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If you were looking just at investor sentiment in the Eurozone, you would conclude that the economy is in recession.
Readers have asked us about the availability of flow-of-funds data in the Eurozone similar to the detailed U.S. reports. The ECB's sector accounts come close and cover a lot of ground, but are also released with a lag. We can't cover all sectors in one Monitor, but the investment data for non-financial firms, excluding construction, suggest that investment growth slowed last year.
German Q4 GDP data this week will give little comfort to investors searching for signs of a resilient economy in the face of increased market volatility. The consensus expects unchanged GDP growth of 0.3% quarter-on-quarter, consistent with solid and stable survey data. But downbeat industrial production and retail sales data point to notable downside risk.
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.
One of the more disheartening aspects of the Q2 national accounts, released last week, was the downward revision to business investment. Quarteron-quarter growth was revised to -0.7%, from +0.5% previously.
Business investment has punched above its weight in the economic recovery from the crash of 2008; annual real growth in capex has averaged 5% over the last five years, greatly exceeding GDP growth of 2%. This recovery is unlikely to grind to a halt soon, since profit margins are still high and borrowing costs will remain low. But corporate balance sheets are not quite as robust as they seem, while capex in the investment-intensive oil sector still has a lot further to fall.
Make no mistake, business investment has been depressed by Brexit uncertainty over the last year.
In one line: A poor start to Q3; investment will remain a drag in the near term.
The outlook for private investment in the Eurozone has deteriorated this year, especially in manufacturing.
Data yesterday suggest that EZ investor sentiment is on track for a modest recovery in Q3.
It has been mostly doom and gloom for euro area investors in equities and credit this year.
Business investment has held up better than most economists--ourselves included--expected after the Brexit vote.
In one line: Poor headline; investment remains a drag.
We covered the detailed German Q1 GDP report in Friday's Monitor--see here--but the investment data could do with closer inspection. The headline numbers looked great.
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.
On the face of it, the potential for a tangible boost to GDP growth from a revival in business investment after a no-deal Brexit has been averted appears modest.
We can't finalize our forecast for residential investment in the second quarter until we see the June home sales reports, due next week, but in the wake of yesterday's housing starts numbers we can be pretty sure that our estimate will be a bit below zero.
Speaking in Brussels earlier this week, Mr. Draghi noted that the ECB is encouraged by signs that private investment is finally turning up, to complement strong consumption. It is too early to make that assumption, we think, but we agree with the president that the trend is moving slowly in the right direction.
We can see no hard evidence, yet, that the expanding trade war with China and other U.S. trading partners is hitting business investment.
Last week's detailed GDP data in the Eurozone confirmed that the economy is benefiting from an investment cycle for the first time since before the financial crisis.
Increasingly, we are hearing equity strategists argue that investors should rebalance their portfolios toward EZ equities. On the surface, this looks like sound advice. Commodity prices have exited their depression, factory gate inflation pressures are rising, and global manufacturing output is picking up. These factors tell a bullish story for margins and earnings at large cap industrial and materials equities in the euro area.
This week sees the release of most of the key May surveys. The prospect of mean reversion following a very strong start to the year, coupled with the impact of recent market volatility, points to a modest loss of momentum, especially for surveys of investors.
Yesterday's German ZEW investor sentiment survey provided the first clear evidence of the coronavirus in the EZ survey data.
Speculators who have sold sterling over the last six months have been frustrated. Investors have been overwhelmingly net short sterling, but the pound has hovered between $1.20 and $1.25, as our first chart shows. Undeterred, investors increased their net short positions last week to 107K contracts-- the most since records began in 1992--from 81K a week earlier.
The recent deceleration in households' real spending means that either business investment or net exports will have to pickup if the economy is to avoid a severe slowdown this year.
We sympathize greatly with investors' frustration over endless postponements and new "deadlines" in the negotiations between Greece and its creditors. Syriza delivered a proposal for reforms to the EU and the IMF on Monday morning, welcome d as a "positive step in the right direction" by Eurogroup president Dijsselbloem and Economic and Financial Affairs commissioner Moscovici.
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.
If the economy is to enter recession, falling business investment probably will have to be the main driver. Growth in consumer spending likely will slow sharply over the next year as firms become more cautious about hiring new workers and inflation begins to exceed wage growth again.
Sterling weakened yesterday, to $1.31 from $1.32, following news that 40 Conservative MPs have agreed to sign a letter of no-confidence in the Prime Minister.
Yesterday's industrial production report was poor, but the headline was better than we, and the market, feared. Output fell 0.5% month-to-month in August, but the July data were revised up 0.2%, pushing the year over-year rate--using the seasonally- and working day-adjusted index--higher to 1.9% from 1.4% in July. Bloomberg reported the year-over-year rate fell to 0.9% from 1.7% in July, but they used an index which is only working day-adjusted.
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.
Friday was a busy day in the Eurozone economy. The third detailed GDP estimate confirmed that growth was unchanged at 0.4% quarter-on-quarter in Q2, pushing the year-over-year rate down by 0.4 percentage points to 2.1%, marginally below the first estimate,2.2%.
The French industrial sector ended last year on an upbeat note, but the underlying trend in activity is still weak. Industrial production rose 1.5% month-to-month in December, equivalent to a 0.1% fall year-over-year.
French manufacturing cooled at the end of 2016. Industrial production slipped 0.9% month-to-month in December, partially reversing an upwardly revised 2.4% jump in November. The main hits came from declines in oil refining and manufacturing of cars and other transport equipment.
Data today likely will show that manufacturing in the Eurozone was off to a strong start to the second quarter. Advance country data suggest that industrial production jumped 1.1% month-to-month in April, pushing the year-over-year rate up to 1.9% from 0.1% in March. The rise in output was driven mainly by Germany and France, but decent month-to-month gains in Ireland, Portugal and Greece also helped.
Fourth quarter construction activity in the Eurozone was much better than in Q3, despite a dip in December. Output fell 0.6% month-to-month in the final month of the year, pushing the year-over-year rate down to -0.4% from a revised 0.3% in November.
Retail sales data later today will give us the first hard data from the fourth quarter, and the story should be altogether more positive than the still downbeat message from the manufacturing sector.
U.K. manufacturers are benefiting from rapid growth in the Eurozone, but increasingly they are being held back by weak domestic demand.
Volatility in commodities and emerging markets has intensified since the beginning of July, with the stock market drama in China taking centre stage. The bubble in Chinese equities inflated without much ado elsewhere, and can probably deflate in isolation too. But the accelerating economic slowdown in EM is becoming an issue for policy makers in the Eurozone.
Last week's capsized European Council summit added to our suspicions that uncertainty over the EU's top jobs will linger over the summer.
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.
French business sentiment cooled marginally at the end of Q3. The headline manufacturing confidence index dipped to 110 in September, from 111 in August, though the overall business sentiment gauge was unchanged at 110.
Yesterday's detailed Q3 GDP data in the Eurozone confirmed that the economy has gone from strength to strength this year.
Productivity statistics released yesterday continued to paint a bleak picture. Output per worker rose by a mere 0.1% year-over-year in Q3, despite jumping by 0.6% quarter-on-quarter.
In one line: A modest upturn, but downside threats have increased recently.
In one line: An ugly start to the fourth quarter; expect more weakness ahead.
In one line: Another ugly report, and Mexico's prospects have deteriorated significantly.
In one line: Capex is struggling; the outlook remains challenging.
In one line: Poor capex in Q3, and consumer confidence is deteriorating.
In one line: A weak-looking report but hit by calendar effects; capex will stabilise as uncertainty fades.
Korea's GDP growth in Q3 was a miss. Quarter- on-quarter growth was unchanged at 0.6%, below the consensus for a 0.8% rise.
The IFO survey released yesterday provides further evidence that the cyclical recovery in Germany's economy continued in the current quarter. The headline business climate index rose to 107.9 in March from 106.8 in February, lifted by increases in both the current assessments and expectations index.
The construction sector in the Eurozone remains moribund. Output fell 0.4% month-to-month in September, pushing the year-over-year rate up to 1.8% from a revised 1.4% fall in August. Declines were recorded in France, Germany, and Italy, with a small increase in Spain. These data could, in theory, lead to revisions in the final Q3 Eurozone GDP data released December 8th, but we very much doubt they will move the needle. Our first chart shows the relationship between construction and GDP growth has broken down since the crisis.
The year so far in EZ equities has been just as odd as in the global market as a whole.
The RICS Residential Market Survey caught our eye last week for reporting that new sale instructions to estate agents rose in May for the first month since February 2016.
The declines in headline housing starts and building permits in September don't matter; both were driven by corrections in the volatile multi-family sector.
Normal service was resumed in the euro area with Friday's GDP reports pointing to solid growth in Germany amid weakness in Italy and France. Real GDP in the Eurozone grew 0.3% quarter-on-quarter in the final three months of last year, up from 0.2% in Q3.
Last week's packed political agenda in Europe confirmed that political relations between the U.S. and the major Eurozone economies remain difficult.
The Eurozone's current account surplus remained close to record highs at the end of Q1, despite dipping slightly to €34.1B in March, from a revised €37.8B in February. A further increase in the services surplus was the key story.
The EZ national accounts were updated and rebased in 2015--from ESA 1995 to ESA 2010--in the name of timeliness and precision.
Broadly speaking, yesterday's headline EZ survey data recounted the same story they've told all year; namely that manufacturing is suffering amid resilience in services.
The chaos in Greece was identified as the main culprit for yesterday's soft IFO report. The headline business climate index fell to 107.4 in July, down from 108.1 in May, driven by declines in respondents' views on the current economy and their expectations for the future. We expected a dip in the he adline IFO, but we were surprised by the fall in the manufacturing sub-index, given the firmer PMI earlier this week.
The CBI's Industrial Trends Survey, for July and Q3, supplied encouraging evidence yesterday that the manufacturing upswing still has momentum.
The second estimate of GDP left the estimate of quarter-on-quarter growth unrevised at 0.3%, a trivial improvement on Q1's 0.2% gain.
We believe China is going through a paradigm shift in its economic policy, away from GDPism-- the obsession with GDP growth targeting--to environmentalism, setting widespread environmental targets on everything, from air to water to waste.
The Chinese activity data published yesterday were much weaker than expected; growth rates fell resoundingly. Did analysts really get it wrong, or is this just another example of erratic Chinese data?
The PMI survey points to a slow, but steady improvement, in Eurozone manufacturing. The gauge rose marginally to 52.5 in June, up from 52.2 in May. This pushed the quarterly average in Q2 to 52.2, up from 51.1 in Q1. The survey is also telling a story of broad-based manufacturing strength in the two major peripheral economies, despite declines in June.
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.
Bloomberg reported on Monday that the PBoC is drafting a package of reforms to give foreign investors greater access to the China's financial services sector. This could involve allowing foreign institutions to control their local joint ventures and raising the 25% ceiling on foreign ownership of Chinese banks.
The 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.
Yesterday's EZ construction data confirmed that capex in the building sector plunged in the second quarter. Construction output fell 0.5% month-to-month in May, pushing the year-over-year rate up trivially to -0.8%, from a revised -1.0% in April. Our forecast for construction investment in Q2 is not pretty, even after including our assumption that production rebounded by 0.5% month-to-month in June.
This year has been sobering for Eurozone equity investors.
The information available to date--which is still very incomplete--suggests that new housing construction will decline in the third quarter. This would be the second straight decline, following the 6.1% drop in Q2. We aren't expecting such a large fall in the third quarter, but it is nonetheless curious that housing investment--construction, in other words--is falling at a time when new home sales have risen sharply.
The latest balance of payments figures, released Wednesday, look set to show that the current account deficit widened in Q3, underlying the U.K.'s vulnerability to a sudden change in overseas investor sentiment. The risk of a full-blown sterling crisis, however, is lower than the enormous current account deficit would appear to suggest.
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.
We have been waiting a long time to see signs that business investment spending is becoming less reliant on movements in oil prices.
Mr. Draghi snubbed investors looking for hints on policy and the euro in his Jackson Hole address--see here--on Friday.
Last week's national accounts confirmed that the economy lost momentum abruptly in Q1, with net trade and investment failing to offset weaker growth in households' spending.
Investor sentiment in the Eurozone showed further signs of recovery yesterday. The ZEW expectations index rose strongly to 48.4 in January from 34.9 in December, and the leap since the trough in October ranks among the strongest rebounds ever recorded in the index.
We have witnessed a dramatic shift in just a few weeks in perceptions of Mexico as an investment destination.
October's money data show that households and firms have regained the appetite for borrowing that they lost immediately after the referendum. But the recent rise in swap rates and the deterioration in consumers' confidence likely will cut short the revival in consumer lending, while persistent Brexit uncertainty likely will continue to subdue firms' investment intentions.
Investors have welcomed the flurry of encouraging opinion polls for the Conservatives that were published over the weekend, with cable rising nearly to $1.30 on Monday, a level last seen on a sustained basis six months ago.
Within the space of two months, investors have gone from wondering whether the slowdown in manufacturing would spill-over into the rest of the EZ economy, to the realisation that the crunch in services is now driving the overall story on the economy.
The four-quarter average growth trend in private investment, excluding dwellings, fell to 0.1% in Q4, and the recent improvement in the PMIs indicates only a modest upturn in Q2. The dearth of investment by non-financial corporates remains one of the biggest threats to long-term growth in the Eurozone.
Yesterday's data in the Eurozone did little to calm investors' nerves amid rising political uncertainty in Italy and tremors in emerging markets.
We recommend that investors take yesterday's inflation data in the Eurozone with a pinch of salt. The headline rate slipped to 1.2% in April, from 1.4% in March, hit by a slide in core inflation to 0.7%, from 1.0%.
Investors awaiting today's interest rate decision might be a little unnerved to learn that the MPC has a track record of surprises.
British firms have adopted a cautious mindset since the Brexit vote and are saving a huge share of their earnings, even though high profit margins make a strong case for investing more. Firms likely will run down their cash stockpiles when they become more confident about the medium-term economic outlook, potentially boosting GDP growth powerfully.
Yesterday's data dump in the EZ delivered something investors haven't seen for a while, namely, positive surprises.
Today will be an incredibly busy day for EZ investors with no fewer than eight major economic reports. Overall, we think the data will tell a story of a stable business cycle upturn and rising inflation. Markets will focus on advance Q4 GDP data in France and in the euro area as a whole. Our mo dels, and survey data, indicate that the EZ economy strengthened at the end of 2016, and we expect the headline data to beat the consensus.
The recent narrowing of the Conservatives' opinion poll lead suggests that investors, particularly in the gilt market, now must consider other parties' fiscal proposals.
Was this an isolated occurrence, connected to the graft investigation into Chinese billionaire Xiao Jianhua, and his financial conglomerate?
Investors have revised down their expectations for interest rates since the November Inflation Report and now only a 50% chance of a 25bp hike in Bank Rate is priced-in by the end of this year.
The second estimate of Q3 GDP last week confirmed that the Brexit vote didn't immediately drain momentum from the economic recovery. But it is extremely difficult to see how growth will remain robust next year, when high inflation will cripple consumers and the impact of the decline in investment intentions will be felt.
Judging by the headline performance metrics, EZ equity investors have little cause for worry.
Detailed GDP data yesterday showed that the domestic German economy fired on all cylinders in the first quarter. Real GDP rose 0.7% quarter-on-quarter in Q1, up from 0.3% in Q4, lifted by strong investment and spending. Domestic demand rose 0.8%, only slightly slower than the 0.9% ris e in the fourth quarter. Net exports fell 0.3%, a bit better than in Q4, when gross exports fell outright.
We expect the Mexican economy to continue growing close to 2% year-over-year in 2019, driven mainly by consumption, but constrained by weak investment, due to prolonged uncertainty related to trade.
Germans head to the polls on Sunday to elect representatives for the national parliament. The media has tried to keep investors on alert for a surprise, but polls indicate clearly that Angela Merkel will continue as Chancellor.
