unveiled last month. Corporate bonds will be added to QE at the end of the second quarter, and monthly purchases of about €5-to-€10B per month are a realistic assumption.
This remains a tumultuous time for EZ bond investors. The twists and turns of the French presidential election campaign continue to shove markets around. Marine Le Pen's steady rise in thepolls has pushed French yields higher this year.
The PBoC has let up on its open-market operations after allowing bond yields to move higher again in October.
Eurozone bond traders of a bearish persuasion are finding it difficult to make their mark ahead of Italy's parliamentary elections next weekend.
The distortions in European fixed income markets have intensified following the initiation of the ECB's sovereign QE program. In the market for sovereigns, German eight-year bond yields are within a touching distance of falling below zero, and this week Switzerland became the first country ever to issue a 10-year bond with negative yields.
Markets have responded strongly to the ECB's announcement that it will be buying corporate bonds as part of QE. Net corporate debt issuance of non-financial firms jumped €16B in March, the biggest monthly increase since January 2014. The 12-month average, however, was stable at €3.6B, and a sustained increase in net debt supply partly depends on firms' appetite for financial engineering
European Central Bank's Bond-Buying Will Help U.S. Tourists and Investors...
Chief LatAm Economist Andres Abadia on the Argentina Election
Chief Eurozone Economist Claus Vistesen on the Greek return to the market
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.
Last month, the ECB set the scene for the majority of its key policy decisions over the next 12 months.
Meetings are a nice way to stress test our base case stories and gauge what questions are important for clients.
The latest public finance figures make it virtually inevitable that the Chancellor will scrap the existing fiscal rules when he delivers his first Budget.
Markets were all over the place yesterday in response to the messages from the ECB.
The Monetary Policy Board of the Bank of Korea is likely to keep its benchmark base rate unchanged, at 1.25%, at its meeting this week.
Mauricio Macri, the centre-right candidate of the Cambiemos--Let's Change--coalition won Argentina's weekend presidential election. Mr. Macri, the mayor of Buenos Aires, defeated Daniel Scioli, of the ruling Front for Victory--FpV--coalition on Sunday. His victory marks the end of the 12-year Kirchnerist era, characterized by wild inflation, huge public deficits and unsustainable subsidies. If Mr. Macri lives up to his promises, Argentina, the second-largest economy in South America, will become an orthodox economy on a sustainable path. The recovery will come, we think, but it will be a long and challenging process.
A less rapid tightening of monetary policy in the U.K. than in the U.S. should ensure that gilt yields don't move in lockstep with U.S. Treasury yields over the coming years. But the outlook for monetary policy isn't the only influence on gilt yields. We expect low levels of market liquidity in the secondary market, high levels of gilt issuance and overseas concerns about the possibility of the U.K.'s exit from the E.U. to add to the upward pressure on gilt yields.
Mexican policymakers likely will stick to the script tomorrow and vote by a majority to cut the main rate by 50bp to 5.00%, which would be its lowest level since late 2016.
The ECB conformed to expectations today, at least on a headline level.
Korean GDP contracted by 1.4% quarter-on- quarter in Q1, erasing the 1.3% jump at the end of last year. The pullback was sharper than we expected, with the cliff-edge drop in private consumption, in particular, catching us by surprise.
Brazil's central bank conformed to expectations on Wednesday, cutting the Selic rate by 75 basis points to 12.25%, without bias. Overall, the BCB recognises that the economic signals have been mixed in recent weeks, but the Copom echoed our view that the data are pointing to a gradual stabilisation and, ultimately, a recovery in GDP growth later this year.
The Chancellor's Autumn Statement dashed hopes that the fiscal consolidation will be paused while the economy struggles to adjust to the implications of Brexit. Admittedly, Mr. Hammond has another opportunity in the Spring Budget to reduce next year's fiscal tightening.
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 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.
The Bank of Japan's biannual Financial System Report was published earlier this week.
Yesterday's stock market bloodbath stands in contrast to the U.S. economic data, most of which so far show no impact from the Covid-19 outbreak.
We've suspected that China's GDP targeting system was on its last legs for some time now.
The big difference between economic cycles in developed and emerging markets is that recessions in the former tend to be driven by the unwinding of imbalances only in the private sector, usually in the wake of a tightening of monetary policy.
The Prime Minister's refusal last week to reaffirm her party's 2015 election pledge not to raise income tax, National Insurance or VAT has fuelled speculation that taxes will rise if the Conservatives are re-elected on June 8. Admittedly, Mrs. May asserted that her party "believes in lower taxes", and the tax pledge s till might appear in the Conservatives' manifesto, which won't be published for a few weeks.
The ECB will not make any major changes to policy today.
On the face of it, the 25 basis points increase in 10-year German yields this month is modest. But the sell-off has reminded levered investors that trading benchmark securities in the Eurozone is not a one-way street. When yields are close to zero, investors also use leverage to enhance returns, and this increases volatility when the market turns.
Last week the Chinese authorities issued a series of new measures to help with bank recapitalisation, and, we think, to supplement interbank liquidity.
Data released yesterday in Mexico highlighted the volatility in international trade resulting from the pandemic.
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.
China's finance minister Liu Kun provided his report on China's current fiscal situation to the legislature last Friday.
The Fed meeting today is unlikely to bring any significant policy shifts, mostly because the Fed has done everything we thought would be necessary once it became clear how badly the economy would be hit by Covid-19.
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.
The Chancellor indicated yesterday that the current fiscal plans--which set out a 1% of GDP reduction in the structural budget deficit this year--will remain in place until a new Prime Minister is chosen by September 2. So for now, the burden of leaning against the imminent downturn is on the MPC's shoulders.
Money supply data in the EZ continue to suggest that headline GDP growth will slow soon.
Recent export performance has been poor, but the export orders index in the ISM manufacturing survey-- the most reliable short-term leading indicator--strongly suggests that it will be terrible in the fourth quarter.
Recent polls in Argentina suggest that Alberto Fernández, from the opposition platform Frente de Todos, has comfortably beaten Mauricio Macri, to become Argentina's president.
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.
Yesterday's big news in the Eurozone was the EU Commission's proposed recovery fund.
Gilt yields have tumbled, with the 10-year sliding to just 1.0%, from 1.2% a week ago.
Judging by the trend in investor sentiment, today's PMI data will look great.
Today is a busy day in the Eurozone economic calendar, but we suspect that markets mainly will focus on the details of Italy's 2019 budget.
China's annual "two sessions" conference is due to start on Sunday, with the economic targets for this year set to be made official over the course of the meetings.
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.
The collapse in oil prices looks near-certain to pull Japan back into deflation in the next few months, though the BoJ normally looks through oil-induced swings in its target inflation measure.
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.
Short-term interest rates in the Eurozone continue to imply that the ECB will lower rates further this year. Two-year yields have been stuck in a very tight range around -0.5% since March, indicating that investors expect the central bank again to reduce its deposit rate from its current level of -0.4%. This is not our base case, though, and we think that investors focused on deflation and a dovish ECB will be caught out by higher inflation.
As the dust settles from Wednesday's budget proposal by the EU Commission--see here--economists and investors are left with a myriad of questions.
China's Q2 real GDP growth officially slowed to 6.2% year-over-year, from 6.4% in Q1, which already matched the trough in the financial crisis.
The 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."
India's government imposed a three-week nationwide lockdown on March 25 to combat the increasingly rapid spread of Covid-19.
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.
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.
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.