November's interest rate rise, which took investors by surprise, was triggered in part by the MPC slashing its estimate of trend growth to 1.5%, from an implicit 2.0%.
The response of U.K. producers and consumers to lower oil prices could not have been more different to those on the other side of the Atlantic. Counter-intuitively, U.K. oil production has grown strongly over the last year, while investment hasn't collapsed to the same extent as in the U.S., yet. Meanwhile, U.K. households have thrown caution to the wind and already have spent the windfall from the previous drop in oil prices, unlike their more prudent--so far--U.S. counterparts. With the costs still to come but most of the benefits already enjoyed, lower oil prices will be neutral for 2016 U.K. GDP growth, at best.
Investors likely will be caught out by the extent to which gilt yields rise this year. Forward rates imply that the 10-year spot rate will rise by a mere 20bp to just 1.45% by the end of 2018. By contrast, we see scope for 10-year yields to climb to 1.60% by the end of this year.
We find it remarkable, after the market volatility induced by the two Brexit deadlines in 2019, that investors do not foresee another bump in the road at the end of this ye ar, when the Brexit transition period is due to end.
Yesterday's PMI reports repeated the message of a firm cyclical Eurozone recovery, despite investors' angst over deflation and the underwhelming Q3 GDP data earlier this month. The composite index in the zone rose to a 54-month high of 54.4 in November from 53.9 in October, lifted by strong output and solid new business growth. Our first chart shows the rise in the PMI points to slight upside risks in Q4 to the four quarter trend in real GDP growth of 0.4% per quarter.
The sell-off in risky assets intensified while we were away, driven by China's decision to loosen its grip on the currency, and looming rate hikes in the U.S. The Chinese move partly shows, we think, the PBoC is uncomfortable pegging to a strengthening dollar amid the unwinding investment boom and weakness in manufacturing.
Weakness in risk assets turned into panic yesterday with the Eurostoxx falling over 6%, taking the accumulated decline to 19% since the beginning of August, and volatility hitting a three-year high. Market crashes of this kind are usually followed by a period of violent ups and downs, and we expect volatile trading in coming weeks. Following an extended bull market in risk assets, the key question investors will be asking is whether the economic cycle is turning.
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.
Japan will host the Olympics in 2020 and the preparatory surge in construction investment makes 2017-to-2018 the peak spending period.
President Trump made official his plan to impose tariffs on up to $60B of annual imports from China, as well as limitations on Chinese investments in the U.S.
The euro has so far defied the most bearish forecasters' predictions that it is on track for parity with the dollar. Currencies can disregard long-run parity conditions, however, for longer than most investors can hold positions.
Yesterday's January EZ money supply data offered support for investors betting on a further dovish shift by the ECB at next month's meeting.
Yesterday's money supply report provided further relief for investors doubtful over the cyclical recovery following the market turmoil. Broad money growth, M3, accelerated to 5.3% year-over-year in July, up from 4.9% in June, and within touching distance of a new post-crisis high. Narrow money continued to surge too, rising 12.1% year-over-year, up from 11.1% in June, sending a bullish message on the Eurozone economy.
Brazil's recent political and economics news has shifted the near-term outlook from bad to worse. President Rousseff on Friday replaced hawkish Finance Minister Joaquim Levy, appointed just over a year ago, with a close partner, Planning Minister Nelson Barbosa. Mr. Levy resigned after continued conflicts with the government, including frustration by the Congress of his attempts to rein in the fiscal mess. Mr. Barbosa is known to be less market friendly, and will likely defend countercyclical measures, delaying any rapid fiscal consolidation. The appointment will deteriorate investors' confidence even further, placing the markets under enormous strain.
Reports yesterday indicated that a deal has finally been struck between the European Commission and the Italian government to start dealing with bad loans in the banking system. The initial details suggest the government will be allowed to guarantee senior tranches on non-performing loans, supposedly making them easier to sell to private investors. In order to avoid burdening government finances as part of the sales--not allowed under the new banking union rules--the idea is to price the guarantees based on the credit risk of similar loans.
Korean real GDP growth slumped in Q2 to 0.6% quarter-on-quarter, from 1.1% in Q1, as both the main drivers--construction and exports--ran out of steam simultaneously. Construction investment grew by 1.0%, sharply slower than the 6.8% in Q1 and contributing just 0.2% to GDP growth in Q2, a turnaround from the 1.1 percentage point contribution in the first quarter.
Investor sentiment data still indicate that EZ PMIs are set for a significant rebound at start of the year.
Economic sentiment in the Eurozone's largest economy stayed solid at the start of the fourth quarter, despite subdued manufacturing and poor investor sentiment. The headline IFO business climate index fell slightly to 108.2 in October from 108.5 in September, due to a fall in the current assessment index. The expectations index rose, though, to 103.8 from 103.5 last month pointing to a resilient outlook for businesses and solid GDP growth in coming quarters.
ECB board member Peter Praet fired the first shot across the markets' bow yesterday following this week's turmoil. Speaking to journalists in Germany, Mr. Praet noted "increased downside risk of achieving a sustainable inflation path towards 2%," and assured investors the current QE program is fully flexible, and can be readily adjusted in response to an adverse development in inflation expectations. We don't think, though, this is a pre -cursor for additional easing at next week's ECB meeting.
After three straight 1.3% month-to-month increases in core capital goods orders, we are becoming increasingly confident that the upturn in business investment signalled by the NFIB survey is now materializing.
The stagnation in business investment since 2016 has been key to the slowdown in the overall economy since the E.U. referendum.
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 main thing on investors' minds is how much more pain the global economy has to take as a result of China's slowdown.
Investors in the euro area demand to know whether their equities can climb--in local currency terms-- even as the euro appreciates.
Today's ZEW investor sentiment report in Germany will kick off a busy week for Eurozone economic survey data, which likely will be tainted by the U.K. referendum result. We think the headline ZEW expectations index fell to about five in July, from 19.2 in June, below the consensus forecast, 9.2. Our forecastis based on the experience from recent "unexpected" shocks to investors' sentiment.
Investors face a busy EZ calendar today, but the second estimate of Q3 GDP, and the advance GDP data in Germany, likely will receive most attention. Yesterday's industrial production report in the Eurozone was soft, but it won't force a downward GDP revision, as we had feared.
Few Eurozone investors are going blindly to accept the rosy premise of last week's relief rally in equities that both a Brexit and a U.S-China trade deal are now, suddenly, and miraculously, within touching distance. But they're allowed to hope, nonetheless.
A modest dip in gasoline prices will hold down the October CPI, due today, but investors' attention will be on the core, after five undershoots to consensus in the past six months.
The U.K.'s still-large current account deficit makes us nervous that sterling will need to depreciate further over the medium-term and would collapse if Brexit talks fail, causing international investors to take flight.
This weeks' IMF's staff report on the Italian economy has increased the urgency for a compromise between the EU and Italy over the country's suffering banks. The report highlighted that financial sector reform is "critical" to the economy, and that the treatment of the significant portion of retail investors in banks' debt structure should be dealt with "appropriately."
...The Fed told investors that it now requires only "some further improvement" in labor market conditions before starting to raise rates-- the "some" is new--but did not set out any specific conditions. With the unemployment rate now just a tenth above the top of the Fed's Nairu range, 5.0-to-5.2%, and very likely to dip into it by the time of the decision on September 17, while payroll growth is trending solidly above 200K per month, rates already would have been raised some time ago in previous cycles.
Investors in the gilt market would be wise not to take the new official projections for borrowing and debt issuance at face value. The forecast for the Government's gross financing requirement between 2017/18 and 2021/22 was lowered to £625B in the Budget, from £646B in the Autumn Statement.
EZ investors are still trying to come to grips with last week's terrifying price action, culminating in the 12.5% crash in equities on Thursday
Investors have been caught out by the speed of the recent rise in RPI inflation and have revised up their expectations. Even so, inflation swaps imply that markets expect RPI inflation to be 3.6% in one year's time, not much above the latest print, 3.2% in February. We still think RPI inflation will exceed markets' expectations.
The U.K.'s dependence on large inflows of external finance was laid alarmingly b are last week, when "hard" Brexit talk by politicians caused overseas investors to give sterling assets a wide berth. Investors now are demanding extra compensation for holding U.K. assets, because the medium-term outlook is so uncertain.
The relative strength of the investor and consumer confidence reports for March, released this week, signal a better outlook for the Mexican economy.
Last week's horrible manufacturing data in the major EZ economies had already warned investors that yesterday's industrial production report for the zone as a whole would be one to forget.
Data released yesterday showed that gross fixed investment in Mexico started Q4 on a decent note, increasing on the back of healthy purchases of imported machinery and equipment and construction spending.
Car registrations, French inflation, advance PMIs and a central bank meeting make up today's substantial menu for investors in the euro area.
Investors in the euro area have mostly been focused on downside risks this year, and the spectre of Turkey spinning out of control has done little to change that.
Japanese domestic demand probably strengthened in Q2, with both private consumption and fixed investment accelerating. Trade and inventories are the key swing components for GDP growth.
Households remain the key driver of the cyclical recovery in the Eurozone. We have seen, so far, little sign that investment will be able convincingly to take over the baton if momentum in consumers' spending slows. The average rate of growth of investment since 2013 has been 0.5%, about two-thirds of the pace seen in previous cyclical upturns. Weakness in construction--about 50% of total euro area investment--has been one of the key factors behind of the under performance.
In yesterday's Monitor we set out the risk that accelerating wages will force the Fed to raise rates more quickly than expected, but we didn't have space to address the underlying premise of this story, namely, the idea that inflation is largely a cost-push phenomenon. From the perspective of fixed income investors, it might not seem to matter whether this is a realistic description of the inflation process, because Fed Chair Yellen believes it wholeheartedly, and her hands are on the levers of monetary policy.
We have argued for some time that investors began much too soon to look for stronger consumption in the wake of the drop in gasoline prices. Typically, turning points in gas prices trigger turning points in the rate of growth of retail sales with a lag of six or seven months.
Yesterday was a nearly perfect day for investors in the Eurozone. The Q3 GDP data were robust, unemployment fell, and core inflation dipped slightly, vindicating markets' dovish outlook for the ECB.
Eurozone investors should by now be accustomed to direct intervention in private financial markets by policymakers.
Brazil's GDP rose by 0.1% quarter-on-quarter in the third quarter, according to the report published last Friday. The slight growth was driven by investment and government spending, both growing 1.3%, while private consumption fell 0.3%, the biggest drop since late 2008.
Increased volatility has given equity investors a torrid start to the year, but economic reports have been strong, and yesterday's PMIs were no exception. The composite index in the Eurozone rose marginally to 54.3 in December from 54.2 in November, slightly higher than the initial estimate of 54.0. This is consistent with a continuing cyclical recovery, and real GDP growth of 0.4%-to-0.5% in Q4, modestly higher than the 0.3% rise in the third quarter.
Yesterday's Sentix investor sentiment survey provided the first glimpse of conditions on the ground in the EZ economy in the wake of the coronavirus scare.
As we head to press, investors are holding their breath over whether today's trade talks between the U.S. and China will be enough for Mr. Trump to step back from his pledge to increase tariffs on $200B of Chinese goods to 25%.
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 recent deal between Greece and the EU shows that the appetite for a repeat of last year's chaos is low. But investors' attention has turned to whether Portugal is waiting in the wings to reignite the sovereign debt crisis. Complacency is dangerous, but economic data suggest that a Portuguese shock to the Eurozone economy and financial markets is unlikely this year.
Judging by interactions with readers in the past few weeks, fiscal policy is one of the most important topics for EZ investors as we move into the final stretch of the year.
There are only two stories that matter for EZ investors at the moment, and neither of them is related to the economic data.
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.
Investors have stuck to their view that interest rates are just as likely to rise this year as not, despite the soft round of PMIs released this week.
Investors have treated the upbeat message of the Markit/CIPS PMIs this week with caution and continue to think that the chance that the MPC will raise interest rates this year is remote. Overnight index swap rates currently are pricing-in just a one-in-four chance of a 25 basis point increase in Bank Rate in 2017.
Over the summer, both Chancellor Javid and PM Johnson appeared to be repositioning the Conservatives, claiming that the era of austerity was over and that higher levels of spending and investment were justified.
Brazil is back on global investors' radar screens. Financial market metrics capture a relatively robust bullish tone, especially since the presidential election.
Business investment in Japan took a nasty hit in the third quarter.
Yesterday's final manufacturing PMIs for October were grim, but they told investors nothing they don't already know.
Barring a disaster, the four-year cyclical upturn in the euro area will continue in the coming quarters. Inflation is a lagging indicator and therefore should rise, and investors should be adjusting their mindset to higher interest rates. But the reality today looks very different. Final inflation data confirmed that the Eurozone inflation slipped to -0.2% year-over-year in February, from 0.2% in January.
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.
The upturn in core CPI inflation this year has passed by almost unnoticed in the markets and media. In the year to September, the core CPI rose 1.9%, up from a low of 1.6% in January. But that's still a very low rate, and with core PCE inflation unchanged at only 1.3% over the same period, it's easy to see why investors have remained relaxed. In our view, though, things are about to change, because a combination of very adverse base effects and gradually increasing momentum in the monthly numbers, is set to lift both core inflation measures substantially over the next few months.
Economic data have yielded the limelight in recent months to Brexit news and, alas, we doubt that February's GDP data, released on Wednesday, will reclaim investors' attention.
Investors now see a 50/50 chance of the MPC cutting Bank Rate within the next nine months, following the slightly dovish minutes of the MPC's meeting, and its new forecasts.
We expect the Budget today to underwhelm investors who are eager to see a quick and powerful government response to the coronavirus outbreak.
Business investment held up surprisingly well last year.
Investors with long sterling positions should not pin their hopes on Friday's GDP report to reverse some of the losses endured over the last week.
German factory orders probably bounced a modest 0.3% month-to-month in February, equivalent to a 0.5% decline year-over-year. We expect private investment growth to have picked up in the first quarter, but leading indicators for the industrial sector in Germany are sending conflicting signals.
China's industrial production growth downtrend worsens. China's retail sales dragged down by autos but boosted as people spend more at home. China's fixed asset investment growth slows despite greater support from infrastructure.
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 two main national surveys--IFO and INSEE-- both beat consensus forecasts yesterday, supporting our story of that economic sentiment is holding up relatively well in the face increasing investor anxiety. In Germany, the main IFO business climate index rose marginally to 108.5 from a revised 108.4 in August, boosted by an increase in the expectations index to a six-month high of 103.3, up from 102.0 in August. The IFO expectations index points to real GDP growth rising 0.5%-to-0.6% quarter-on-quarter in Q3.
European Central Bank's Bond-Buying Will Help U.S. Tourists and Investors...
The Conservatives' opinion poll rating has fallen dramatically over the last 10 days or so, pushing sterling down and forcing investors to confront the possibility that Theresa May might not increase her majority much from the current paltry 17 MPs.
We can't recall a time when we have disagreed so strongly with the consensus narrative, in both the media and the markets, about the state of the U.S. economy. We think both investors and the commentariat are too bearish on growth and too complacent about inflation risks, and as a result, insufficiently worried about the speed with which interest rates will rise over the next couple of years.
Investors have concluded from June's Markit/CIPS PMIs and Governor Carney's speech on Tuesday that the chance of the MPC cutting Bank Rate before the end of this year now is about 50%, rising to 55% by the time of Mr. Carney's final meeting at the end of January.
Some analysts argue that sterling won't recover materially even if MPs wave through Brexit legislation, because the threat of a Labour government worries investors more than a messy departure from the EU.
German investor morale soars--too good to be true?
Are there any signs of a Chinese recovery yet? Freya Beamish discusses
What to expect from the ECB as Ms. Lagarde takes the seat as new president?
Chief Eurozone Economist Claus Vistesen on sentix in December
Ellen Hazen, portfolio manager at F.L. Putnam Investment Management, and Ian Shepherdson, chief economist at Pantheon Macroeconomics, join "Squawk Box" to discuss the markets and the economy as the Fed gets set to kick off its two-day meeting on rates.
Isabelle Mateos Y Lago, official institutions group deputy head at BlackRock, and Freya Beamish, chief Asia economist at Pantheon Macroeconomics, discuss U.S.-China trade concerns and their impact on investing. They speak with Lisa Abramowicz on "Bloomberg Surveillance."
Ian Shepherdson, chief economist at Pantheon Macroeconomics, said investors shouldn't "downplay" the coronavirus.
David Bahnsen, managing partner and chief investment officer of the Bahnsen Group, and Ian Shepherdson, chief economist at Pantheon Macroeconomics, join "Squawk Box" to discuss the markets and the government measures being taken to stimulate the economy amid the coronavirus outbreak.
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.
Yesterday's barrage of French business surveys contains hundreds of indicators, but its central story is comfortably simple.
Real GDP in Germany grew 0.7% quarter-on-quarter in Q4, thanks mainly to a 0.4% contribution from private consumption, and a 0.2% boost from net trade. Household consumption grew 2.2% annualised in 2014, the best year for German consumers since 2006.
The ECB won't make any changes to its policy settings today.
Last week's debt-relief agreement between Greece and its European creditors goes somewhat further than previous instances when the EU has kicked the can down the road.
Last week's news that the composite PMI collapsed to 47.7 in July--its lowest level since April 2009--from 52.4 in June is the first clear indication that the U.K. is heading for a recession.
The run of better-than-expected public borrowing figures ended abruptly with the publication of March data yesterday.
Korean real GDP growth--to be published on Thursday--should bounce back in Q1 to 1.0% quarter-on-quarter, after the 0.2% drop in Q4.
The FTSE 100 has dropped by 7% since the end of September--leaving it on course for its worst month since May 2012--and now is 12% below its May peak.
Korea's preliminary GDP report for Q3 will be released tomorrow.
India's Finance Minister Nirmala Sitharaman finally brought out the big guns on September 20, announcing significant cuts to corporate tax rates.
Last week's advance PMI data suggest that economic activity in the Eurozone was stable at the beginning of Q2. The composite EZ PMI fell trivially to 53.0 in April, from 53.1 in March, because a dip in manufacturing offset a small rise in the services index.
A shutdown of the federal government, which could happen as early as this weekend, is a political event rather than a macroeconomic shock. But if it happens--if Congress cannot agree on even a shortterm stop-gap spending measure in order to keep the lights on after the 28th--it would demonstrate yet again that the splits in the House mean that the prospects of a substantial near-term loosening of fiscal policy are now very slim.
We are fundamentally quite bullish on the housing market, given the 100bp drop in mortgage rates over the past six months and the continued strength of the labor market, but today's May new home sales report likely will be unexciting.
The IFO continues to tell a story of a German economy on the ropes.
Yesterday's business confidence data in the EZ core were mixed.
The Bank of Japan's biannual Financial System Report was published earlier this week.
Fed Chair Yellen set out a robust and detailed defense of the orthodox approach to monetary policy in her speech in Amherst, MA, yesterday afternoon. Her core argument could have come straight from the textbook: As the labor market tightens, cost pressures will build. Monetary policy operates with a "substantial" lag, so waiting too long is dangerous; the "...prudent strategy is to begin tightening in a timely fashion and at a gradual pace".
Argentina's economy continues to recover steadily.
The IFO did its part to alleviate the stock market gloom yesterday, with the business climate index rising slightly to 108.3 in August from 108.0 in July. The August reading doesn't reflect the panic in equities, though, and we need to wait until next month to gauge the real hit to business sentiment. The increase in the headline index was driven by businesses assessment of current output, with the key expectations index falling trivially to 102.2 from a revised 102.3 in July. This survey currently points to a stable trend in real GDP growth of about 0.4% quarter-on-quarter, consistent with our expectation of full year growth of about 1.5%.
The key data today, covering March durable goods orders and international trade in goods, should both beat consensus forecasts.
The mortgage market is continuing to hold up surprisingly well, given the calamitous political backdrop.
The gaps in the third quarter GDP data are still quite large, with no numbers yet for September international trade or the public sector, but we're now thinking that growth likely was less than 11⁄2%.
On a headline level, the key message from the Eurozone PMIs was little changed on Friday.
Argentina's Q4 GDP report, released last week, underscored the severity of the recession, due to the currency crisis and the subsequent tighter fiscal and monetary policies.
The commentariat was very excited Friday by the inversion of the curve, with three-year yields dipping to 2.24% while three-month bills yield 2.45%.
We see significant upside risk to today's headline durable goods orders numbers for April.
Yesterday's economic data in Germany confirmed that the economy slowed in Q3, but also added to the evidence that growth will rebound in Q4. The second estimate for Q3 showed that real GDP rose 0.2% quarter-on-quarter, slowing from a 0.4% gain in Q2.
The PM now is at a fork in the road and will have to decide in the coming days whether to risk all and seek a general election, or restart the process of trying to get the Withdrawal Agreement Bill--WAB--through parliament.
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.
Yesterday's advance EZ PMI data were virtually unchanged from previous months, yet again. The composite PMI rose trivially to 53.3 in August from 53.2 in July; this means that the index has been almost stable since February. The headline was lifted by a small increase in services, which offset a slight decline in manufacturing.
We expect today's second estimate of Q2 GDP to confirm that the U.K. has been the slowest growing G7 economy this year.
Mexican consumers' spending improved toward the end of Q2. Retail sales jumped by 1.0% month-to-month in June, pushing the year-over-year rate up to 9.4%, from an already solid 8.6% in May. Still, private spending lost some momentum in the second quarter as a whole, rising by 2.5% quarter-on-quarter, after a 3.8% jump in Q1. A modest slowdown in consumers' spending had to come eventually, following surging growth rates in the initial phases of the recovery.
Friday's PMIs were supposed to provide the first reliable piece of evidence of the coronavirus on euro area businesses, but they didn't. Instead, they left economists dazed, confused and scrambling for a suitable narrative.
Yesterday's detailed German GDP report raised more questions than it answered. The headline confirmed that growth accelerated to 0.4% quarteron- quarter in Q4, from 0.1% in Q3, leaving the year-over- year rate unchanged at 1.7%.
Sentiment in Germany has improved slightly this month with the IFO business climate index rising to 106.8 from 106.7 in January, pushed higher by a small increase in the expectations index.
Colombia's recently-released data signal that the economy started the year quite strongly, following a relatively poor end to Q4.
The preliminary April PMIs point to a continuation of the cyclical bounce, despite falling slightly from last month. The composite PMI in the Eurozone fell to 53.5 in April, down from 54.0 in March.
The Eurozone's external surplus rebounded further over the summer.
Mr. Draghi gave one of his most dovish performances to date yesterday. The central bank kept its main interest rates and the pace of QE unchanged, but reiterated that risks to growth and inflation are tilted to the downside. The president noted further that the existing policies will be "reexamined" in December in light of updated staff projections. It is difficult to see how the downbeat assessment on the economy will change materially from now until December, indicating that further stimulus is likely.
China's September activity data, released at the end of last week, back up our claim that GDP growth weakened in Q3, on a quarter-on-quarter basis.
The gap between U.K. and U.S. government bond yields has continued to grow this year and is approaching a record.
Argentina's economy is on the verge of a renewed recession; available data for August and the effect of the recent financial crisis, driven by the result of the primaries, suggest that output will come under severe strain.
We can't yet know how bad the spread of the coronavirus from the Chinese city of Wuhan will be.
The public finances are in better health than appeared to be the case a few months ago.
Korea's 20-day export growth came in weaker than we anticipated earlier this week. Granted, year-over- year growth rebounded to 14.8% in May, from 8.3% in April.
Brazil has made a convincing escape from high inflation in the past few months, laying the groundwork for a gradual economic recovery and faster cuts in interest rates. Mid-March CPI data, released this week, confirmed that inflation pressures eased substantially this month.
A grim-looking headline durable goods orders number for April seems inevitable today, given the troubles at Boeing.
India's National Democratic Alliance, led by Prime Minister Narendra Modi's Bharatiya Janata Party,
Yesterday's detailed GDP report in Germany showed net exports propelled GDP growth to a cyclical high last quarter.
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.
Friday's advance PMI data for the Eurozone added further evidence of stabilisation in the economy after the sharp slowdown in GDP growth since the beginning of last year.
Data released in recent days confirm the story of a struggling economy and falling inflation pressures in Mexico, strengthening our forecast of interest rate cuts over the second half of the year.
On the face of it, the trend in public borrowing deteriorated sharply late last year. In the three months to December, borrowing on the main "PSNB ex ." measure, which excludes banks owned by the public sector, was a trivial £0.3B, or 1.6%, lower than in the same months of 2017.
The ECB conformed to expectations today, at least on a headline level.
The tailwinds that have propelled Eurozone equities higher since the middle of last year remain place, in principle. In the economy, political uncertainty in the euro area has turned into an opportunity for further integration and reforms, and cyclical momentum in has picked up. And closer to the ground, fundamentals also have improved.
GDP data for Q2 are due July 26; we expect the report to show a marginal dip in growth, to a seasonally adjusted 0.8% quarter-on-quarter, from 1.0% in Q1.
The apparent softness of business capex is worrying the Fed.
The German economy finished last year on the back foot.
Data released yesterday confirmed that Mexico's economy ended Q4 poorly, confounding the most hawkish Banxico Board members.
We are happy to report that the laws of gravity have been temporarily suspended in the German survey data.
President Temer seems to be advancing on his reform agenda.
Korean real GDP growth rebounded to 1.4% quarter-on-quarter in Q3, from 0.6% in Q2. The main driver was exports, with government consumption also popping, and private consumption was a little faster than we were expecting.
We expect today's first estimate of third quarter GDP growth to show that the economy expanded at a 2.4% annualized rate over the summer.
Brazil's recovery has been steady in recent months, and Q1 likely will mark the end of the recession. The gradual recovery of the industrial and agricultural sectors has been the highlight, thanks to improving external demand, the lagged effect of the more competitive BRL, and the more stable political situation, which has boosted sentiment.
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.
The BRL remains under severe stress, despite renewed signals of a sustained economic recovery and strengthening expectations that the end of the monetary easing cycle is near.
It has been difficult to be an optimist about U.S. international trade performance in recent years. The year-over-year growth rate of real exports of goods and services hasn't breached 2% in a single quarter for two years.
We expect to learn today that the economy expanded at a 1.7% rate in the fourth quarter. At least, that's our forecast, based on incomplete data, and revisions over time could easily push growth significantly away from this estimate. The inherent unreliability of the GDP numbers, which can be revised forever--literally--explains why the Fed puts so much more emphasis on the labor market data, which are volatile month-to-month but more trustworthy over longer periods and subject to much smaller revisions.
Today's FOMC announcement will be something of a non-event. Rates were never likely to rise immediately after December's hike, and the weakness of global equity markets means the chance of a further tightening today is zero.
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.
By the close on Friday, the initial reaction in U.S. markets to the U.K. Brexit vote could be characterized as a bad day at the office, but nothing worse. Not a meltdown, not a catastrophe, no exposure of suddenly dangerous fault lines.That's not to say all danger has passed, but the first hurdle has been overcome.
February's retail sales figures highlighted that consumers' spending was flagging even before the Covid-19 outbreak.
Whatever number the BEA publishes this morning for first quarter GDP growth -- we expect zero -- you probably should add about one percentage point to correct for the persistent seasonal adjustment problem which has plagued the data for many years. Reported first quarter growth has been weaker than the average for the preceding three quarters in 21 of the 31 years since 1985 -- and in eight of the past 10 years.
The Covid-19 outbreak has rattled equity markets, but has not had a major bearing on DM currencies, yet.
Judging by the survey data, German business sentiment remained depressed at the start of the year.
Core durable goods orders in recent months have been much less terrible than implied by both the ISM and Markit manufacturing surveys.
Money supply growth in the Eurozone rebounded slightly last month, reversing some of the weakness at the start of the year.
Momentum in the euro area's money supply slowed last month. M3 growth dipped to 4.7% year-over-year in February, from a downwardly-revised 4.8% in January. The headline was mainly constrained by the broad money components. The stock of repurchase agreements slumped 24.3% year-over-year and growth in money market fund shares also slowed sharply.
Data released last week confirm that the Argentinian economy ended 2017 strongly.
Data to be released this Friday should show that Japan's labour market remains tight, though the unemployment rate likely ticked back up in February, to 2.6%, after the erratic drop to 2.4% in January.
All the evidence indicates that growth in Mexican consumers' spending is slowing, despite the better- than-expected November retail sales numbers, released yesterday.
Yesterday's IFO data reversed the good vibes sent by last week's upbeat German PMIs.
It seems pretty clear from press reports that the White House budget, which reportedly will be released March 14, will propose substantial increases in defense spending, deep cuts to discretionary non- defense spending, and no substantive changes to entitlement programs. None of this will come as a surprise.
The Colombian economy was relatively resilient at the end of last year, but economic reports released during the last few weeks indicate that growth is still fragile, and that downside risks have increased. Real GDP rose 1.0% quarter-on-quarter in Q4, pushing the year-over-year rate up to 1.6% from 1.2% in Q3.
China's government overshot its deficit target last year, and probably will overshoot it by at least as much this year
We have no choice but to revise down our forecast for GDP growth in Q2, now that the threat of a no-deal Brexit likely will hang over the economy beyond March, probably for three more months.
Housebuilders were one of the biggest winners from the post-election relief rally in U.K. equity prices.
Forecasting the health insurance component of the CPI is a mug's game, so you'll look in vain for hard projections in this note.
Brazil's external accounts are well under control, despite the wider deficit in January, mainly driven by seasonal deterioration on the trade account.
In our view, the chances of a no-deal Brexit on October 31 have not surged just because Boris Johnson has become Prime Minister and is gesticulating wildly at the Despatch Box.
Last month, the ECB set the scene for the majority of its key policy decisions over the next 12 months.
The German statistical office will supply a confidential estimate to Eurostat for this week's advance euro area Q2 GDP data. Our analysis suggests this number will be grim, and weigh on the aggregate EZ estimate. Our GDP model, which includes data for retail sales, industrial production and net exports, forecasts that real GDP in Germany contracted 0.1% quarter-on-quarter in the second quarter, after a 0.7% jump in Q1.
The verdict from the German business surveys is in; economic growth probably slowed further in Q2.
The INSEE's manufacturing sentiment data in France are slightly confusing at the moment.
Major central banks in Asia, particularly those operating in export-oriented economies, have recently been pinning their future policy moves on the prospects of a specific industry, namely semiconductors.
Today's preliminary estimate of GDP likely will show that the economy continued to struggle in response to high inflation, further fiscal austerity and Brexit uncertainty.
Yesterday's national business surveys provided an optimistic counterbalance to the underwhelming PMIs on Monday, although they all suggest that the euro area economy is in good form.
Brazil's external accounts continue to be the country's bright spot, having improved considerably in recent quarters. The unadjusted current account deficit for January, USD4.8B, was lower than expected and much smaller than the USD12.2B shortfall a year earlier.
The spread of the Covid-19 virus remains the key issue for markets, which were deeply unhappy yesterday at reports of new cases in Austria, Spain and Switzerland, all of which appear to be connected to the cluster in northern Italy.
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.
Mexican inflation fell sharply in the first two weeks of January, dipping by 0.2% from two weeks earlier, thanks to lower energy prices and a reduction in long-distance phone tariffs. Telecom reform explains about 15bp of the headline reduction.
Yesterday's IFO report reinforced the message from the PMIs that the Eurozone economy stumbled slightly at the beginning of the first quarter. The headline business climate index fell to an 11-month low of 107.3 in January, from a revised 108.6 in December, hit mainly by a drop in the expectations component. Intensified market volatility and worries over further weakness in the Chinese economy likely were the main drivers. Last week's dovish message from Mr. Draghi, however, came after the survey's cut-off date, leaving us cautiously optimistic for a rebound next month.