Global economic growth continues to fall short of expectations, and the call for aggressive fiscal stimulus is growing in many countries. This is partly a function of the realisation that monetary policy has been stretched to a breaking point. But it is also because of record low interest rates, which offer governments a golden and cheap opportunity to kickstart the economy. One of the main arguments for stronger fiscal stimulus is based on classic Keynesian macroeconomic theory.
Headline money supply growth in the Eurozone has averaged 5% year-over-year since the beginning of 2015; yesterday's October data did not change that story.
Last week's enormous €1.3T take-up in the ECB's first post-virus TLTRO auction was hardly a blip for financial markets, consistent with the reactions to previous auctions.
The perfect world for equities is one in which earnings and valuations are rising at the same time, but in the Eurozone it seems as if investors have to make do with one or the other.
The FOMC kept policy unchanged at April's meeting-- rates stayed at zero, and all the market valves are wide open, as needed--but policymakers spent considerable time pondering what might happen over the next few months, and how policy could evolve.
Swoons in EZ investor sentiment are not always reliable leading indicators for the economic surveys, but it is fair to say that risks for today's advance PMIs are tilted to the downside, following the dreadful Sentix and ZEW headlines earlier this month.
On the face of it, BoJ policy seems to be to change none of the settings and let things unfold, hoping that the trade war doesn't escalate, that China's recovery gets underway soon, and that semiconductor sales pick up in the second half.
The coronavirus ordeal continues in LatAm as a whole.
Borrowing by local authorities from the Public Works Loan Board, used to finance capital projects-- and arguably dubious commercial property acquisitions--has surged this year.
The Eurozone's external surplus recovered a bit of ground mid-way through the third quarter.
Long term benchmark yields in the Eurozone almost fell to zero towards the end of the first quarter as investors were carried away in their celebration of QE. The counter-reaction to this move, though, was violent with 10-year yields surging from 0.2% to 0.9% in the space of two months from April to June, and we think a similar tantrum could be waiting in the wings for investors. We are particularly wary that upside surprises in inflation data--mainly in Germany--could push yields up sharply in the next few months.
The stakes in the Brexit saga have been raised significantly over the summer.
Friday's detailed euro area CPI report for December confirmed that inflation pushed higher at the end of last year. Headline inflation increased to 1.3% year-over- year, from 1.0% in November, lifted primarily by higher energy inflation, rising by 3.4pp, to +0.2%. Inflation in food, alcohol and tobacco also rose, albeit marginally, to 2.1%, from 2.0% in November.
The ECB held fire yesterday. The central bank kept its main refinancing rate unchanged at 0.0%, and also maintained the deposit and marginal lending facility rates at -0.4% and 0.25% respectively.
The Eurozone's current account surplus almost surely fell further in Q4.
Economists refer to two different types of forward rate guidance by central banks: Delphic and Odyssean. The former describes a "normal" situation, in which the central bank follows a transparent rate-setting rule allowing markets to forecast what it will do, based on the flow of economic data.
The annual National People's Congress meeting of China's legislature will get underway at the end of this week, after delay due to the Covid outbreak.
House price inflation in tier-one cities has been crushed by China's most recent monetary tightening. This is a sharp turnaround from the overheating mid-way through last year. Unlike in previous cycles, interest rates are probably more important for house prices than broad money growth.
Hard data released in Argentina over the last month showed that the economy was struggling in early Q1, even before the Covid-19 hit.
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.
We have been on the ECB's case recently. The action taken at last week's official meeting--see here--fell short of market expectations, but more importantly, Ms. Lagarde's communication around the decisions was disastrous.
Prospects for further rate cuts in Brazil, due to the sluggishness of the economic recovery and low inflation, have played against the BRL in recent weeks.
Yesterday's headline economic data in the euro area were solid across the board, though the details were mixed.
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.
We have had something of a rethink about the likely timing of the coming cyclical downturn. Previously, we thought the economy would start to slow markedly in the middle of next year, with a mild recession--two quarters of modest declines in GDP-- beginning in the fourth quarter.
In Friday's Monitor, we warned that Moody's would soon cut Mexico's credit rating; in a matter of hours, it was a done deal.
The EZ's current account surplus was stung at the end of Q3, falling to a three-year low of €16.9B in September, from a revised €23.9B in August.
The data tell an increasingly convincing story that the Eurozone's external surplus rose further in the second half of last year.
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.
Barring a meteor strike, the ECB will leave its main refinancing and deposit rates unchanged today, at 0.00% and -0.5% respectively.
German 10-year yields have been trading according to a simple rule of thumb since 2017, namely, anything around 0.6% has been a buy, and 0.2%, or below, has been a sell.
The PBoC managed to keep interest rates well- anchored around the Chinese New Year holiday, when volatility is often elevated.
The story in EZ capital markets this year has been downbeat.
Yesterday's August PMI data in the euro area ran counter to the otherwise gloomy signals from the ZEW and Sentix investor sentiment indices.
Friday's inflation data in Brazil confirmed that the ripples from the truckers' strike in May were still being felt at the start of the third quarter.
The Eurozone's current account surplus extended its decline in May, falling to a nine-month low of €22.4B, from €29.6B in April.
Two major themes emerged from the Chinese Party Congress last week, namely, further opening of the financial sector to foreigners, and the threat of a Minsky moment.
The prospect of fiscal stimulus in the euro area-- ostensibly to "help" the ECB reach its inflation target-- remains a hot topic for investors and economists.
The Covid-19 shock to the real economy in China, and now the world, is colossal. Asia is leading the downturn, both because the outbreak started in China, but also because of its place in the supply chain.
China has undoubtedly been through a credit tightening, commonly explained as the PBoC attempting to engineer a squeeze, to spur on corporate deleveraging.
We tend to keep a close eye on monetary policy initiatives in Japan, as the BOJ's fight to spur inflation in a rapidly ageing economy resembles the challenge faced by the ECB.
A Financial Times report over the weekend--see here--added to the speculation that the ECB is not going to lift the amount of asset purchases pledged under its Pandemic Emergency Purchase Program--PEPP-- anytime soon.
Economic activity in Chile in the first half of the year is now a write-off, due to Covid-19. The country is in a deep recession, and the impact of lockdowns on labour markets and businesses will cause long-lasting economic damage, which will hold back the recovery.
Friday's final EZ CPI data for July confirm the advance report.
The BoJ held firm, for the most part, during this year's bout of central bank dovishness.
German survey data did something out of character yesterday; they fell. The IFO business climate index declined to 117.2 in December from a revised 117.6 in November.
This year has been sobering for Eurozone equity investors.
Discussions between Greece and its creditors drifted further into limbo last week, but we are cautiously optimistic that the Euro Summit meeting later today will yield a deal. The acrimony between Syriza and the main EU and IMF negotiators means, though, that a grand bargain is virtually impossible. We think an extension of the current bail-out until year-end is the most likely outcome.
Financial markets and economic survey data have been sending a downbeat message on the Eurozone economy so far this year. The composite PMI has declined to a 12-month low, consumer sentiment has weakened, and national business surveys have also been poor.
The Eurozone's external surplus rebounded over the summer, reversing its sharp decline at the start of Q3.
The EU Commission and Italy's government remain at loggerheads over the country's fiscal plans next year.
The public finances are in better shape than October's figures suggest in isolation. Public sector net borrowing excluding public sector banks--PSNB ex.--leapt to £11.2B, from £8.9B a year earlier.