Yesterday's IFO offered a rare upside surprise in the German survey data.
Meetings are a nice way to stress test our base case stories and gauge what questions are important for clients.
India's GDP report for the second quarter, due on Friday, is likely to show a decent rebound in growth from the first quarter.
The first point to make about today's Q1 GDP growth number is that whatever the BEA publishes, you probably should add 0.9 percentage points.
Mexican GDP was unchanged quarter-on-quarter in Q2, according to the final report, a tenth worse than the preliminary reading.
The rate of growth of Covid-19 cases outside China appears to have peaked, for now, but we can't yet have any confidence that this represents a definitive shift in the progress of the epidemic.
Eurozone bond traders of a bearish persuasion are finding it difficult to make their mark ahead of Italy's parliamentary elections next weekend.
The Covid-19 scare can be split into two stages, the initial outbreak in China, concentrated in Wuhan, and the now-worrying signs that clusters are forming in other parts of the world, primarily in South Korea, the Middle East and Italy.
Korean real GDP growth rebounded to 1.1% quarter-on-quarter in Q1, after GDP fell 0.2% in Q4. Growth in Q4 was hit by distortions, thanks to a long holiday in October, which normally falls in September.
Yesterday's barrage of French business sentiment data was mixed.
Mexico's final estimate of third quarter GDP, released yesterday, confirmed that the economy is still struggling in the face of domestic and external headwinds.
The second estimate of Q1 GDP made for grim reading. Quarter-on-quarter GDP growth was revised down to 0.2%--the joint-slowest rate since Q4 2012--from the preliminary estimate of 0.3%.
The November IFO report suggests that the headline indices are on track for a tepid recovery in Q4 as a whole, but the central message is still one of downside risks to growth
The Bank of England will be dragged into the political arena on Thursday, when it sends the Treasury Committee its analysis of the economic impact of the Withdrawal Agreement and the Political Declaration, as well as a no-deal, no- transition outcome.
We have tweaked our third quarter GDP forecast in the wake of the September advance international trade and inventory data; we now expect today's first estimate to show that the economy expanded at a 4.0% annualized rate.
As we write, the Commons appears to be on the verge of voting for the Withdrawal Agreement Bill--WAB--at its second reading but then voting against the government's "Programme Motion", which sets out a very tight timetable for its passage through parliament, in a bid to meet the October 31 deadline and to minimise parliamentary scrutiny.
Brazil's external deficit fell marginally in October, but most of the improvement is now likely behind us. The unadjusted current account deficit dipped to USD3.3B, from USD4.3B in October 2015. The trend is stabilizing, with the 12-month total rolling deficit easing to USD22B--that's 1.2% of GDP--from USD23B in September.
The Fed's announcement, at 11.30pm Wednesday, that it will establish a Money Market Mutual Fund Liquidity Facility--MMLF--to support prime money market funds, is another step to limit the emerging credit crunch triggered by the virus.
Yesterday's economic data added further evidence that GDP growth in the EZ will slow in Q2.
The Eurozone construction sector ground to a halt at the start of 2017. Data on Friday showed that output plunged 2.3% month-to-month in January, pushing the year-over-year rate down to -6.0%, from a revised +3.0% in December. The weakness was broad-based across the major economies, but it was concentrated in France and Spain where output fell by 3.5% and 3.8%, respectively.
Construction in the EZ stumbled at the start of the year.
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
Colombia, the third largest economy in LatAm, has not been immune to the headwinds of the global economy since the financial crisis in 2008, though it remains one of the fastest growing economies in the region. GDP growth slowed sharply to just 1.7% in 2009, but that was still much better than the 1.2% contraction of the region as a whole.
We continue to see signs of a strengthening upturn in Eurozone construction. Output in construction rose 0.3% month-to-month in April, pushing the year-over-year rate down to 3.2%, from an upwardly revised 3.8% in March.
We have been arguing for some time that the drag on growth from falling capital spending in the oil sector would fade to nothing in the third quarter, and would then likely be followed by a small increase in the fourth quarter. But we seem to have been too cautious. It now seems much more likely that oil capex will rebound strongly as soon as the third quarter, following the clear upturn in the rig count data produced by Baker Hughes, Inc.
The Eurozone's external accounts were extremely volatile at the end of Q4.
The euro area's current account surplus stumbled at the end of 2017, falling to €29.9B in December from an upwardly-revised €35.0B in November.
Officially, China's real GDP growth was unchanged at 6.0% year-over-year in Q4; low by Chinese standards, but not overly worrying. Full-year growth was 6.1% within the 6.0-to-6.1% target down from 6.7% last year, also in keeping with the authorities' long-term poverty reduction goals.
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.
Mexican president-elect Andrés Manuel López Obrador, known as AMLO, has set out the first points of his austerity plan, two weeks after his overwhelming victory at the polls.
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.
This weekend's first round of the French presidential election is too close to call. Our first chart indicates that a runoff between Marine Le Pen and Emmanuel Macron remains the best bet. But the statistical uncertainty inherent in the predictions, and the proximity of the two remaining candidates--the centre-right Mr. Fillon and far-left Mr. Melenchon-- mean that this is now effectively a four-horse race.
Hopes that the economy will not slow over the next year are largely pinned on the idea that net trade will be boosted by the drop in sterling. The pound has tracked sideways over the last two months and is about 15% below its trade-weighted peak in November 2015.
The PBoC's reformed one-year Loan Prime Rate was published yesterday at 4.25%, compared with 4.31% on the previous LPR, and below the benchmark lending rate, 4.35%.
The construction sector remains a stand-out performer in the Eurozone economy, despite stumbling at the end of Q2.
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.
The Eurozone's external surplus is on track for a record-breaking year in 2016. Data yesterday showed that the current account surplus rose to €28.4B in October, from €27.7B in September. The trade surplus in goods fell, but this drag was offset by a higher services and income surplus, and a lower current transfers deficit.
Recent economic indicators in Brazil have undershot consensus in recent weeks, but the economy nonetheless continues to recover.
On the official gauge, China's real GDP growth fell minimally to 6.8% year-on-year in Q3, from 6.9% in Q2. Growth edged down to 1.7% quarter-on-quarter from an upwardly revised 1.8% in Q2.
CPI inflation in India jumped to 4.6% in October, from 4.0% in September, marking a 16-month high and blasting through the RBI's target.
The recent increases in single-family housing construction are consistent with the rise in new home sales, triggered by the substantial fall in mortgage rates over the past year.
Mr. Draghi's speech to the European Banking Congress on Friday--see here--was a timely reminder to markets that the ECB is in no hurry to make any changes to its policy setting.
Chile's Q3 GDP report, released yesterday, confirmed that the economy lost momentum in the last quarter.
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.
Greek Finance Minister Yanis Varoufakis' letter requesting a six-month loan extension has been interpreted widely as Syriza throwing in the towel. But we don't see this way. The best possible outcome for Greece is to be able to participate in the ECB's sovereign QE program, and to negotiate a new deal with the Troika; the request for an extension could very well achieve both.
Production in the EZ construction sector slumped at the end of Q4. Data yesterday showed that output slid by 3.1% month-to-month in December, comfortably reversing the 0.7% increase in November.
Data on Friday showed that the downward trend in Brazil's unemployment continued into this year. The unadjusted unemployment rate fell to 11.2% in January, slightly below the consensus, and down from 12.0% in January last year.
Japan's labour data threw another January curve ball this year--last year it was wages--with a change in the standards for job openings.
China's manufacturing PMI posted a surprise, albeit trivial, increase in February, to 51.6 up from 51.5 in January.
Brazil's GDP growth slowed to just 0.1% quarter- on-quarter in Q4, from an upwardly-revised 0.2% in Q3. This pushed the year-over-year rate up to 2.1%, from 1.4%, but this was weaker than market expectations.
In broad terms, the euro has followed the EZ economy in the past 12-to-18 months.
Korean exports continued to fall year-over-year in April, but the story isn't as bleak as the headlines suggest.
Yesterday's final May manufacturing PMIs confirmed that the EZ industrial sector is in fine form. The PMI for the euro area was unchanged at a cyclical high of 57.0 in May, in line with the initial estimate.
Inflation in the Eurozone increased slightly last month, and probably will rise a bit more in coming months.
A sharp ARS sell-off was the key highlight while we were away over the holidays.
Data on EZ consumption were soft while we were enjoying our Christmas break. The advance EC consumer confidence index slipped to a three-year low of -8.1 in December, from -7.2 in November, breaking its recent tight range.
The economy slowed less than we expected in 2017.
The economy's fragility was underlined by the Q3 national accounts, released just before the Christmas break.
In the wake of last week's national accounts release, markets judge that the probability of a Bank Rate hike at the August 2 MPC meeting has increased to about 65%, from 60% beforehand.
Korea's trade data have been extremely volatile over the past two months, thanks to distortions caused by last year's odd holiday calendar.
Brazil's September industrial production report, released yesterday, confirmed the message from survey data that the sector stabilized towards the end of summer. Output rose 0.5 month-to-month, and August output was revised up by 0.3 percentage points.
The INSEE business sentiment data in France continue to tell a story of a robust economy.
Markets tend to ignore Eurozone construction data, but we suspect today's report will be an exception to that rule. Our first chart shows that we're forecasting a 8.5% month-to-month leap in February EZ construction output, and we also expect an upward revision to January's numbers.
Yesterday's IFO survey capped a fine Q4 for German business survey data. The headline business climate index climbed to a 34-month high of 111.0 in December, from 110.4 in November. An increase in the "current assessment" index was the main driver of the gain, while the expectations index rose only trivially.
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.
The FOMC did the minimum expected of it yesterday, raising rates by 25bp--with a 20bp increase in IOER--and dropping one of its dots for 2019.
The possibility of a Corbyn-led Labour Government has been highlighted by some analysts as a major economic risk. Mr. Corbyn, however, has little practical chance of being elected soon.
Lending conditions in the EZ economy continued to improve in Q1, according to the ECB's bank lending survey. Business and consumer credit supply conditions eased, but mortgage lending became more difficult to come by as standards tightened sharply in Germany, France, and the Netherlands. Demand for new loans also rose, but the increase was due entirely to gains in the mortgage and consumer credit components.
As we're writing, the price of U.S. crude oil is only about 50 cents per barrel lower than on Thursday, when markets began to anticipate an OPEC deal to cut production over the weekend. The failure of the Doha talks generated an initial sharp drop in oil prices, but the damage now is very limited, as our first chart shows.
Japan's Tankan survey continues to paint a picture of a contracting economy.
Brazil's industrial production rose 0.8% month- to-month in August, well above our call, and the consensus, for a trivial increase.
Last week's national accounts were a setback for the hawks on the MPC seeking to raise interest rates at the next meeting, on November 2.
The U.S. reached a trade agreement with Canada on Sunday, adding its northern neighbour to the pact sealed a month ago with Mexico.
Yesterday's final EZ PMIs imply that growth in manufacturing slowed marginally in August. The PMI fell to 51.7, from 52.0 in July, trivially below the initial estimate, 51.8. Output and new orders growth declined, pushing down the pace of new job growth. But we think the hard data for industrial production in Q3 as a whole will be decent.
Today's advance EZ PMIs will be watched more closely than usual.
Brazil's current account data last week provided further evidence of stabilisation in the economy, despite the modest headline deterioration. The unadjusted current account deficit increased marginally to USD5.1B in January, from USD4.8B in January 2016, but the underlying trend remains stable, at about 1.3% of GDP. Our first two charts show that the overall deficit began to stabilize in mid-2016, as the rate of improvement in the trade balance slowed, reflecting the easing of the domestic recession.
China's real GDP growth officially slowed to 6.5% year-over-year in Q3, from 6.7% in Q2.
Sterling briefly touched $1.30 yesterday, in response to signs that a very small majority in the Commons stands ready to vote for an unamended version of the Withdrawal Agreement Bill--WAB-- on Tuesday.
It's going to be very hard for Fed Chair Powell's Jackson Hole speech today to satisfy markets, which now expect three further rate cuts by March next year.
The performance of Italy's economy in the first half of 2017 proves that the strengthening euro area recovery is a tide lifting all the r egion's boats.
Taken at face value, the GDP data continue to suggest that the Brexit vote has had no adverse consequences for the economy. The official estimate of quarter-on-quarter GDP growth in Q4 was revised up yesterday to 0.7%, from 0.6%. The revision had been flagged earlier this month by stronger industrial production and construction output figures.
The story in EZ capital markets this year has been downbeat.
Colombia's trade deficit continued to narrow in Q3; a postive development now that EM are back in the firing line. Assuming no revisions, the marginal year-over-year dip in the September trade deficit means that the third quarter deficit was USD3.1B, down from US4.6B a year ago.
In recent public appearances, the Chancellor has made a concerted effort to downplay expectations of fiscal loosening in Wednesday's Autumn statement. On Sunday, he labelled the deficit "eye-wateringly" large and he warned that he was "highly constrained".
Yesterday's barrage of survey data in France suggests that business sentiment in the industrial sector remained soft mid-way through Q4, but the numbers are more uncertain than usual this month.
Most LatAm currencies have been under pressure recently, with the Brazilian real and the Chilean peso breaking all-time lows versus the USD in recent weeks.
Japan's all-industry activity index fell 0.5% month-on- month in September after a 0.2% rise in August. Construction activity continued to plummet, with the subindex dropping 2.3%, after a 2.2% fall in August.
Korea's trade figures for the first 20 days of November, published yesterday, gave the first real glimpse in a long time of how its exporters are truly performing.
The EU Commission and Italy's government remain at loggerheads over the country's fiscal plans next year.
U.K. activity data have consistently surprised to the downside over the last month.
GDP growth in Korea surprised to the upside in the fourth quarter, with the economy expanding by 1.2% quarter-on-quarter, three times as fast as in Q3, and the biggest increase in nine quarters.
Policymakers and governments are gradually deploying major fiscal and monetary policy measures to ease the hit from Covid-19 and the related financial crisis.
The June batch of the French statistical office's business surveys continues to signal a firming cyclical recovery. The aggregate business index rose to cyclical high of 106 in June from a revised 105 in May, continuing an uptrend that began in the middle of 2016.
Economists' forecasts are changing almost as quickly as market prices these days, and not for the better.
Today's EZ calendar is a busy one.
Yesterday's barrage of survey data in France, tentatively suggest that business sentiment is stabilising following a string of declines since the start of the year.
Japanese policymakers will have been scouring yesterday's data for signs that the trade situation is improving.
The manufacturing industry in France is recovering slowly, but surely. The headline INSEE index rose to 102 in July from 101 in June, close to a post-crisis high, pointing to steady improvement for manufacturers. Our first chart shows the main leading components of the survey, indicating a modest, but positive, trend in output. The increase in sentiment in July was driven by firming new orders--especially in the export sector--pushing the new orders-to-inventory ratio to an 18-month high.
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.
Brazil's central bank is finally decisively facing its demon, persistently high inflation. The eight-member policy board, known as Copom, decided unanimously on Wednesday to increase the Selic rate by 50bp to 12.25%, the highest level in more than three years, in line with the consensus.
Barring a meteor strike, the ECB will leave its main refinancing and deposit rates unchanged today, at 0.00% and -0.5% respectively.
Full employment is a deceptively simple-sounding concept. If everyone who wants a job has one, the economy is at full employment, right? Anything less tends to raise eyebrows among non-economists, whether the people who want a job are formally inside the labor force, or have dropped out but would come back if they thought they could find work.
Korea's preliminary Q4 GDP report was stronger than nearly all forecasters, including ourselves, expected.
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 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.
Data released on Monday showed that Chile's external accounts remained under pressure at the start of the year, and trade tensions mean that it will be harder to finance the gap.
The Eurozone's external surplus fell further at the end of Q1, and has now fully reversed the jump at the start of the year.
Oil prices have risen by about $20 per barrel since last fall.
On the face of it, Japanese GDP came thumping home in Q1, rising 0.5% quarter-on-quarter, after the 0.4% increase in Q4.
Japanese trade remained in the doldrums in October, keeping policymakers on their toes as they repeat the refrain of "resilient" domestic demand.
The French economy has suffered from weakness in manufacturing this year, alongside the other major EZ economies.
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.
China reportedly has offered President Trump a $200B reduction in its annual trade surplus with the U.S., engineered by increasing imports of American products, among other steps.
We've had pushback from readers over our take on the likelihood of a trade deal with China in the near future.
Argentina's latest hard data suggest that activity is softening, but we don't see the start of a renewed downtrend.
January's public finance data, released today, take on particular importance because they are the last to be published before the Chancellor delivers his first Budget on March 8. The public finances nearly always swing into surplus in January, primarily because the deadline for individuals to submit self-assessment--SA--tax returns for the previous fiscal year is at the end of the month. Firms also pay their third of four payments of corporation tax for their profits in the current fiscal year.
Data released on Friday confirmed that Colombian activity lost momentum in Q4, following an impressive performance in late Q2 and Q3. Retail sales rose 4.4% in November, down from 7.4% in October and 8.3% in Q3.
Colombia is one of the few larger economies in Latin America to have enjoyed solid, positive economic growth over the past two years. But lower commodity prices and last year's central bank tightening, to curb high inflation generated by strong growth, have started to become visible in the main economic data.
Signs that the government is softening its Brexit plans, in response to its substantial defeat in the Commons last week, has enabled sterling to recover most of the ground lost against the dollar and euro in the fourth quarter of last year.
Chile's central bank left rates unchanged at 3.5% last Thursday, as expected, and maintained its neutral tone. Inflation pressures are easing, economic activity remains sluggish and global risks have increased.
The Eurozone's external surplus recovered a bit of ground mid-way through the third quarter.
Chinese GDP numbers always require a great deal of detective work, and yesterday's needed more than the norm; multiple rounds of revisions needed decoding.
As we reach our Sunday afternoon deadline, no deal has been reached to re-open the federal government.
Yesterday's barrage of French business sentiment data suggest that confidence in the industrial sector was a little stronger than expected in Q2.
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.
The Spanish economy has been living a quiet life recently, amid markets' focus on political risks in Italy and manufacturing slowdowns in Germany and France.
Today's economic calendar in the Eurozone is filled to the rafters.
After a disappointing run of monthly data, the huge surplus on the main "PSNB ex ." measure of borrowing in January must have been greeted with relief at the Treasury.
Gilt yields slid to record lows at many maturities in mid-February, and while equity prices have since rebounded, gilt yields have remained anchored at rock-bottom levels. But with political risks rising and deficit reduction still very slow, gilt yields look primed to spring back soon.
In recent client meetings the first and last topic of conversation has been the market implications of the possible departure of President Trump from office.
The government now has a 50:50 chance of getting the Withdrawal Agreement Bill--WAB--through parliament in the coming weeks, despite Letwin's successful amendment and the extension request.
The FOMC's view of the economic outlook and the likely required policy response, set out in yesterday's statement and Chair Yellen's press conference, could not be clearer.
Last week's attacks in Barcelona--one of Spain's most popular tourist spots--struck at the heart of one of the economy's main growth engines.
The Chancellor can go on his Christmas vacation content that the public finances have weathered the economy's slowdown relatively well this year.
Brazil's economic prospects continue to deteriorate rapidly, due to a combination of rising political uncertainty, the failure of the new government to advance on reforms, and ongoing external threats.
The Prime Minister's resignation and the stillborn launch of the Withdrawal Agreement Bill last week has forced us to revise our Brexit base case, from a soft E.U. departure on October 31 to continued paralysis.
The upside to manufacturing survey data in the Eurozone appears endless.
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%.
The near-term performance for EZ manufacturing will be a tug-of-war between positive technical factors, and a still-poor fundamental outlook.
Markets have been positively surprised by Brazil's rapid disinflation, the efforts at fiscal reform, and the prospect of growth in the economy this year. The Ibovespa index is now above its pre-crisis high and the real has approached the key level of three per USD in recent months. But the latest GDP report, released yesterday, showed that the economy struggled in Q4. Real GDP fell 0.9% quarter-on-quarter, worse than the revised 0.7% drop in Q3.
The build-up to today's ECB meeting has drowned in the focus on Italy's new political situation and the rising risk of a global trade war.
The PBoC finally moved yesterday, cutting its one-year MLF rate by 5bp to 3.25%, whilst replacing around RMB 400B of maturing loans.
Data released last week confirm that Brazil's recovery has continued over the second half of the year, supported by steady household consumption and rebounding capex.
The PMI survey points to a slight loss of momentum in Eurozone growth towards the end of Q3. The composite index fell to 53.6 in September from 54.3 in August, trivially lower than the initial estimate of 53.9. This is not enough to move the needle on the survey's signal for Q3 GDP growth, though; our first chart shows it pointing to stable growth of 0.4% quarter-on-quarter.
Chile's growth dynamics were robust in August, according to the latest data. Production rose and consumption remained strong during most of Q3. Indeed, industrial output increased 5.1% year-over- year, up from an already strong 3.1% increase in July, and contrasting sharply with the 2% fall in Q2.
Sterling recovered to $1.23 yesterday, its highest level since late July, in response to the sharp decline in the risk of a no -deal Brexit at the end of October, triggered by MPs' actions.
Data released yesterday confirm that Brazil's recovery has continued over the second half of the year, supported by steady capex growth and rebounding household consumption.
Demand for German manufacturing goods slipped at the end of Q3. Yesterday's report showed that factory orders fell 0.6% month-to-month in September, constrained by weakness in domestic demand and falling export orders to other EZ economies.
Korea's final GDP report for the third quarter confirmed the economy's growth slowdown to 0.4% quarter-on-quarter, following the 1.0% bounce-back in Q2.
Brazil's December industrial production and labour reports, released late last week, confirmed that the recovery was struggling at the end of last year.
In trade-weighted terms, sterling finished 2017 just 1% higher than at the start of the year, reversing little of 2016's 14% drop.
The Caixin manufacturing headline was unremarkable, but the input price index signals that PPI inflation is set to rise again in May, to 4.0%-plus, from 3.4% in April.
At the start of the year, #euroboom was the moniker used in financial media to describe the EZ economy.
Data released on Wednesday, along with the BCB's press release on Tuesday, supported our longstanding forecast of further rate cuts in Brazil in the very near term.
We're relatively optimistic--yes, you read that correctly--on the outlook for the U.K. economy in 2019.
On the face of it, markets' newfound view that the MPC's next move is more likely to be a rate cut than a hike was supported by May's Markit/CIPS PMIs.
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.
Chancellor Sunak faces a tough first gig on Wednesday, when he delivers the long-awaited Budget.
Friday's Brazilian industrial production data were relatively positive. Output was unchanged month-to-month in May, and April's marginal gain was revised slightly higher. The flat monthly reading pushed year-over-year growth in output up marginally to -8.9% from -9.1%. May production rose month-to-month in two of the four major categories.
Yesterday's minutes of the October 31 COPOM meeting, at which the Central Bank cut the Selic rate unanimously by 50bp at 5.00%, reaffirmed the committee's post-meeting communiqué, which signalled that rates will be cut by the "same magnitude" in December.
Money supply growth in the euro area eased further towards the end of Q4.
China's National People's Congress yesterday laid out its main goals for this year, on the first day of its annual meeting.
The Brazilian industrial sector started this year on a very downbeat note, despite a 2% month-to-month jump in output. The underlying trend in activity is still very weak. Production fell 5.2% year-over-year.
Consumption remains an important source of economic growth in LatAm.
EZ consumers' spending slowed at the start of Q3. Retail sales slipped 0.3% month-to-month in July, pushing the year-over-year rate down to 2.6% from an upwardly revised 3.3% in June.
If the current rate of contraction continues, the U.S. onshore oil industry will cease to exist in the third week of January next year. Over the past six weeks, the number of operating rigs has dropped by an average of 8.5, and 362 rigs were running last week. At the peak, in early October 2014--just 18 months ago--the rig count reached 1,609.
Yesterday's advance Eurozone Q4 GDP report conformed to expectations. Headline GDP increased 0.6% quarter-on-quarter, slowing trivially from an upwardly-revised 0.7% rise in Q3, and nudging the year-over-year rate down marginally to 2.7%.
As things stand, we see little reason to revise down our forecasts for the U.K. economy in response to the tailspin in equity markets
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.
Chair Yellen's final FOMC meeting today will be something of a non-event in economic terms.
Brazil's external accounts remain solid, despite the recent modest deterioration.
No fewer than four FOMC members will speak today, ranging from the very dovish to the pretty hawkish.
Following the publication of Korea's preliminary Q4 GDP report last month--see here--we said the consensus-beating print would be susceptible to downgrades, unless the economy had a miraculous end to 2018
It's a myth that the 10-ye ar decline in the unemployment rate has not driven up the pace of wage growth.
Hopes that GDP growth will strengthen following the general election, which has eliminated near- term threats of a no-deal Brexit and a business- hostile Labour government, were bolstered yesterday by the release of December's Markit/ CIPS services survey.
October's money and credit report indicates that the economy had little momentum at the start of the fourth quarter.
Japan's retail sales values jumped 1.2% month-on-month in October, after the upwardly-revised 0.1% increase in September.
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.
The summer usually is a quiet time for business, but seemingly not for CFOs this year. Yesterday's money and credit figures from the Bank of England showed that borrowing by private non-financial corporations has rocketed. Net finance raised by PNFC's from all sources increased by £8.9B in July, compared to an average increase of just £2.5B in the previous 12 months.
The virus outbreak has been relatively limited so far in Argentina, with 820 confirmed cases, but the numbers are rising rapidly.
Covid-19 has cut short a nascent recovery in housing market activity.
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.
LatAm, particularly Mexico, has dealt with Donald Trump's presidency better than expected thus far. Indeed, the MXN rose 10.7% against the USD in Q1, the stock market has recovered after its initial post-Trump plunge, and risk metrics have eased significantly.
2019 is a year many in the construction sector would prefer to forget.
China last week banned unlicensed micro-lending and put a ceiling on borrowing costs for the sector, in an effort to curtail the spiralling of consumer credit.
Mexico's economy is not accelerating, but it is holding up well in extremely difficult circumstances for EM. Growth is reasonably healthy, inflation is under control and the labor market is resilient. In short, Mexico is a success story, given the backdrop of plunging oil prices. The contrast with the disaster in Brazil is stark. Last week's survey and hard data continued to tell an upbeat story on Mexico's economy. The IMEF manufacturing index, Mexico's PMI, rose to 52.1 in November up from 51.6 in October, lifted mainly by gains in the employment and deliveries indexes.
Implied volatility on the euro is now so low that we're compelled to write about it, mainly because we think the macroeconomic data are hinting where the euro goes next.
The September consumption data were a bit better than median expectations, with real spending rebounding by 0.6%, led by an 15.1% leap in the new vehicle component.
Advance CPI data yesterday continue to indicate that inflation pressures remain depressed in the Eurozone's largest economy, for now. Inflation in Germany rose slightly in May, but only to 0.1% year-over-year, from -0.1% in April. The downward pressure on the headline from the crash in oil prices remains significant. Energy prices fell 7.9% year-over-year, slowing slightly from the 8.5% drop in the year to April.
The outlook for Argentina is improving. We expect economic growth to remain quite strong over the next year, despite a relatively soft start to 2017 and increasing external threats in recent weeks. The INDEC index of economic activity--a monthly proxy for GDP--is volatile, rising 1.9% month-to-month in March after a 2.6% drop in February, but the underlying trend is improving.
The national accounts look set to show that GDP growth in the fourth quarter was even stronger than previously estimated. Earlier this month, quarter-on-quarter growth in construction output in Q4 was revised up to 1.2%, from 0.2%. As a result, construction's contribution to GDP growth will rise by 0.07 percentage points.
The rally in U.K. equities immediately after the general election has done little to reverse the prolonged period of underperformance relative to overseas markets since the E.U. referendum in June 2016.
Today's advance EZ CPI report likely will show that inflation pressures eased in May. We think inflation slipped to 1.5% year-over-year, from 1.9% in April, as the boost to the core rate from the late Easter faded.
April's production data, released today, look set to indicate that the industrial sector's recession--its third in the last eight years--deepened in the second quarter. We think the consensus expectation that industrial production held steady in April is too upbeat. We look for a 0.3% month-to-month drop.
Recent economic indicators in Mexico have been mixed, distorted by temporary factors, including the effect of the natural disasters in late Q3. Private consumption has lost some momentum, hit by the lagged effect of high interest rates and inflation, as well as the earthquakes.
Headline inflation in Brazil remained low in October, and even breached the lower bound of the BCB's target range.
Factory orders in Germany probably jumped in September, following a string of losses in the beginning of Q3. We think new orders rose 1.0% month-to-month, pushing the year-over-year rate slightly lower, to 1.8% from 2.0% in August. A rebound in non- Eurozone export orders likely will be the key driver of the monthly gain, following a 14.8% cumulative plunge in the previous two months. The rise will be concentrated in capital and consumer goods, and should be enough to offset a fall in export orders within the euro area. Our forecast is consistent with new orders falling 2.0% quarter-on-quarter in Q3, partly reversing the 3.0% surge in the second quarter, and raising downside risks for production in Q4.
News last week increased our conviction that the economy will struggle over the coming months, but then will have a spring in its step next year.
Economic conditions are deteriorating rapidly in Chile, despite the relatively decent Imacec reading for Q3.
The simultaneous weakening of the ISM manufacturing and non-manufacturing surveys in recent months is one of the more disconcerting shifts in the recent macro data.
Speculation mounted yesterday that the MPC will follow the U.S. Fed and cut interest rates before its next meeting on March 26.
November's Markit/CIPS construction report brings hope that the sector no longer is contracting. The PMI increased to a five-month high of 53.1 in November from 50.8 in October, exceeding the 52-mark that in practice has separated expansion from contraction.
This week's detailed Q3 GDP data will confirm that the euro area economy is going from strength to strength.
India's headline GDP print for the third quarter was damning, with growth slowing further, to 4.5% year- over-year, from 5.0% in Q2.
Brazilian February industrial production data, released yesterday, were relatively positive. Output rose 0.1% month-to-month, pushing the yearover- year rate down to -0.8% from 1.4% in January. Statistical quirks were behind February's year-over-year fall, though.
We've been surprised by the fast rate of Japanese GDP growth in the first half, though the Q1 pop merely was due to a plunge in imports.
We have been telling an upbeat story about the EZ economy in recent Monitors, emphasizing solid services and consumers' spending data.
We remain optimistic on the scope for sterling to appreciate this year, reflecting our views that a deal for a soft Brexit will be reached soon and that the MPC will resume its tightening cycle later this year.
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.
The key data originally scheduled for today--ADP employment and the ISM non-manufacturing survey, and the revised Q3 productivity and unit labor costs-- have been pushed to Thursday because the federal government will be closed for the National Day of Mourning for president George H. W. Bush.
The Fed's unscheduled 50bp cut on Tuesday opens up some space for Asian central banks to follow suit.
The flow of downbeat business surveys continued yesterday, with the release of the Markit/CIPS construction survey.
We very much doubt that Fed Chair Powell dramatically changed his position last week because President Trump repeatedly, and publicly, berated him and the idea of further increases in interest rates.
The majority of headlines from last week's advance Q4 GDP data in the Eurozone--see here--were negative.
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.
Brazil's external position continue to improve, but we are sticking to our view that further significant gains are unlikely in the second half, given the stronger BRL. For now, though, we still see some momentum, with the unadjusted trade surplus increasing to USD7.2B in June, up from USD4.0B a year earlier. Exports surged 24% year-over-year but imports rose only 3%.