China's growth can be decomposed into the structural story and the mini-cycle, which is policy- driven.
The Eurozone's external surplus rebounded further over the summer.
The fundamentals underpinning our forecast of solid first half growth in consumers' spending remain robust.
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.
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.
Inflation in the Eurozone is on the rise but, as we explained in yesterday's Monitor it is unlikely to prompt the ECB further to reduce the pace of QE in the short run. The central bank has signalled a shift in focus towards core inflation, at a still-low 0.9% well below the 2% target. But the core rate also is a lagging indicator, and we think it will creep higher in 2017.
Advance inflation data from Germany and Spain indicate that the Eurozone slipped into deflation last month, piling maximum pressure on Mr. Draghi later this month. Inflation in the euro area's largest economy fell to 0.2% year-over-year in December from 0.6% in November, driven by a 6.6% plunge in the energy component.
It's hard to overstate the geopolitical importance of Friday's assassination of Qassim Soleimani, architect of Iran's external military activity for more than 20 years and perhaps the most powerful man in the country, after the Supreme Leader.
In today's Monitor, we'll let the economy be, and focus instead on what are fast becoming the two defining political issues for the EU and its new Commission, namely migration and climate change.
We think today's February payroll number will be reported at about 140K, undershooting the 175K consensus.
Productivity growth reached the dizzy heights of 1.8% year-over-year in the second quarter, following a couple of hefty quarter-on-quarter increases, averaging 2.9%.
Political risks in the periphery have simmered constantly during this cyclical recovery, but they have increased recently. In Italy, the government is scrambling to find a solution to rid its ailing banking sector of bad loans. But recapitalisation via a bad bank is not possible under new EU rules.
If 2017 really is the year of "reflation", somebody forgot to tell the gilt market. Among the G7 group, 10-year yields have fallen only in the U.K. during the last three months, as our first chart shows.
Mr. Draghi was in a slightly more bullish mood yesterday, noting that the significant easing of financial conditions in recent months and improving sentiment show that monetary policy "has worked". Economic risks are tilted to the downside, according to the president, but they have also "diminished".
Productivity likely rose by 1.7% last year, the best performance since 2010.
October payrolls were stronger than we expected, rising 128K, despite a 46K hit from the GM strike.
The comforting 183K increase in February private payrolls reported by ADP yesterday likely overstates tomorrow's official number.
It will take a while for the economic data in the euro area fully to reflect the Covid-19 shock, but the incoming numbers paint an increasingly clear picture of an improving economy going into the outbreak.
China's official non-manufacturing PMI rose further in May, hitting a four-month high of 53.6.
If you were looking just at investor sentiment in the Eurozone, you would conclude that the economy is in recession.
Japan's monetary base growth showed further signs of stabilisation in May, at 8.1% year-over-year, edging up trivially from 7.8% in April.
The surge in the broad money supply in March, as the U.K.'s lockdown began, suggests that businesses are in relatively good shape to survive a multi-month period of greatly depressed demand.
The simultaneous decline in both ISM indexes was a key factor driving markets to anticipate last week's Fed easing.
Judging solely by yesterday's PMI and retail sales data, the EZ economy has shaken off the virus and is going from strength to strength.
Our hopes of another solid increase in payrolls in July were severely dented by yesterday's ADP report, showing that private payrolls rose only 167K in July.
Markets tend to take an eclectic view on macroeconomic data in the Eurozone.
Headwinds from global growth fears have weighed on Eurozone equities in recent months, leaving the benchmark MSCI EU ex-UK index with a paltry year-to-date return ex-dividends of 1.7%. We think bravery will be rewarded, though, and see strong performance in the next six months. Equities in Europe do best when excess liquidity --M1 growth in excess of inflation and nominal GDP growth--is high.
Markets were jolted yesterday by news that the U.S. Fed is mulling ending, or at least slowing, the reinvestment of Treasuries and mortgage-backed securities later this year. Such a move would reduce liquidity in global markets that has underpinned soaring equity prices in recent years.
The final Monitor before our summer break is characterized by great uncertainty.
In Friday's Monitor we analysed the draft Japanese budget, as reported by Bloomberg. We suggested that the GDP bang-for-government-expenditure- buck is likely to be less than that implied by the authorities' forecasts.
The twists and turns of the French presidential election campaign continue. François Fillon was tipped as favourite after he won the Republican primaries. But Mr. Fillon now is struggling to keep his campaign on track after allegations that he gave high paying "pro-forma" jobs to his wife as an assistant last year. The socialist candidate, Benoit Hamon, has been hampered by the unpopularity of his party's incumbent, François Hollande, and has lost ground to the far-left Jean-Luc Mélenchon.
We have two competing explanations for the unexpected leap in November payrolls. First, it was a fluke, so it will either be revised down substantially, or will be followed by a hefty downside correction in December.
Markets are looking for the ECB to extend QE today, and we think they will get their way. We expect the central bank to prolong the program by six months, to September 2017, and to maintain the pace of monthly purchases at €80B per month.
Markets clearly love the idea that the "Phase One" trade deal with China will be signed soon, at a location apparently still subject to haggling between the parties.
The reported drop in mortgage applications over the holidays is now reversing, not that it ever mattered.
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.
Friday's German new orders data were sizzling. Factory orders jumped 3.6% month-to-month in August, pushing the year-over-year rate up to a nine-month high of 7.8%, from an upwardly-revised 5.4% in July.
Japanese average regular wages increased at an annualised rate of 0.6% in the three months to August compared with the previous three months, matching the rate in July.
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%.
Leave it to an economist to tell contradictory stories; German manufacturing orders, at the start of the year, rose at their fastest pace since 2014, but it doesn't mean anything.
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.
The contrast between November's very modest 67K ADP private payroll number and the surprising 254K official reading was startling, even when the 46K boost to the latter from returning GM strikers is stripped out.
The jump in oil prices over the past two trading days eventually will lift retail gasoline prices by about 35 cents per gallon, or 131⁄2%.
Inflation data later today will likely show that the Eurozone fell into deflation driven primarily by the big plunge in oil prices since 2008. The consensus expects a 0.1% decline year-over-year, but we look for the CPI to fall slightly more, by 0.2%.
We raised our forecast for today's January payroll number after the ADP report, to 200K from 160K.
October's GDP report, released on Monday, might just manage to break through the wall of noise coming from parliament ahead of the key Brexit vote on Tuesday.
Demand in German manufacturing rebounded powerfully at the end of the second quarter, accelerating from an initially modest rebound when lockdowns were lifted.
This week's uproar over the ECB's purchases of Italian debt in May--or lack thereof--shows that monetary policy in the euro is never far removed from the political sphere.
One bad month proves nothing, but our first chart shows that October's auto sales numbers were awful, dropping unexpectedly to a six-month low.
Yesterday's detailed Q3 GDP data in the Eurozone confirmed that the economy has gone from strength to strength this year.
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's authorities recognised, around the middle of this year, that activity was slowing and that monetary conditions had become overly tight.
Today's ECB meeting will follow the same script as in July. No-one expects the central bank to make any formal changes to its policy settings. The ECB will keep its main refinancing and deposit rates at zero and -0.4%, respectively.
Our composite index of employment indicators, based on survey data and the official JOLTS report, looks ahead about three months.
This week's detailed Q3 GDP data will confirm that the euro area economy is going from strength to strength.
Something of a debate appears to be underway in markets over the "correct" way to look at the coronavirus data.
Inflation pressures in the Eurozone are building rapidly, setting up an "interesting" ECB meeting next week. Yesterday's advance CPI report showed that inflation edged up further in February to 2.0%, from 1.8% in January. The headline rate is now in line with the ECB's target, and up sharply from the average of 0.2% last year.
French finance minister Bruno Le Maire had bad news for his compatriots yesterday.
April's money and credit figures show that relatively few firms suffered from a lack of liquidity at the beginning of the Covid-19 crisis.
Gilts continued to rally last week, with 10-year yields dropping to their lowest since October 2016, and the gap between two-year and 10-year yields narrowing to the smallest margin since September 2008.
May's money and credit data show that Covid-19 has not pushed many businesses immediately over the edge.
The massive hit from low oil prices, Covid-19 and President AMLO's willingness to call snap referendums on projects already under construction is putting pressure on Mexico's sovereign credit fundamentals and ratings.
The stage is set for the Fed to ease by 25bp today, but to signal that further reductions in the funds rate would require a meaningful deterioration in the outlook for growth or unexpected downward pressure on inflation.
October's money and credit report indicates that the economy had little momentum at the start of the fourth quarter.
Industrial profits in China collapsed by 38.3% year- over-year in the first two months of 2020, making December's 6.3% fall look like a minor blip.
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.
China's Caixin manufacturing PMI doused hopes of turning over a January new leaf; it dropped to 49.7 in November, from 50.2 in December.
The substantial gap between the key manufacturing surveys for the U.S. and China, relative to their long-term relationship, likely narrowed a bit in December.
While we were out, data released in Mexico added to our downbeat view of the economy in the near term, supporting our base case for interest rate cuts in the near future.
China's economic targets are AWOL this year, thanks to Covid-19 disruptions to the legislative calendar... and because policymakers seem unsure of what targets to set in such uncertain times.
Monetary policy usually is the first line of defence whenever a recession hits.
We aren't convinced by the idea that consumers' confidence will be depressed as a direct result of the rollover in most of the regular surveys of business sentiment and activity.
Our analysis of the Q3 activity and GDP data in yesterday's Monitor strongly suggests that China's authorities will soon ready further stimulus.
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.
Many investors are betting that the MPC will announce a bold package of easing measures on Thursday. For a start, overnight index swap markets are pricing-in a 98% probability that the MPC will cut Bank Rate to 0.25%, and a 30% chance that interest rates will fall to, or below, zero by the end of the year.
The number of coronavirus cases continues to increase, but we're expecting to see signs that the number of new cases is peaking within the next two to three weeks.
December's money and credit data support the MPC's decision last week to hold back from providing the economy with more stimulus.
The Redbook chainstore sales survey today is likely to give the superficial impression that the peak holiday shopping season got off to a robust start last week.
Yesterday's final manufacturing PMIs confirmed that the headline index in the euro area rebounded further last month.
The big news in the EZ yesterday was the announcement by German chancellor Angela Merkel that she will step down as party leader for CDU later this year, and that she will hand over the chancellorship when her term ends in 2021.
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.
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.
Recent hard data have confirmed the severe shock from Corona to the Chilean economy in Q2.
The unexpectedly robust 128K increase in October payrolls--about 175K when the GM strikers are added back in--and the 98K aggregate upward revision to August and September change our picture of the labor market in the late summer and early fall.
We have spent the past few weeks shifting our story on the EZ economy from one focused on slowing growth and downside risks to a more balanced outlook. It seems that markets are starting to agree with us.
Markets were left somewhat disappointed yesterday by the G7 statement that central banks and finance ministers stand ready "to use all appropriate policy tools to achieve strong, sustainable growth and safeguard against downside risks."
We sympathise if readers are sceptical of our opening gambit in this Monitor.
Survey data in EZ manufacturing remain soft. Yesterday's final PMI report for August confirmed that the index dipped to 54.6 in August, from 55.1 in July, reaching its lowest point since the end of 2016.
Japan's monetary base growth has continued to slow, to 13.2% year-over-year in November from 14.5% in October.
We were worried about downside risk to yesterday's ADP employment measure, but the 67K increase in November private payrolls was at the very bottom of our expected range.
The advance indicators of July payrolls are wildly contradictory, so you should be prepared for anything from a consensus-busting jump to a renewed outright drop, in both Friday's official numbers and today's ADP report.
Yesterday's data provided further evidence of the rising costs of supporting the EZ economy through the Covid-19 shock.
We aren't in the business of trying to divine the explanation for every twist and turn in the stock market at the best of times, and these are not the best of times.
At the start of the year, #euroboom was the moniker used in financial media to describe the EZ economy.
Was this an isolated occurrence, connected to the graft investigation into Chinese billionaire Xiao Jianhua, and his financial conglomerate?
Yesterday's final EZ manufacturing PMIs for July extended the run of gains since the nadir during lockdown.
As we showed in yesterday's Monitor--see here--EZ governments and the ECB have thrown caution to the wind in their efforts to limit the pain from the Covid-19 crisis.
The PBoC cut its seven-day reverse repo rate to 2.20%, from 2.40%, while making a token injection; the Bank only moves these rates when it injects funds.
Data yesterday showed that German inflation roared higher at the start of the year, but the devil is in the detail.
Under normal circumstances, sustained ISM manufacturing readings around the July level, 54.2, would be consistent with GDP growth of about 2% year-over-year.
The ADP employment report was on the money in October at the headline level--it undershot the official private payroll number by a trivial 6K--but the BLS's measure was hit by the absence of 46K striking GM workers from the data.
German inflation surged in December, pointing to an upside surprise in today's advance EZ report. The headline inflation rate rose to a three-year high of 1.7% year-over-year in December, from 0.8% in November. This was the biggest increase in the year- over-year rate since 1993.
The PBoC yesterday cut its 7-day and 14-day reverse repo rate by 10bp, to 2.40% and 2.55% respectively, while injecting RMB 1.2T through open market operations.
Inflation in the Eurozone eased at the start of Q3.
The dovish message from the ECB going into today's final meeting of the year has intensified. Mr. Draghi's comments last month, at the European Banking Congress in Frankfurt, point to an increased worry on low core inflation.
Money supply growth in the Eurozone quickened last month, by 0.3 percentage points to 3.9% year- over-year, but the details were less upbeat.
The PBoC reduced its 14-day reverse repo by 5bp to 2.65% in a routine operation yesterday.
We struggle to see how the pro-separatist movement in Catalonia can move forward from here.
We have downgraded our 2019 and 2020 China GDP forecasts on previous occasions because monetary conditions have been surprisingly unresponsive to lower short-term rates.
All major EZ governments are now in the process of lifting lockdowns, but investors should expect less a grand opening, more of a careful tip-toeing.
India's shocking PMIs for April leave little doubt that the second quarter will be bad enough to result in a full-year contraction in 2020 GDP, even if economic activity recovers strongly in the second half.
Today's ECB meeting is supposed to be a slam-dunk.
The Spanish economy remains the stand-out performer in the Eurozone, but recent data suggest that growth is slowing.
Yesterday's EZ industrial production report conformed to expectations.
Political uncertainty is never far away in the Eurozone, though the most recent outbreak could easily swing in favour of markets.
The EZ's current account surplus is solid as ever, despite falling slightly in February to €35.1B, from an upwardly-revised €39.0B in January.
The 0.1% dip in the core CPI in March was the first outright decline in three years, but we expect another-- and bigger--decline in today's April numbers.