LatAm financial markets have performed solidly in the first sessions of the year, with most regional currencies trading more strongly against the USD.
The Budget on March 11 will be the first time that the new government's ambition and bluster collide with reality.
The comforting 183K increase in February private payrolls reported by ADP yesterday likely overstates tomorrow's official number.
India's prime minister, Narendra Modi, yesterday held his last cabinet meeting before the general election.
Brazil's key data flow started Q4 on a soft note, but we still believe that the economic recovery will gather strength over the next three-to-six months.
China's current account dropped sharply in Q1, to a deficit of $28.2B, from a surplus of $62.3B in Q4.
Data last Friday showed Japan's labour market trends deteriorating.
Brazil's December industrial production report, released yesterday, confirmed that the recovery was stuttering at the end of last year.
August's Markit/CIPS services survey, released today, likely will show that the economy's biggest sector is continuing to slow. We think that the PMI fell to just 53.0--its lowest level since it plunged immediately after the Brexit vote--from 53.8 in July, below the consensus, 53.5.
Friday's final PMI data for March were even more terrifying than the advance numbers. The composite index in the euro area collapsed to 29.7, from 51.6 in February, lower than the consensus 31.4. A downward revision was coming.
India's GDP report for the fourth quarter surprised to the upside, with the economy growing by 4.7% year-over-year, against the Bloomberg median forecast of 4.5%.
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.
Colombia's GDP growth hit a relatively solid 2.8% year-over-year in Q4, up from 2.7% in Q3, helped by improving domestic fundamentals, which offset the drag from weaker terms of trade.
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.
Thursday and Friday were busy days for LatAm economy watchers. In Brazil, the data underscored our view that the economy is on the mend, but the recent upturn remains shaky, and external risks are still high.
The economic and political backdrop to this week's Monetary Policy Committee meeting is significantly more benign than when it last met on September 19.
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.
The key story in Brazil this year remains one of gradual recovery, but downside risks have increased sharply, due mainly to challenging external conditions.
Revisions to the first quarter productivity numbers, due today, likely will be trivial, given the minimal 0.1 percentage point downward revision to GDP growth reported last week.
We are sticking to our call for a weak first half in Japan, despite likely upgrades to Q1 GDP on Monday.
The most positive thing to say about the EZ manufacturing PMI at the moment is that it has stopped falling.
Yesterday's final May PMI data in the Eurozone confirmed the strength of the cyclical upturn. The composite PMI was unchanged at 56.8, in line with the initial estimate.
Economic activity is slowing in Colombia. The ISE activity index--a monthly proxy for GDP--rose only 0.6% year-over-year in April, down from 2.3% in March, and we expect it to rise at this pace over the coming months. During the first quarter, the index rose at an average year-over-year rate of 3.0%.
November's monetary indicators provide an upbeat rebuttal to the swathe of downbeat business surveys. Year-over-year growth in the MPC's preferred measure of broad money--M4 excluding intermediate other financial corporations--rose to a 19-month high of 4.0% in November, from 3.5% in October.
The economic calendar in Mexico was relatively quiet over Christmas, and broadly conformed to our expectations of poor economic activity in Q4.
Yesterday's detailed Q3 growth data in the Eurozone offered no surprises in terms of the headline.
Chilean GDP growth hit bottom in August, but activity is now picking up and will gather speed over the coming quarters. The tailwinds from lower oil prices and fiscal stimulus will soon be visible in the activity data.
Brazil's industrial sector is on the mend, but some of the key sub-sectors are struggling.
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.
With only three weeks to go until the release of the initial official estimate of first quarter GDP, the Atlanta Fed's GDPNow measure shows growth at just 0.4%. Our own estimate, which includes our subjective forecasts for the missing data--the Atlanta Fed's measure is entirely model-based--is a bit higher, at 1%, and both measures could easily be revised significantly.
The record 1,178-point drop in the Dow will garner all the headlines today, but a sense of perspetive is in order, despite the chaos. The 113-point, or 4.1%, fall in the S&P 500 was very startling, but it merely returned the index to its early December level; it has given up the gains only of the past nine weeks.
The jump in the Caixin services PMI in the past two months looks erratic, with holiday effects playing a role, though there could be more going on here.
Mr. Draghi and his colleagues erred on the side of maximum dovishness yesterday.
Sterling's depreciation has done little to remedy the U.K.'s dependence on external finance.
Friday's early EZ CPI data for December were red hot. Headline HICP inflation in Germany jumped to 1.5%, from 1.3% in November, while the headline rate in France increased by 0.4pp, to 1.6%.
Manufacturers in Germany endured another miserable quarter in Q3.
Japan's real GDP seems unlikely to have risen in Q3, and could even have edge down quarter-on- quarter, after the 0.7% leap in Q2.
Price action in Italian bonds went from hairy to scary yesterday as two-year yields jumped to just under 3.0%.
Hard data released in Argentina over recent weeks showed that the economy was resilient in Q1 and early Q2.
President Trump tweeted yesterday that he wants to re-introduce tariffs on steel and aluminium imports from Brazil and Argentina, after accusing these economies of intentionally devaluing their currencies, hurting the competitiveness of U.S. farmers.
China's manufacturing PMIs put in a better performance in November, with the official gauge ticking up to 50.2 in November, from 49.3 in October, and the Caixin measure little changed, at 51.8, up from 51.7.
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 official PMIs suggest that the January survey data have escaped the worst of the hit from the virus.
The data in LatAm were all over the map while we were out.
December's money and credit data support the MPC's decision last week to hold back from providing the economy with more stimulus.
Yesterday's final manufacturing PMIs confirmed that the headline index in the euro area rebounded further last month.
The political momentum in the run-up to the election now lies with Labour.
Eurozone September CPI data this week will show that inflation pressures remain weak, appearing to support the ECB's focus on downside risks. We think Eurozone inflation--data released Wednesday-- rose slightly to 0.2% year-over-year in September from 0.1% in August, as core inflation edged higher, offsetting weak energy prices. Looking ahead, structural inflation pressures will keep inflation well below the central bank's 2% target for a considerable period.
Recent polls suggest that Jair Bolsonaro has comfortably beaten Fernando Haddad, to become Brazil's president.
Brazil's current account deficit is stabilizing following an substantial narrowing since early 2015, thanks to the deep recession.
It is fair to say that the economic debate on fiscal policy has shifted dramatically in the last 12-to-18 months.
Don't expect a pretty picture when Korea's Q1 GDP report appears in the last week of April.
The first economic report of 2020 confirmed the main story in the euro area last year; namely a recession in manufacturing.
The Eurozone manufacturing sector finished 2017 on a strong note. The headline PMI increased to a cyclical high of 60.6 in December, from 60.1 in November, in line with the initial estimate.
Survey data point to a very strong headline, 0.6%-to-0.7% quarter-on-quarter, in today's Q1 advance Eurozone GDP report. But the hard data have been less ebullient than the surveys. A GDP regression using retail sales, industrial production and construction points to a more modest 0.4% increase, implying a slowdown from the upwardly-revised 0.5% gain in Q4.
Banxico's Quarterly Inflation Report--QIR--for Q4 2016, published this week, confirmed that the monetary authority is concerned about the slowing pace of economic activity and rising inflation pressures. Banxico noted that signs of a recovery have emerged in external demand, but it also pointed out that the Trump administration might impose policies which would hit FDI flows into Mexico.
Inflation and growth paths remain diverse across LatAm, but in the Andes, the broad picture is one of modest inflationary pressures and gradual economic recovery.
Manufacturers in the Eurozone are still suffering, but yesterday's final PMI data for April offered a few bright spots.
Manufacturing in the Eurozone remained a strong driver of GDP growth in the third quarter. The headline EZ manufacturing PMI rose to 58.1 in September, from 57.4 in August, only a tenth below the initial estimate 58.2.
Most of the time, sterling broadly tracks a path implied by the difference between markets' expectations for interest rates in the U.K. and overseas. During the financial crisis, however, sterling fell much further than interest rate differentials implied, as our first chart shows.
Yesterday's final manufacturing PMIs confirmed that all remained calm in the EZ industrial sector through February.
It has been a nasty start to the year for LatAm as markets have been hit by renewed volatility in China, triggered by the coronavirus.
The U.K.'s balance of payments leaves little room for doubt that sterling would sink like a stone in the event of a no-deal Brexit.
The manufacturing sector appears to have finished 2017 on a strong note. The Markit/CIPS manufacturing PMI fell to 56.3 in December from 58.2 in November, but it remained above its 12-month average, 55.9.
Last week's balance of payments showed that the U.K. has made significant progress in reducing its reliance on overseas finance.
Data released this week in Brazil underscored the effect of weaker external conditions. This adds to the poor domestic demand picture, which has been hit by high, albeit easing, political uncertainty.
Don't write off the outlook for the construction sector purely on the basis of June's grim Markit/CIPS survey.
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.
Monetary policy usually is the first line of defence whenever a recession hits.
The BoJ until last week had been in wait-and-see mode over China's slowdown, but they finally folded with Thursday's decision.
Momentum in EZ money supply slipped marginally in September. Headline M3 growth slowed to 5.0%, from 5.1%, mainly due to a slowdown in narrow money. Overnight deposit growth slowed to 9.4%, from 9.9% in August, offsetting a slight rise in growth of currency in circulation.
The EZ economic survey data for April were disappointing in our absence.
Brazil's economic outlook is gradually improving following a challenging Q2, which was hit by political risk, putting business and consumer confidence under pressure.
Brazil's external accounts were a relatively bright spot again last year.
Mexico's risk profile and financial metrics have improved in recent days, following news of a preliminary bilateral trade deal with the U.S. on Monday.
Yesterday's money supply data in the Eurozone were solid across the board. Growth in headline M3 rose to 5.1% year-over-year in August, up from a 4.9% increase in July. A rebound in narrow money growth was the key driver of the gain, with seasonally- and calendar-adjusted M1 rising 8.9% year-over-year, up from July's 8.4%.
Survey data in Germany showed few signs of picking up from their depressed level at the start of Q4.
This year has been a story of two halves for EZ equities. The MSCI EU ex-UK jumped 11% in the first five months of 2017, but has since struggled to push higher.
CPI inflation last Friday gave Japanese policymakers a break from the run of bad data, jumping to 0.9% in April, from 0.5% in March.
We have been asked how we can justify raising our growth forecasts but at the same time arguing that the housing market is set to weaken quite dramatically, thanks to the clear downshift in mortgage applications in recent months. Applications peaked back in June, so this is not just a story about the post-election rise in mortgage rates.
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.
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.
The Fed will do nothing to the funds rate or its balance sheet expansion program today.
Our ECB-story since Ms. Lagarde took the helm as president has been that the central bank will do as little as possible through 2020, at least in terms of shifting its major policy tools.
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.
Retail sales values in Japan plunged by 14.4% month-on-month in October, reversing September's 7.2% spike twice over.
It doesn'tt matter if third quarter GDP growth is revised up a couple of tenths in today's third estimate of the data, in line with the consensus forecast.
The Monetary Policy Board of the Bank of Korea will tomorrow hold its final meeting for the year.
Our analysis of the Q3 activity and GDP data in yesterday's Monitor strongly suggests that China's authorities will soon ready further stimulus.
Yesterday's EZ money supply data confirmed that liquidity conditions in the private sector improved in Q3, despite the dip in the headline.
Data released this week have confirmed that the Mexican economy is struggling and that the near-term outlook remains extremely challenging.
Last week's second estimate of GDP reaffirmed that quarter-on-quarter growth declined to 0.1% in Q1--the lowest rate since Q4 2012--from 0.4% in Q4.
In the last few weeks markets have been treated to the news that euro area industrial production crashed towards the end of Q4, warning that GDP growth failed to rebound at the end of 2018 from an already weak Q3.
The real Boris Johnson will have to stand up this year.
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 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.
Banxico yesterday left its policy rate unchanged at 3%, the highest level in a decade.
The ink has hardly dried on economists' and the ECB's inflation projections for 2020, but we suspect that some forecasters are already considering ripping up the script.
Data released last week confirmed that Mexico's economy stumbled in the first half of the year, hurt by a temporary shocks in both the industrial and services sectors, and heightened political uncertainty, due to policy mistakes at the outset of AMLO's presidency.
Today's barrage of data kicks off a couple of busy days in the Eurozone economic calendar.
New orders data released yesterday for Germany confirmed that weakness in the manufacturing sector remains a key challenge for the economy. Factory orders fell 2.4% month-on-month in November, equivalent to a 0.4% fall year-over-year.
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.
New orders data increasingly suggest that German manufacturers all but shut their production lines at the start of the year.
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 German manufacturing sector appears to have settled into an equilibrium of sustained misery.
When trade-weighted sterling fell by 20% in 2016, it was widely expected that net trade would cushion GDP growth from the hit to households' real incomes.
Sterling has begun this year on the front foot, rising last week to its highest level against the U.S. dollar since June 2016.
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.
Japan is one of the countries most exposed to economic damage from the coronavirus.
Yesterday's FOMC , announcing a unanimous vote for no change in the funds rate, is almost identical to December's.
Small business sentiment and activity, as reported by the NFIB survey, has recovered exactly half the drop triggered by the rollover in stock prices in the fourth quarter. This matters, because most people work at small firms, which are responsible for the vast bulk of net job growth.
The Italian economy slowed at the end 2017, and it continues to underperform other major EZ economies. Real GDP rose 0.2% quarter-on-quarter in Q4, a bit slower than the 0.3% gain in Q3, pushing full-year growth up to a modest 1.0%. This compares poorly, though, with growth of 1.6% in the euro area as a whole.
The MPC will take a step forward on Thursday when it publishes an estimate of the medium term equilibrium interest rate--the rate which would anchor real GDP growth at its trend and keep inflation stable--in the Inflation Report.
The third estimate of euro area growth in the first quarter provides clear evidence that measuring GDP is not an exact science. Real GDP rose 0.6% quarter-on-quarter in Q1, accelerating from 0.4% in Q4. This latest estimate is higher than the previous estimate, 0.5%, but in line with the first calculation. Eurostat and all the large Eurozone economies now provide early estimates of GDP, before data for the full quarter is available.
Markets will be extremely sensitive to economic data in the run-up to the MPC's next meeting on August 3, following signals from several Committee members that they think the cas e for a rate rise has strengthened.
Industrial production in Germany had a decent start to the third quarter. Output rose 0.7% month-to-month in July, less than we and the consensus expected, but the 0.5% upward revision to the June data brings the net headline almost in line with forecasts. Rebounds of 2.8% and 3.2% month-to-month in the capital goods and construction sectors respectively were the key drivers of the gain, following similar falls in June. A 3.2% fall in consumer goods production, however, was a notable drag.
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 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.
Fiscal stimulus, partly financed by a border adjustment tax, and Fed rate hikes, were supposed to be a powerful cocktail driving a stronger dollar in 2017. But so far only the Fed has delivered--we expect another rate hike next month--while Mr. Trump has disappointed in the White House.
The U.S. coronavirus outbreak is not slowing. The curve is not bending much, if at all. Confirmed cases continue to increase at a steady rate, averaging 23% per day over the past three days.
The ECB made no changes to its policy stance yesterday. The central bank left its refinancing and deposit rates at 0.00% and -0.4%, respectively, and maintained the pace of QE at €60B per month. The program will run until December "or beyond, if necessary."
Colombia and Chile faced similar broad trends through most of 2018.
The hard data in Germany took a turn for the worse at the start of Q4. The outlook for consumers' spending was dented by the October plunge in retail sales--see here-- and on Friday, the misery spilled over into manufacturing.
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.
Yesterday's economic reports in the Eurozone were solid across the board.
Advance country data indicate that headline EZ inflation fell slightly in June; we think the rate dipped to 1.3% year-over-year, from 1.4% in May.
We aren't convinced that China's recovery is in train just yet.
Korea's final GDP report for Q4 was little changed, in the end.