The Fed paved the way with a 50bp emergency rate cut on March 3, with more to come.
The recent cyclical upturn in the EZ began in the first quarter of 2013. GDP growth has accelerated almost uninterruptedly for the last two years to 1.5% year-over-year in Q3, despite the Greek debt crisis and slower growth in emerging markets. Overall we think the recovery will continue with full-year GDP growth of about 1.6%. But we also think the business cycle is maturing, characterised by stable GDP growth and higher inflation, and we see the economy slowing next year.
Our suggestion that the ECB could still raise the deposit rate later this year, by 20bp to -0.4%, has met with strong scepticism in recent conversations with readers.
Chair Powell broke no new ground in his semi-annual Monetary Policy Testimony yesterday, repeating the Fed's new core view that the current stance of policy is "appropriate".
In previous Monitors--see here--we've suggested that, thanks to the coronavirus, China simply will lose some of the spending that would have gone on during the holiday this year.
It would take nothing short of a catastrophe in coming months for the ECB to alter its plan to end QE via a three-month taper between September and December.
Judging by the headline performance metrics, EZ equity investors have little cause for worry.
China's money and credit data for February were reassuring, at least when compared with the doomsday scenario painted, so far, by other key indicators for last month.
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.
Central bankers globally are full of market- appeasing but conditional statements.
Today's November retail sales numbers are something of a wild card, given the absence of reliable indicators of the strength of sales over the Thanksgiving weekend, and the difficulty of seasonally adjusting the data for a holiday which falls on a different date this year.
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.
The ECB disappointed slightly on the big headlines in yesterday's policy announcements, but it delivered shock and awe with the details
PM Abe last week asked the cabinet to put together a package of measures in a 15-month budget aimed at bolstering GDP growth through productivity enhancement, in addition to the shorter-term goal of disaster recovery.
Analysts have fiercely debated the consequences of the U.S. Treasury's plan to break the bank in Q2 with a whopping €3T issuance of new debt to cover the initial costs of Covid-19.
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".
We are easily excitable when it comes to monetary policy and macroeconomics, but we are not expecting fireworks at today's ECB meetings.
The BoE announced on Thursday that it had agreed the Treasury could increase its usage of its Ways and Means facility--effectively the government's overdraft at the central bank--without limit.
While we were away, the advance Q2 GDP report in the Eurozone confirmed our expectations of a strong first half of the year for the economy. Real GDP rose 0.6% quarter-on-quarter, the same pace as in Q1, lifting the year-over-year rate to a cyclical high of 2.1%.
We're doing a wrap-up of the data that were released last week while we were away, and the Chinese numbers were both a hit and a miss.
We argued a couple of weeks ago that the stock market could suffer a relapse, on the grounds that valuations hadn't fallen far enough from their peak to reflect the extent of the hit to the economy; that hopes for an early re-opening were likely to prove forlorn; and that investors were likely to be spooked by the incoming coronavirus data.
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 effects of Covid-19--both negative and positive--on Korea's labour market certainly were felt in February.
Japan's money and credit data have shown signs of life in recent months, but that's all set to change quickly, due to the disruptions caused by the outbreak of the coronavirus.
The underlying trend in the core CPI is rising by just under 0.2% per month, so that has to be the starting point for our January forecast.
We suspect that today's ECB meeting will be a sideshow to the political chaos in the U.K., but that doesn't change the fact that the central bank's to-do list is long.
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.
Chinese monetary conditions remain tight. Systemic tightening through higher interest rates last year is playing a role, but intensified and ever- more public regulatory enforcement is becoming the primary driver of tightening credit conditions for businesses.
China's GDP report for the fourth quarter, due on Friday, is likely to show that economic growth has stabilised, on the surface.
It is by now a familiar story that the Eurozone has become a supplier of liquidity to the global economy in the wake of the sovereign debt crisis.
The final June inflation report from Germany yesterday confirmed that pressures are rising. Inflation rose to 0.3% year-over-year in June, up from 0.1% in May, mainly due to higher energy prices. Household energy prices--utilities--fell 4.9% year-over-year, up from a 5.7% decline in May, while deflation in petrol prices eased to -9.4%, up from -12.1% in May.
The euro area economy continues to defy rising political uncertainty. Data yesterday showed that industrial production, ex-construction, in the Eurozone jumped 1.5% month-to-month in November, pushing the year-over-year rate up to 3.2% from a revised 0.8% in October. Output rose in all the major economies, but the headline was flattered by a 16.3% month-to-month leap in Ireland. This was due to a production jump in Ireland's "modern sector" which includes the country's large multinational technology sector.
The FOMC did mostly what was expected yesterday, though we were a bit surprised that the single rate hike previously expected for next year has been abandoned.
Yesterday's ZEW investor sentiment report in Germany provided an upside surprise.
Taken at face value, September's money supply data suggest that the economy is ebullient, quickly recovering from the shock referendum result. Year-over-year growth in notes and coins in circulation has accelerated to its highest rate since June 2002.
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 BoJ yesterday kept the policy balance rate at -0.1%, and the 10-year yield target at "around zero", in line with the consensus.
We expect to see a 70K increase in October payrolls today.
Friday's manufacturing and trade data added to the evidence of a solid rebound in the EZ economy at the end of Q2, as lockdowns were lifted.
The monthly survey of small businesses conducted by the National Federation of Independent Business is quite sensitive to short-term movements in the stock market, so we're expecting an increase in the November reading, due today.
Yesterday's CPI report in Mexico showed that inflation pressures are rising consistently. Headline inflation rose to 3.4% year-over-year in December, from 3.3% in November, above the mid-point of the central bank's 2-to-4% target range. Surging goods inflation and higher services prices--especially seasonal increases for package holidays and airline fares--were mainly to blame.
Our forecast of a solid 190K increase in headline December payrolls ignores our composite employment indicator, which usually leads by about three months and points to a print of just 50K or so.
The reported 225K jump in payrolls in January was even bigger than we expected, but it is not sustainable. The extraordinarily warm weather last month most obviously boosted job gains in construction, where the 44K increase was the biggest in a year
China's official manufacturing PMI edged down to 50.8 in April, from 52.0 in March. The output sub- index stayed relatively high, inching down only to 53.7 from 54.1, and chiming with our initial take on the industrial production data for March.
The government last week fired the starting gun for the contest to replace Mark Carney as Governor of the Bank of England.
China's official PMIs for March surprised well to the upside, cheering markets across Asia.
Even though Greece managed to avert default yesterday by paying €200M in interest to the IMF, our assumption is that the country remains on the brink of running out of money. Our view is supported by the government's decision to expropriate local authority funds, and reports that the government's domestic liabilities, excluding wages and pensions, are not being met.
Advance data suggest German inflation pressures eased towards the end of last year. Inflation fell to 0.3% year-over-year in December from 0.4% in November, likely due to a fall in food inflation--mean reversion in fruit and vegetables inflation--and a sharp fall in the annual price increase of clothing and shoes. State data indicate that deflation in household utilities persisted, but that inflation of fuel and transportation is slowly recovering. Assuming a stable oil price in coming months, base effects should push up energy price inflation in the first quarter, though it should then fall again slightly in the second quarter. Overall, though, we expect energy price inflation gradually to stabilise and recover this year.
Business investment has been resilient to the slowdown in the wider economy so far, with year-over-year growth in the first three quarters of 2015 averaging a very respectable 6.2%. Outside the oil sector, firms are generating healthy profits and can borrow cheaply.