Over the sleepy August holidays, a view has gained traction in the media that the U.K. economy is showing little damage from the Brexit vote. Optimists argue that the size and composition of the 0.6% quarter-on-quarter rise in Q2 GDP, the 1.4% month-to-month jump in retail sales volumes in July, and the slight dip in the unemployment claimant count demonstrate that the recovery is in good shape.
The Brazilian economy enjoyed a decent Q2, with GDP rising 0.2% quarter-on-quarter, despite the disruptions caused by the truck drivers' strike, after a 0.1% decline in Q1.
A plunge in imports saved the EZ economy from a contraction in second quarter GDP. Yesterday's final data showed that real GDP growth rose 0.3% quarter- on-quarter, slowing from a 0.5% jump in Q1. A 0.4 percentage points boost from net exports was the key driving force.
If you had asked us in the spring where the action would be in capital spending over the summer, we would have said that the housing component was the best bet. Right now, though, the opposite seems more likely, with housing likely to be the weakest component of capex.
Steady Q4 GDP growth in China masks respectable q/q rebound. Signs of recovery in China's industrial complex, but for how long? China's households continue to struggle. China's FAI growth shows rebuilding confidence around the Phase One deal. Japan's November tertiary index suggests October plunge was more tax than typhoon. January sees the first of many BoK "holds" this year.
Friday's advance GDP data provided the first solid evidence of a Q1 slowdown in the euro area economy.
China's retail sector is on its knees at best. China's IP data suggest that the horrendous PMIs underplayed the carnage. A damning FAI report... tertiary capex should rebound, but the hit to global demand will hold back the secondary industry. China's property market grounds to a halt in February. The Bank of Korea steps in with an emergency cut, despite falling new infections locally.
Yesterday's final EZ manufacturing PMIs for August provided little in the way of relief for the beleaguered industrial sector.
Fears of a Chinese hard landing have roiled financial and commodity markets this past year and have constrained the economic recovery of major raw material exporters in LatAm.
The $10 increase in the price of Brent crude oil over the last three months to $68 is an unhelpful, but manageable, drag on the U.K. economy's growth prospects this year.
Colombia was the fastest growing LatAm economy in 2019, due mostly to strong domestic demand, offsetting a sharp fall in key exports.
Markets expect the MPC to shelve November's guidance--that interest rates need to rise only twice in the next three years--at today's meeting.
Industrial production in Germany stumbled at the end of Q4. Data yesterday showed that output fell 0.6 month-to-month in December, though this drop has to be seen in light of the downwardly-revised 3.1% jump in November.
Korean industrial production surprised to the upside in August, according to data released yesterday.
Judgement pending on Chinese industrial production. Chinese retail sales buoyed by inflation. Chinese FAI growth stable through Q4; local government spending better managed this year. China's housing market still not reached a bottom. Japan's tertiary index plunge is more tax hike than typhoon. Japan's PMIs underline damage from tax hike.
Yesterday's ECB policy decision was a carbon copy of the announcement in July. The central bank maintained its key refinancing rate at 0.00%, and also kept its deposit and marginal lending facility rates unchanged at -0.4% and 0.25% respectively. The ECB also kept the pace of QE unchanged at €80B per month. Finally, the central bank refrained from formally extending QE.
After 29 straight weekly declines, the number of oil rigs in operation in the U.S. rose to 640 in the week ended July 2, from 628 the previous week, according to oil services firm Baker Hughes, Inc. If today's report for the week ended July 9 shows the rig count steady or up again, it will b e much easier to argue that the plunge in activity since the peak--1,601 rigs, in mid-September--is now over.
We just can't get away from the deeply vexed question of wages; specifically, why the rate of growth of nominal hourly earnings has risen only to just over 2.5%, even though the historical relationship between wage gains and the tightness of the labor market points to increases of 4%-plus.
Recently data from Argentina continue to signal a firming cyclical recovery. According to INDEC's EMAE economic activity index, a monthly proxy for GDP, the economy grew 4.0% year-over-year in June, up from an already-solid 3.4% in May.
The minutes from Banxico's August 11 monetary policy meeting--in which Board members unanimously voted to keep rates on hold at 4.25%--confirmed that the bank's policy guidance remains broadly neutral. Subdued economic activity, favourable inflation and gradual fiscal consolidation explain policymakers' position.
The 7.8% month-on-month plunge in Japan's core machine orders in May re-emphasises the underlying weakness that we have been worrying about, after the 5.2% jump in April.
Yesterday's economic reports in the Eurozone were mostly positive.
Industrial production data in Germany continued to defy the signal of doom and gloom from leading indicators.
China's unadjusted current account surplus widened to $16.0B in the preliminary report for Q3, from $5.3B in Q2.
Yesterday's economic numbers in the Eurozone were mixed, but we are inclined to see them through rose-tinted glasses.
Friday's detailed Q2 growth data in the EZ broadly confirmed the advance numbers.
Data while we were away have intensified fears that the global, and by extension EZ, economy is slipping into recession.
Recently released data in Mexico are sending weak signals for the business outlook, and the Texcoco airport saga won't help.
Britain's productivity problem has been building under the surface for years, but it is set to be more pertinent now that the economy is close to full employment.
Just how low would sterling go in the event of a no-deal Brexit? When Reuters last surveyed economists at the start of June, the consensus was that sterling would settle between $1.15 and $1.20 and fall to parity against the euro within one month after an acrimonious separation on October 31.
Yesterday's economic activity data from Peru signalled that the relatively firm business cycle continues. The monthly GDP index accelerated to 3.6% year-over-year in November, rising from 2.1% in October, but marginally below the 4.4% on average in Q3. Growth continued to be driven by mining output, including oil and gas, which rose 15% year-over- year. The opening of several new mines explains the upturn, and we expect the sector to remain key for the Peruvian economy this year.
Mexico's industrial sector did relatively well in Q3, due mainly to the resilience of the manufacturing sector, and the rebound in construction and oil output, following a long period of sluggishness.
The headline figures from yesterday's GDP report gave a bad impression. September's 0.1% month-to- month decline in GDP matched the consensus and primarily reflected mean-reversion in car production and car sales, which both picked up in August.
To the extent that markets bother with the NFIB survey at all, most of the attention falls on the labor market numbers. But these data--hiring, compensation, jobs hard-to-fill--haven't changed much in recent months, and in any event most of them are released the week before the main survey, which appeared yesterday. The message from the labor data is unambiguous: Hiring remains very strong, employers are finding it very difficult to fill open positions, and compensation costs are accelerating.
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.
The renewed fall in market interest rates and sterling this month indicates that markets expect the MPC to strike a dovish note at midday, when the Inflation Report is published, alongside the rate decision and minutes of this week's meeting.
The Fed paved the way with a 50bp emergency rate cut on March 3, with more to come.
It's hard to find anything to dislike in the February employment report.
Yesterday's industrial production numbers in Germany were similar to Friday's confusing new orders data.
Last week, the Chinese authorities were out in force, talking up the economy and markets, and bearing measures to support private firms.
September's GDP report laid bare the economy's sluggishness.
Mexico's February industrial production report was weaker than markets expected. Output expanded by 0.7% year-over-year, below the consensus, 1.2%, and slowing from 0.9% in January.
Many analysts argue that the MPC inevitably will raise interest rates at its May 10 meeting because markets have fully priced-in a 25bp uplift.
Political uncertainty is never far away in the Eurozone, though the most recent outbreak could easily swing in favour of markets.
Revisions to Japan's real GDP growth, on Monday, left Q2 blisteringly hot.
The Board of the Bank of Korea will meet again in less than a week's time for this year's penultimate meeting.
We struggle to see how the pro-separatist movement in Catalonia can move forward from here.
Data released yesterday support our view that the Brazilian retail sector has gathered strength in recent months, following a weak Q2, when activity was hit by the truckers' strike.
Chancellor Sunak's "temporary, timely and targeted" fiscal response to the Covid-19 outbreak, and the BoE's accompanying stimulus measures, won't prevent GDP from falling over the next couple of months.
Mexico's industrial production report released yesterday brought encouraging news about the state of the economy, helping relieve some doubts about its health.
Mexico's economy is not accelerating, but it is holding up very well in difficult circumstances, with rising domestic political risk and stifling interest rates.
Yesterday's minutes of the February 4-to-5 COPOM meeting, at which Brazil's central bank, the BCB, cut the benchmark Selic rate by 25bp to 4.25%, reaffirmed the committee's post-meeting communiqué.
The latest GDP data confirm that the economy ended last year on a very weak note.
Chinese monetary conditions show signs of a temporary stabilisation. M2 growth picked up to 9.1% year-over-year in November from 8.8% in October, though largely as a correction for understated growth in recent months.
The U.K. general election is the main event in today's European calendar, but the first official ECB meeting and press conference under the leadership of Ms. Lagarde also deserves attention.
The key question for the MPC at this week's meeting is whether it is prepared to tolerate the consequences for inflation of sterling's further depreciation since its last meeting in August.
Friday's weekly report on the assets and liabilities of U.S. commercial banks will complete the picture or March and, hence, the first quarter. It won't be pretty. With most of the March data already released, a month-to-month decline in lending to commercial and industrial companies of about 0.7% is a done deal. That would be the biggest drop since May 2010, and it would complete a 1% annualized fall for the first quarter, the worst performance since Q3 2010. The year-over-year rate of growth slowed to just 5.0% in Q1, from 8.0% in the fourth quarter and 10.3% in the first quarter of last year.
Today's industrial production data in the Eurozone will extend the run of soft headlines at the start of the year.
On a headline level, the Spanish economy conformed to its image as the star performer in the EZ in Q4.
In yesterday's Monitor, we lamented the lack of growth in the French economy. The outlook is not much brighter in Italy. We think Italian GDP was unchanged quarter-on-quarter in Q4, slightly better than the -0.1% consensus but still very soft.
We're very interested in the detail of today's January NFIB survey; the headline index, not so much.
Japanese M2 growth increased trivially in June to 3.9% year-on-year from 3.8% in May, significantly higher than the 3.2% rate in August, before the BoJ began targeting the yield curve.
China's Q2 official GDP growth, to be released on Monday, likely slowed to 6.2% year-over-year, from 6.4% in Q1.
Japan's preliminary GDP report for Q4 is out on Thursday, and we expect to see a punchy number.
On the face of it, the latest GDP data look awful. December's 0.4% month-to-month fall in GDP closed a poor Q4, in which quar ter-on-quarter growth slowed to 0.2%, from 0.6% in Q3.
Today's Q4 GDP report in the Eurozone likely will show that growth slowed again at the end of last year. We think GDP growth dipped to 0.2% quarter-on-quarter in Q4, down from 0.3% in Q3, and risks to our forecast are firmly tilted to the downside. The initial release does not contain details, but we think a slowdown in consumers' spending and a drag from net exports were the main drivers of the softening.
It's hard to know what will stop the correction in the stock market, but we're pretty sure that robust economic data--growth, prices and/or wages--over the next few weeks would make things worse.
We expect July's consumer prices report, due on Wednesday, to reveal that CPI inflation dropped to 1.8% in July, from 2.0% in June.
GDP growth in Japan surprised to the upside in the second quarter, although the preliminary headline arguably flattered the economy's actual performance.
The second presidency of Chile's conservative Sebastián Piñera, a billionaire turned politician, began on Sunday, March 11, in favourable economic circumstances.
External and domestic shocks in Mexico over the last two years, including the "gasolinazo", NAFTA renegotiation and the presidential election, have put the country's financial metrics under severe stress and pushed inflation to cyclical highs.
Monthly manufacturing and retail sales data point to upside risk to the consensus expectation of 0.4% quarter-on-quarter in Q1 Eurozone real GDP growth. Advance country data indicate that industrial production was unchanged month-to-month in March, equivalent to a 0.9% increase quarter-on-quarter.
Germany's external surplus remained resilient at the start of the year. Data on Friday showed that the seasonally adjusted trade surplus rose marginally to €18.5B in January, from a revised €18.3B in December.
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".
LatAm governments and policymakers are bracing for a more dramatic and longer virus-led downturn than initially expected.
The measures to support the economy through the coronavirus crisis, unveiled by policymakers on Budget day, exceeded expectations.
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.
Chile's market volatility and high political risk continue, despite government efforts to ease the crisis.
The political situation in Spain remains an odd example of how complete gridlock can be a source of relative stability.
It was no surprise that Banxico cut its policy rate by 25bp to 7.00% yesterday, following similar moves in August, September, November and December.
We've already raised a red flag for today's second Q4 GDP estimate in the Eurozone, but for good measure, we repeat the argument here.
Japan's GDP likely dropped by a huge 0.9% quarter-on-quarter in Q4, after the 0.5% increase in Q3, with risks skewed firmly to the downside.
Peru's central bank left its policy interest rate unchanged at 3.75% last week, but signalled that further easing is on the way. According to the press release accompanying the decision, policymakers noted that inflation expectations are within their target range and still falling.
German inflation data are more noise than signal at the moment.
As a general rule, faster productivity growth is always good news.
What should we make of the view of Fed hawks, set out with admirable clarity in the September FOMC minutes, that higher rates "might spur rather than restrain economic activity"? The core story behind this counter-intuitive proposal is the idea that zero rates send a signal to the private sector that the Fed is deeply worried about the state of the economy.
Inflation in Germany rebounded last month, rising to plus 0.1% year-over-year in May, from minus 0.1% in April. We think the economy has escaped the claws of deflation, for now. Household energy prices fell 5.7% year-over-year in May, up from a 6.3% decline in April, and the rate will rise further. Base effects and higher oil prices point to a surge in energy inflation in the next three-to-six months.
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.
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.
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.
The fact that Italy's economy is in poor shape will not surprise anyone following the euro area, but the advance Q4 GDP headline was astonishingly poor all the same.
The ECB and Ms. Lagarde played it safe yesterday.
A sluggish GDP headline, a further increase in inflation, and poor German manufacturing data were the primary euro area highlights in our absence.
The Q2 GDP figures show that the economy has little underlying momentum.
Japan's GDP growth came roaring back in Q2, thanks to a strong rebound in private consumption, and an acceleration in business capex.
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.
GDP data today will probably show that the Eurozone economy accelerated to 0.3% quarter-on-quarter in Q4, up from 0.2% a quarter earlier. Industrial production came in disappointingly at 0.0% month-to-month in December, but this is not enough to change our forecast in the light of solid data on household spending.
A dearth of properties for sale has helped to ensure that house prices have continued to rise since the Brexit vote, despite weaker demand. But now, signs are emerging that demand and supply are coming closer to balance
Official, real GDP growth was low in Q1, at 1.4% quarter-on-quarter, down from 1.6% in Q4.
Activity in the Mexican industrial sector cooled marginally at the start of the second quarter, but the drop was not as dramatic as the headlines suggested. Output fell 4.4% year-over-year in April, after a 3.4% increase in March.
Claims abound that sterling's sharp depreciation since the start of the year--to its lowest level against the dollar since May 2010--partly reflects the growing risk that the U.K. will vote to leave the European Union in the forthcoming referendum. We see little evidence to support this assertion. Sterling's decline to date can be explained by the weakness of the economic data, meaning that scope remains for Brexit fears to push the currency even lower this year.
The French manufacturing data delivered another upside surprise last week, following the solid numbers in Germany; see here. French industrial production rose slightly in November, by 0.3% month-to-month, extending the gains from an upwardly-revised 0.5% rise in October.
Data on industrial production and trade released last week have fanned hopes that the U.K.'s growth model is moving away from its excessive reliance on household spending, and towards production and exports. But a close look at the underlying drivers of the strong headline figures suggests that it is too soon to hope that the economy is undergoing a major rebalancing.
Thursday's CPI report in Mexico showed that inflation is edging lower. We are confident that it will continue to fall consistently during Q1, thanks chiefly to the subpar economic recovery, low inertia and the effect of the recent MXN rebound.