The BoJ had two tasks at its meeting yesterday.
Advance data indicate German inflation rose to 0.4% year-over-year in November, up from 0.3% in October, lifted by higher food and energy price inflation. The upward trend in food prices won't last, but base effects in energy prices will persist, boosting headline inflation significantly in coming months. The details show that services inflation was stable at 1.2% last month, despite state data indicating a fall in volatile leisure and entertainment inflation, while net rent inflation was also stable, at 1.1%.
China's official manufacturing PMI implies a modest gain in momentum in Q2, at 51.4, compared with 51.0 on average in Q1.
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.
China's economy looks to have shrugged off the supposed "second wave" of Covid-19, sparked by a cluster in Beijing's largest wholesale market for fruit and veg, looking at June's PMIs.
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.
Our base case remains a 10bp cut in the deposit rate, to -0.5%, in September.
Economic conditions in Brazil are deteriorating rapidly.
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.
It's just not possible to forecast the reaction of businesses and consumers to the coronavirus outbreak.
Economic data in the euro area are still slipping and sliding.
China's October foreign trade headlines beat expectations, but the year-over-year numbers remain grim, with imports falling 6.4%, only a modest improvement from the 8.5% tumble in September.
The undershoot in the September core CPI does not change our view that the trend in core inflation is rising, and is likely to surprise substantially to the upside over the next six-to-12 months.
The escalation in the U.S.-Chinese trade wars has understandably pushed EZ economic data firmly into the background while we have been resting on the beach.
EZ investors remain depressed. The headline Sentix confidence index fell to 12.0 in September, from 14.7 in August, and the expectations gauge slid by three points to -8.8.
Base effects were the key driver of yesterday's upbeat industrial production headline in Italy.
A reader pointed out Friday that the standard measurement of the impact of the weather on January payrolls--the number of people unable to work due to the weather, less the long-term average--likely overstated the boost from the extremely mild temperatures.
We see clear upside risk to the inflation data due before the FOMC announcement, from three main sources.
The stakes are raised ahead of today's ECB meeting after the central bank's pledge in January to "review and reassess" its policy stance. Since then, survey data have weakened, inflation has fallen and volatility in financial markets has increased. The ECB likely will act accordingly and deliver a boost to monetary stimulus today.
The collapse in oil prices was the immediate trigger for the 7.6% plunge in the S&P 500 yesterday, but the underlying reason is the Covid-19 epidemic.
In this Monitor we'll let the data be, and try to make some sense of the recent market volatility from a Eurozone perspective, with an eye to the implications for the economy and policymakers' actions.
Most countries in LatAm are now fighting a complex global environment; a viral outbreak of biblical proportions and plunging oil prices, after last week's OPEC fiasco.
Donald Trump's victory casts a shadow of political uncertainty over what had appeared to be a decent outlook for the U.S economy. The U.K.'s trade and financial ties with the U.S., however, are small enough to mean that any downturn on the other side of the Atlantic will have little impact on Britain.
The hard data now point to a horrendous Q3 GDP print in Germany, which almost surely will constrain the advance EZ GDP print released on October 30.
Japanese PPI inflation rose sharply to 2.6% in July from 2.2% in June, well above the consensus for a modest rise.
Markets tend to look to Italy as the canary in the coalmine for signs of stress in the EZ economy and financial markets, but we recommend keeping a close eye on Spain too.
The ECB made no changes to its policy stance yesterday.
German inflation pressures were unchanged last month. The CPI index rose 0.8% year-over-year, matching the increase in October, and in line with the consensus and initial estimate. Energy deflation intensified marginally, as a result of lower prices for household utilities.
Mexico has been one of LatAm's highlights in terms of financial markets and currency performance in recent months.
China's monetary and credit data--released yesterday, two days behind schedule--suggest that monetary conditions are loosening at the margin, while credit conditions have remained stable, but easier than in the first half.
Money and credit data released last weekend suggest that China's demand for credit remains insatiable.
Venezuela's fundamentals continue to deteriorate, economic chaos is increasing and the social/political situation remains fragile.
he ECB governing council gathered last week under the leadership of Ms. Lagarde for the first time to lay a battle plan for the course ahead.
The Portuguese economy has faltered recently. In the year to Q2, real GDP rose only 0.8%, down from a 1.5% increase in the preceding year. Slowing growth in investment has been the key driver, but consumers' spending has weakened too.
The ECB's communication to markets has been clear this year. In Q1, the central bank changed its stance on the economy towards an emphasis on "downside risks to the outlook".
Investors have been used to central bank policy as a source of low volatility in recent years, but the last six months' events have changed that. Uncertainty over the timing of Fed policy changes this year, an ECB facing political obstacles to fight deflation, and last week's dramatic decision by the SNB to scrap the euro peg have significantly contributed to rising discomfort for markets since the middle of last year.
Yesterday's IFO data in Germany heaped more misery on the Eurozone economy.
A PBoC rate cut is looking increasingly likely. Policy is already on the loosest setting possible without cutting rates, but the Bank has little to show for its marginal approach to easing, with M1 growth still languishing.
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.
Eurozone inflation pressures remained subdued in April. Today's final data likely will show that inflation fell to -0.2% year-over-year in April, from 0.0% in March. The main story in this report will be the reversal in services inflation from the March surge, which was due to the early Easter.
The split between the reality reflected in the economic data and market pricing has never been wider in the euro area
China's activity data for May were a mixed bag, but they broadly paint a consistent picture of a slowdown in economic growth from the first quarter.
Yesterday's ECB meeting was a snoozer, just as we predicted.
China's money data, out last week, bode ill for real GDP growth in the second half. June M2 growth dipped to 9.4% year-over-year from 9.6% in May and 10.5% in April.
The BoJ is likely to stay on hold this week for all its main policy settings.
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.
"Disappointing" is probably the word that most EZ equity investors would use to describe their market so far this year.
Demands that Germany pay reparations from the Second World War, and the apparently deteriorating relationship between Messrs. Varoufakis and Schauble, have further complicated talks between the Eurogroup and Greece in recent weeks.
The global coronavirus pandemic is hitting the LatAm economy at a particularly vulnerable time, following last year's stuttering economic recovery, temporary shocks in key economies and the effect of the global trade war.
The ECB won't make any major changes to its policy stance today. We think the central bank will keep its main refinancing rate unchanged at 0.00%, and that it will maintain its deposit and marginal lending facility rate at -0.4% and 0.25%, respectively. The central bank also will keep the pace of QE unchanged at €80B per month until March, and at €60B hereafter until December. This is the first ECB meeting for some time in which Mr. Draghi will be able to report significantly higher inflation in the euro area.
Investors in the euro area demand to know whether their equities can climb--in local currency terms-- even as the euro appreciates.
The number of Covid-19 cases is increasing at a faster rate, though 89% of the new cases reported Saturday were in China, South Korea, Italy and Iran.
The ECB will not make any adjustments to its policy stance today. We think the central bank will keep its main refinancing and deposit rates unchanged at 0.0% and -0.4%, respectively, and also that will maintain the pace of QE purchases at €80B a month. The updated macroeconomic projections likely will include a modest upgrade of this year's GDP forecast to 1.5%, from its 1.4% estimate in March.
May's money and credit data indicate, reassuringly, that the economy still is growing at a steady, albeit unspectacular, rate, despite the endless uncertainty created by Brexit.
At the end of last year, China's Central Economic Work Conference set out the lay of the land for 2019. Cutting through the rhetoric, we think the readout implies more expansionary fiscal policy, and a looser stance on monetary policy.
January's money and credit data broadly support our view that the economy still lacks momentum.
We previewed today's advance EZ Q1 GDP number in our Monitor on April 30--see here--and the data since have not changed our outlook.
Argentina's economic and financial situation has deteriorated significantly in recent weeks and the outlook is becoming increasingly bleak.
The Brazilian economy fell into recession over the first half of the year due to the severity of the Covid shock on domestic demand.
Last month was sobering month for equity investors in the Eurozone, and indeed in the global economy as a whole.
China's official manufacturing PMI was unchanged at 50.2 in December, marking a weak end to the year. But it could have been worse; we had been worried that the return to above-50 territory in November had been boosted by temporary factors. December's print allays some of those fears.
While were out over the holidays, the single biggest surprise in the data was yet another drop in imports, reported in the advance trade numbers for November.
The construction sector in the Eurozone probably stumbled in March. Advance data for the major economies suggest that output fell 1.2% month-to-month, pushing the year-over-year rate down to 1.6% from 2.4% in February.
The broad strokes of yesterday's ECB meeting were in line with markets' expectations. The central bank left its main refinancing and deposit rates unchanged, at 0.00% and -0.4% respectively, and maintained the same forward guidance.
Japan's February trade data were a shocker, but not for the reasons we expected, given the signal from the Chinese numbers.
Inflation pressures in the Eurozone have been building in recent months, but we think the headline is close to a peak for the year.
We're reasonably happy with the idea that business sentiment is stabilizing, albeit at a low level, but that does not mean that all the downside risk to economic growth is over.
With campaigning for the general election intensifying last week, it was unsurprising that October's money and credit release from the Bank of England received virtually no media or market attention.
The 2010s were the first decade since reliable records begin--in the 1700s--in which a recession was completely avoided
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 key detail in Friday's barrage of economic data was the above-consensus increase in EZ inflation.
To avoid rocking the 2020 boat, the Phase One trade deal needed to be sufficiently vague, so that neither side, and particularly Mr. Trump, would have much cause to kick up a fuss around missed targets.
A lot of ink has been spilled over the relative significance of the supply and demand effects of Covid-19, but the short-term story is clear.
Nobody has a monopoly on "the truth".
Yesterday's data showed that growth in the EZ slowed in the second quarter.
China's unadjusted March trade balance rebounded to a surplus of $20B, from a combined deficit of -$7B in the first two months of the year.
Chinese monetary conditions have tightened sharply in the past year. Conditions have stabilised in recent months but Fed policy normalisation implies the increase in the money stock should slow again in 2018.
The ECB did its utmost not to say or do anything remotely novel today. The central bank kept its main refinancing and deposit rates unchanged at 0.00% and -0.40%, respectively, and reiterated its plan for QE next year.
China's trade surplus jumped to a six-month high of $46.8B in December, from $37.6B in November, on the back of a strong increase in exports.
Italy's economy was in trouble before the Covid-19 hammer-blow. The new government's ill-fated threat in 2018 to leave the Eurozone, unless Brussels allowed a looser budget, threw the economy into a technical recession, from which it never made a convinicing recovery.
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."
Eurozone investors should by now be accustomed to direct intervention in private financial markets by policymakers.
Japan's PPI data yesterday confirmed that October was a turning point for prices--due to the consumption tax hike--despite the surprising stability of CPI inflation in Tokyo for the same month.
China's monetary conditions remain tight, pointing to a substantial downtrend in GDP growth this year and next.
Industrial production in India turned around sharply in November, rising by 1.8% year-over-year, following October's 4.0% plunge and beating the consensus forecast for a trivial 0.3% uptick.
The 0.242% increase in the January core CPI left the year-over-year rate at 2.3% for the third straight month.
Chancellor Javid's resignation, only eight months after assuming the role, is the clearest sign yet that the Johnson-led government wants fiscal policy to play a bigger part in stimulating the economy over the next couple of years.
EZ households' demand for new cars was off to a strong start in 2017. Car registrations in the euro area jumped 10.9% year-over-year in January, accelerating from a 2.1% rise in December. We have to discount the headline level of sales by about a fifth to account for dealers' own registrations. Even with this provision, though, the January report was solid. Growth rebounded in France and Germany, and a 27.1% surge in Dutch car registrations also lifted the headline. We think car registrations will rise about 1.5% quarter-onquarter in Q1, rebounding from a weak Q4. But this does not change the story of downside risks to private spending.
In an interview with The Times yesterday, MPC member Ian McCafferty--who voted to raise interest rates in June--suggested he also might favour starting to run down the Bank's £435B s tock of gilt purchases soon.
The Johns Hopkins database shows a mixed coronavirus picture in the Andes, with the trend in new cases still rising in Argentina and Colombia, but relatively flat for about the past two weeks in Peru.
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 ECB will leave its main refinancing and deposit rates unchanged at 0.00% and -0.4%, respectively,
Chinese M2 growth was stable at 8.3% year- over-year in May, despite favorable base effects.
Italy is edging closer to a coalition government with the Five-Star Movement, the Northern League, and Forza Italia at the helm.
German inflation pressures are rising. Yesterday's final September CPI report showed that inflation rose to 0.7% year-over-year, from 0.4% in August, chiefly as a result of continued easing of deflation in energy prices.
We look for yet another unanimous vote by the MPC to keep Bank Rate at 0.75% on Thursday, with no new guidance on the near-term outlook.
The sovereign debt crisis in the euro area was a macroeconomic horror story
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.
Final May CPI data in the Eurozone today likely will confirm that inflation pressures edged marginally higher last month. We think inflation increased to -0.1% year-over-year, from -0.2% in April, as a result of slightly higher services inflation, and a reduced drag from falling energy prices.
China's March money and credit data, published last Friday, showed that conditions continue to tighten, posing a threat to GDP growth this year.
China and the U.S. are officially to restart trade talks, according to China's Ministry of Commerce, after previous negotiations stalled in June.
Over the past 30 years China's role in LatAm and the global economy has increased sharply. Its share of world trade has surged, and its exports have gained significant market share in LatAm.
The story of U.S. retail sales since last summer is mostly a story about the impact of the hurricanes, Harvey in particular.
China's activity data outperformed expectations in November.
The Covid-19 crisis has turned the tables on the Spanish economy.
We had expected the batch of Chinese data released at the end of last week to disappoint.
The BoJ is likely to be thankful next week for a relatively benign environment in which to conduct its monetary policy meeting.
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.
The big difference in this round of stimulus is in the complete lack of easing on the shadow banking side.
China's post-lockdown recovery broadly has surprised this quarter, particularly in the industrial sector.
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.
China's September trade numbers show that, far from reducing the surplus with the U.S., the trade wars so far have pushed it up to a new record.
Today's ECB meeting will be a snoozer.
China's money and credit data released last Friday reaffirm our impression that the tightening has gone too far.
July's BoJ meeting was a quiet one, with the Board keeping the -0.10% policy balance rate and the 10- year yield target of "around zero", as widely predicted.
Final data today will likely confirm that German inflation was unchanged at 0.2% year-over-year in August. The increased drag from falling energy prices was likely offset by higher food prices, mostly fresh vegetables. Core inflation was likely stable at 0.9% year-over-year, with a marginal rise in consumer services inflation offset by a fall in net rent. Rents could fall further this year due to the implementation of caps in major cities, but we s till only have little evidence on how individual states will implement the new legislation.
A looming rate lift-off at the Fed, chaos in Greece, and a renewed rout in commodities have given credit markets plenty to worry about this year. The Bloomberg global high yield index is just about holding on to a 0.7% gain year-to-date, but down 2.5% since the middle of May. The picture carries over to the euro area where the sell-off is worse than during the taper tantrum in 2013.
Yesterday's economic reports provided further evidence on the state of the world before Covid-19.
Today's Sentix survey of Eurozone investor sentiment likely will remain downbeat. We think the headline index rose only trivially, to 6.0 in April from 5.5 in March, and that the expectations index was unchanged at 2.8. Weakness in equities due to global growth fears and negative earnings revisions likely is the key driver of below-par investor sentiment.
Without tying its hands, the MPC--which voted unanimously to keep interest rates at 0.25% and to continue with the £60B of gilt purchases and £10B of corporate bond purchases authorised last month--gave a strong indication yesterday that it still expects to cut Bank Rate in November.
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.
• U.S. - Third quarter growth looks decent, but the details are soft • EUROZONE - EZ bond markets remain primed for ECB easing next month • U.K. - Our U.K. service is on holiday, publication will resume on September 4 • ASIA - The PBoC's new interest rate policy faces supply-side challenges • LATAM - Further rate cuts on the way in LatAm
Gilt yields have shot up over the last couple of months, despite ongoing bond purchases authorised by the MPC in August. Ten-year yields closed last week at 1.47%, in line with the average in the first half of 2016.
CHF traders, and the rest of the market, were blindsided yesterday by the decision of the SNB to scrap the 1.20 EURCHF floor. The SNB has already boosted its balance sheet to about 85% of GDP to prevent the CHF from appreciating, and with the ECB on the brink of adding sovereign bonds to its QE program, the peg was simply indefensible.
Investors will get what they want today from the ECB: additional easing in the form of government bond purchases. The central bank is likely to announce or pre-commit to sovereign QE and corporate bond purchases in a new program that will last at least two years.
The bond market has become extremely pessimistic about the long-term economic outlook following Britain's vote to leave the EU. Forward rates imply that the gilt markets' expectation for official interest rates in 20 years' time has shifted down to just 2%, from 3% at the start of 2016.
Gilt yields have collapsed this year, aided by a surge in safe-haven demand, the much lower outlook for overnight interest rates and the resumption of QE. Bond yields also have fallen globally, but the drop in the ten-year gilt yields to a record low of 0.53%, from nearly 2% at the beginning of 2016, has greatly exceeded the declines elsewhere, as our first chart shows.
Bond investors in Italy voted with their feet on Friday with news that the government has agreed a 2019 budget deficit of 2.4%.
The slide in global long-term bond yields, and flattening curves, have spooked markets this year, sparking fears among investors of an impending global economic recession.
CPI inflation held steady at 2.3% in March, as we and the consensus had expected. Nonetheless, the consumer price figures boosted sterling and bond yields, as the details of the report made it clear that inflation is on a very steep upward path.
The renewed decline in bond EZ bond yields has raised the question of whether inflation expectations will recover at all in this cycle. We think they will, and we also believe 10-year yields will rise towards 1%-to-1.2% towards the end of the year. But two factors will keep inflation expectations and yields in check in the near term.
Bond investors in the Eurozone are licking their wounds following a 40 basis point backup in 10-year yields since the end of last month. Nothing goes up in a straight line, but we doubt that inflation data will provide much comfort for bond markets in the short term.
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.
The MPC surprised nobody yesterday by voting unanimously to keep Bank Rate at 0.75% and to maintain the stocks of gilt and corporate bond purchases at £435B and £10B, respectively.
In one line: Did the ECB just revive the bank-carry trade in government bonds?
Bond market volatility and political turmoil in Greece have been the key drivers of an abysmal second quarter for Eurozone equities. Recent panic in Chinese markets has further increased the pressure, adding to the wall of worry for investors. A correction in stocks is not alarming, though, following the surge in Q1 from the lows in October. The total return-- year-to-date in euros--for the benchmark MSCI EU ex-UK index remains a respectable 11.4%.
It says a lot about investor expectations that markets' reaction to yesterday's policy announcement by the ECB was marked by slight "disappointment," with EURUSD rallying and EZ bond yields rising.
Even Charles Dickens could not have written a more dramatic prologue to today's ECB meeting. Elevated expectations ahead of major policy events always leave room for major disappointment, but we think the central bank will deliver. Advance data yesterday indicated inflation was unchanged at 0.1% year-over-year in November, below the consensus 0.2%, and providing all the ammunition the doves need to push ahead. We expect the central bank to cut the deposit rate by 20bp to -0.4%, to increase the pace of bond purchases by €10B to €70B a month, and to extend QE to March 2017.
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.
In one line: BoJ makes a gesture on bond buying
In one line: BoJ makes a gesture on bond buying
The sell-off in bonds and equities continued yesterday, but the reaction bears no resemblance, so far, to the sovereign debt crises in 2012 and 2010. The first evidence from sentiment data in July also points to surprising stability. The headline Sentix index rose to 18.5, up slightly from 17.1 in June, but the expectations index fell marginally, to 22.3 from 22.5.
The ECB's corporate bond purchase program began yesterday with purchases concentrated in utilities and telecoms, according to media sources. This is consistent with the structure of the market, and the fact that bond issues by firms in these sectors are the largest and most liquid. But debt issued by consumer staples firms likely also featured prominently.
Many investors probably glossed over yesterday's barrage of data in the Eurozone, for fear of being caught out by another swoon in Italian bond yields. Don't worry, we are here to help.
The ECB stood pat yesterday, keeping its key refinancing and deposit rates unchanged at zero and -0.4%, respectively. The marginal lending facility rate was also left at 0.25%, and the monthly pace of QE was maintained at €80B, with a preliminary end-date in the first quarter of 2017. Purchases of corporate bonds will begin June 8, and the first new TLTRO auction will take place June 22.
Friday's euro area inflation reported capped a difficult week for EZ bondholders, although most of the damage was done beforehand by the advance German data.
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.
Defaults by Chinese companies have been on the rise lately. Most recently, China Energy, an oil and gas producer with $1.8B of offshore notes outstanding, missed a bond payment earlier this week. We've highlighted the likelihood of a rise in defaults this year, for three main reasons.
• U.S. - Can Powell push Congress to act again? • EUROZONE - Has the ECB revived the carry trade in EZ government bonds? • U.K. - What are the options for the MPC this week? • ASIA - Don't be fooled by the relatively solid Chinese manufacturing PMI • LATAM - The LatAm economies are feeling the pain of Covid-19
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".
Claus Vistesen, Pantheon Macroeconomics chief euro zone economist, discusses how volatility has impacted the bond market.
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.
Chief U.S. Economist Ian Shepherdson on the latest from the Fed
Chief U.S. Economist Ian Shepherdson discussing the latest from the Fed
Why is the EZ current account surplus rising and net exports falling at the same time?
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
Claus Vistesen on the Greek election results impact on the Eurozone
Freya Beamish, Pantheon Macroeconomics Chief Asia Economist, says the recovery in China is likely to underperform in the second half of the year.
Chief Eurozone Economist Claus Vistesen discussing Italy
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
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
Chief U.K. Economist Samuel Tombs on U.K. Inflation
What to expect from the ECB as Ms. Lagarde takes the seat as new president?
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