Manufacturing in France rebounded only modestly at the start of Q3, despite favourable base effects.
If sustained, sterling's recent depreciation looks set to drive CPI inflation up to about 3.5% by the end of next year.
China's official and Caixin manufacturing PMIs have diverged in the last couple of months.
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.
China's FX reserves were relatively stable in March, with the minimal increase driven by currency valuation effects.
The latest national accounts show that the economy is holding up much better in the face of heightened Brexit uncertainty than previously thought.
Industrial output in Chile struggled late in the third quarter, falling 1.3% month-to-month in September. The year-over-year rate, calendar and seasonally adjusted, rose 2.4% in September, down from a revised 5.3% in August.
Brazil's GDP growth slowed to just 0.1% quarter- on-quarter in Q4, from a downwardly-revised 0.5% in Q3.
Yesterday's economic headlines in the Eurozone were pleasant reading.
We expect to see a 70K increase in October payrolls today.
The early Q4 hard data in Germany recovered a bit of ground yesterday.
Friday was a busy day in the Eurozone. The final and detailed GDP report confirmed that growth in the euro area slowed to 0.2% quarter-on-quarter in Q3, from 0.4% in Q2, with the year-over-year rate slipping by 0.6 percentage points to 1.6%, just 0.1pp below the first estimate.
For some time now, we have puzzled over the softness of small firms' capital spending intentions, as measured by the monthly NFIB survey.
China's FX reserves were little changed in June, at $3,112B.
Friday's data provided the first bit of evidence that manufacturing in the Eurozone is headed for a slowdown in Q2, partly reversing the strength in Q1.
Yesterday's industrial production report in Germany was much better than implied by the poor new orders data--see here--released earlier this week.
Friday's industrial production data in the core EZ economies, for December, were startlingly poor. In Germany, industrial production plunged by 3.5% month-to-month, comfortably reversing the revised 1.2% rise in November.
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
Inflation data in Brazil, Mexico and Chile last week reinforced our view that interest rates will remain on hold, or be cut, over the coming meetings. The recent fall in oil prices, and the weakness of domestic demand, will offset recent volatility caused by the FX sell-off, driven mostly by the coronavirus story.
A quick rebound in growth, after the slowdown to a reported 2.6% in the fourth quarter, is unlikely.
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.
Mexico's structural reforms, robust fundamentals, and its close ties to the U.S. should have conferred a degree of protection from the turmoil in EMs over the past year. But its markets have been hit as hard as other LatAm countries by the sell-off in global markets in recent weeks. The MXN fell about 5% against the USD in January alone, and has dropped by 20% over the last year.
The first major data release of 2016 showed manufacturing activity slipping a bit further at the end of last year, but we doubt the underlying trend in the ISM manufacturing index will decline much more. Anything can happen in any given month, especially in data where the seasonal adjustments are so wayward, but the key new orders and production indexes both rose in January; almost all the decline in the headline index was due to a drop in the lagging employment index.
Advance data indicate that Q1 annualized GDP growth in the U.S. was a trivial 0.2%. And in the U.K., annualized growth is estimated to have slowed to 1.2%, from 2.4% in Q4.
Yesterday's survey data tell a story of resilient manufacturing in the Eurozone. The headline EZ PMI rose to 52.6 in September, from 51.7 in August, lifted by a rise in new orders to a three-month high.
Eurozone manufacturing is showing signs of stabilisation. Final PMI data showed the headline gauge falling trivially to 52.4 in July from 52.5 in June, slightly above the initial estimate of 52.2. New orders slowed, though, with companies reporting weakness in export business amid firm domestic demand.
Economic theory tells us that government spending should be counter-cyclical, but recent experience in the Eurozone tells a slightly different story. The contribution to GDP growth from government spending rose during the boom from 2004 to 2007, and remained expansionary as the economy fell off the cliff in 2008. As the economy slowed again following the initial recovery, the sovereign debt crisis hit, driving a severe pro-cyclical fiscal hit to the economy.
The revival in the construction sector is slowing on all fronts as the fiscal squeeze intensifies, business confidence fades and the recovery in housebuilding loses momentum. These headwinds are likely to ensure that construction output only holds steady this year, thereby contributing to the broader economic slowdown.
The European financial sector was in the news again on Friday, propelled by further weakness in Deutsche Bank's share price. In our Monitor of September 27, we said that worries of a European "Lehman Moment" were overblown.
This is the final report before your Eurozone correspondent dials down for the summer, and heads for the beach. Advance Q2 GDP data next week is the key release while we are away, with the latest Bloomberg consensus--published July 20th--looking for a 0.4% increase quarter-on-quarter. Everything we look at suggests the consensus is right on this one, with risks tilted to the upside due to strong net exports in Germany.
The Q4 national accounts show that the economy lost further momentum at the end of last year, in the face of unprecedented levels of political uncertainty.
It's probably safe to assume that Q1's 0.5% quarter-on-quarter increase in GDP will be as good as it gets this year.
April's money and credit figures suggest that GDP growth has remained sluggish in Q2. Households' broad money holdings increased by just 0.3% month-to-month in April.
The fact that Brazilian economy shrank in the first quarter was never in doubt; what really mattered was the pace of contraction. Surprisingly; the decline was just 0.2% quarter-on-quarter in Q1, above market expectations, but still down after the meagre 0.3% gain in Q4.
Wednesday's first estimate of full-year 2018 GDP in Mexico indicates that growth lost momentum in Q4.
It's tempting to conclude from the recent decline in consumers' confidence that growth in real spending will continue to weaken over the coming quarters, from the already modest 1.8% year-over-year rate in Q3.
The Prime Minister is in a position on Brexit all chess players dread: zugzwang.
The collapse in business activity and consumer confidence since the referendum has sealed the deal on policy easing from the MPC on Thursday. The Committee has cut Bank Rate by 50 basis points when the composite PMI has been near July's level in the past, as our first chart shows.
The 2010s were the first decade since reliable records begin--in the 1700s--in which a recession was completely avoided
China's trade balance flipped to an unadjusted deficit of $7.1B in the first two months of the year, from a $47.2B surplus in December.
This has been a very complicated week for LatAm policymakers, who are particularly uneasy about the performance of the FX market.
It's still unclear how exactly Covid-19 will impact the euro area as a whole, but little doubt now remains that Italy's economy is in for a rough ride.
China's unadjusted trade surplus collapsed in February, to just $4.1B, from $39.2B in January.
France is solidifying its position as one of the Eurozone's best-performing economies.
Recent economic indicators in Mexico have been relatively positive.
Another day, another solid economic report in the Eurozone. Data yesterday showed that industrial production in France jumped 2.2% month-to-month in November, pushing the year-over-year rate up to +1.8%, from -1.8% in October. The 2.3% jump in manufacturing output was the key story, offsetting a 0.3% decline in construction activity. Production of food and beverages rebounded from weakness in October, and oil refining also accelerated.
Economic data in the euro area are still slipping and sliding.
Yesterday's manufacturing data in France were in stark contrast to last week's upbeat German numbers.
French manufacturing came roaring back at the end of Q1. Industrial production jumped 2.0% month-to- month in March, driving the year-over-year rate higher to +2.0%, from a revised -0.7% in February.
This week's data confirmed Mexico's strong economic performance over the first few months of this year.
Yesterday's French industrial production data were worse than we expected. Output slipped 1.1% month-to-month in September, pushing the year-over-year rate down to -1.1% from a revised +0.4% in August. Mean-reversion was a big driver of the poor headline, given the upwardly-revised 2.4% jump in August.
Recent inflation numbers across the biggest economies in LatAm have surprised to the downside, strengthening the case for further monetary easing.
Yesterday's economic reports in the Eurozone were ugly.
The large unexpected surge in oil and gas output this year has boosted the overall economic recovery significantly. But this looks like the last hurrah for a sector of the U.K. economy in terminal decline.
Friday's data force us to walk back our recession call for Germany. The seasonally adjusted trade surplus rose in September, to €19.2B from €18.7B in August, lifted by a 1.5% month-to-month jump in exports, and the previous months' numbers were revised up significantly.
March data for retail sales and manufacturing have tempered our optimism for the advance Q1 GDP estimate in Germany next week. Industrial production fell 0.5% month-to-month in March, equivalent to a mere 0.1% increase year-over-year, mainly as a result of weakness in core manufacturing activities.
Yesterday's industrial production data in Germany were downbeat. Output fell 1.3% month-to-month in March, pushing the year-over-over rate down to 0.3%, from 2.0% in February. Production was held back by weakness in manufacturing and a plunge in construction, Meanwhile, energy output rebounded slightly following last month's fall. Over Q1 as a whole, though, the industrial sector performed strongly.
Banxico's monetary policy meeting on Thursday was the first to be attended by the two new deputy governors, Jonathan Heath and Gerardo Esquivel, economists appointed by AMLO.
Fears over a Eurozone banking crisis have compounded market volatility recently, and sent bank equities into a tailspin. Deutsche Bank has been the focus of the attention, probably due to its systemic importance and opaque balance sheet. DB's stock price is down a staggering 38% year-to-date, and earlier this week, the German finance minister had to assure markets that he has no worries about the bank's position.
Market participants and analysts have gradually softened their cautious stance towards Mexico, as concerns about the new U.S. administration's trade and immigration policies have eased, and risks of a credit rating downgrade have lessened.
Japan's August balance of payments data, released yesterday, offer the first overview of financial flows since the BoJ "tweaks" at the end of July.
Data released in recent days have supported our base case for further interest rate cuts in Mexico over the coming meetings.
Yesterday's economic data in Germany cemented the story of a strong start to the year, despite the disappointing headlines. Industrial production slipped 0.4% month-to-month in March, pushing the year-over-year rate down to +1.9% from a revised +2.0% in February.
We're expecting a hefty increase in February payrolls today, but even a surprise weak number likely wouldn't prevent a rate hike next week. The trends in all the private sector employment surveys are strong and improving, and jobless claims have dropped to new lows too, though we think that's probably less important than it appears.
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.
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.
Workers in the euro area remain scarred by the zone's repeated crises, but the strengthening cyclical recovery is slowly starting to spread to the labour market. The unemployment rate fell to a three-year low of 10.9% in July, and employment has edged higher after hitting a low in the middle of 2013. Germany's outperformance is a key story, with employment increasing uninterruptedly since 2009, and the unemployment rate declining to an all-time low of 6.4%. Among the other major economies, the unemployment rate in Spain and Italy remains higher than in France. But employment in Spain has outperformed in the cyclical recovery since 2013.
The first quarter probably saw continued weakness in German net trade, despite the modest February rebound in gross exports. The seasonally-adjusted trade surplus rose to €19.7B from €18.7B in January, lifted by a 1.3% month-to-month rise in exports, which offset a 0.4% increase in imports.
October industrial production data in France surprised to the upside yesterday, with headline output rising 0.5% month-to-month, well above the consensus estimate and our own forecast for a monthly fall. Production was lifted by a 5.1% month-to-month jump in energy output, due to unusually cold weather, offsetting a 0.5% decline in manufacturing output, the fifth drop in the past six months.
Mexico's latest forward-looking indicators are showing tentative signs of stabilisation in the wake of recent evidence that growth slowed quicker than markets have been expecting.
The resilience and adaptability that the Chilean economy has shown over previous cycles has been tested repeatedly over the last year. Uncertainty on the political front, falling metal prices, and growing concerns about growth in China have been the key factors behind expectations of slowing GDP growth.
Recent activity data in Mexico have been soft and leading indicators still point to challenging near-term prospects, due mainly to relatively high domestic political risk, stifling interest rates and difficult external conditions.
Manufacturing in France remained on the front foot at the start of Q4.
Data released yesterday reinforced our forecast of a further rate cut in Brazil next month.
Japanese PPI inflation rose sharply to 2.6% in July from 2.2% in June, well above the consensus for a modest rise.
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.
Mexico's headline inflation fell to a record low of 2.9% in May, down from 3.1% in April and below the middle of Banxico's inflation target, 2-to-4%, for the first time since May 2005. C ore inflation was unchanged at 2.3% in May; higher services prices were offset by a slowing in the rate of increase of goods prices to 2.4% from 2.7% in April, confirming that the pass-through effect from the MXN's depreciation has been very limited.
Banxico will meet tomorrow, and we expect Mexican policymakers to cut the main interest rate by 25bp, to 7.25%.
Data yesterday added further evidence of a slow recovery in Eurozone auto sales.
The BoJ is likely to stay on hold this week for all its main policy settings.
Yesterday's final EZ CPI data for March confirmed the message from the advance report that inflation pressures eased last month.
China's real GDP growth was unchanged at 6.4% year-over-year in Q1, above the consensus for a slowdown to 6.3%.
China's activity data yesterday made pretty uncomfortable reading for policymakers.
The headlines of China's August activity data are missing the real story in recent months.
Today's economic data will add to the evidence that construction in the Eurozone slowed in the first quarter.
Spain heads to the polls on Sunday, but unlike the chaos that descended on Europe following Greece's elections earlier this year, we expect a market-friendly outcome. The key political story likely will be the end of the two-party system, as polls indicate neither of the two largest mainstream parties--Partido Popular and PSOE--will be able to form a majority. Markets' fears have been that the fall of the established parties would allow anti-austerity party, Podemos, to lead a confrontation with the EU, but this looks very unlikely.
The idea that the ECB will use its forthcoming strategic policy review to include a measure of real estate prices in its inflation target has been consistently brought up by readers in recent meetings.
Japanese policymakers have a wary eye on the weakness in industrial production and exports.
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.
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.
Chinese residential property prices appear to be staging a comeback, with new home prices rising 1.1% month-on-month in June, faster than the 0.8% increase in May.
Yesterday's November EZ construction data offered little respite to the gloomy outlook for the Q4 GDP headline.
We've continuously warned that Japan's national accounts weren't sitting easily with the underlying signals from survey data, and monetary conditions, through last year.
Colombia's December activity reports confirmed that quite strong retail sales last year were less accompanied by local production, which became only a minor driver of the economic recovery, as shown in our first chart.
The Eurozone's trade surplus rebounded slightly over the summer, rising to €16.6B in August from €12.6B in July, helped mainly by a 2.0% month-to- month jump in exports.
The Monetary Policy Board of the Bank of Korea voted yesterday to lower its policy base rate to 1.25%, from 1.50%.
China's GDP data--to be published on Monday-- are likely to report that growth slowed to 1.4% quarter-on-quarter in Q4, from 1.6% in Q3. A 1.4% increase would match the series low of Q1 2016.
Chinese real GDP growth reportedly edged down to 6.7% year-over-year in Q2, from 6.8% in Q1.
The outlook for growth in the EZ economy is currently both stable and relatively uncomplicated, at least based on the most widely-watched leading indicators.
The trend in manufacturing output probably is about flat, with no real prospect of any serious improvement in the near term.
A strong finish to the fourth quarter spared the EZ auto sector the embarrassment of posting an outright fall in domestic sales through 2019 as a whole.
We had expected the batch of Chinese data released at the end of last week to disappoint.
Friday' second Q4 GDP estimate revealed that the EZ economy barely grew at the end of 2019. The report confirmed that GDP rose by 0.1% quarter-on-quarter in Q4, slowing from a 0.3% rise in Q3, but the headline only narrowly avoided downward revision to zero, at just 0.058%
Brazil's consumer resilience in Q3 continued to November, but retail sales undershot market expectations, suggesting that the sector is not yet accelerating and that downside risks remain.
The Eurozone's sovereign bond markets are dying, and this is a good thing, by and large.
The market for new cars in the Eurozone remained red-hot last month. New registrations surged 18.4% year-over-year in May, up from a 9.4% rise in April, and pushing the 12-month average level of registrations to a post-crisis high of 843K units. Accelerating growth in Italy and France was the key driver.
The Japanese GDP report yesterday contained substantial revisions to Q4. We had expected the Q1 contraction, but the revisions recast the health of the recovery, making the domestic demand performance look much less impressive recently, with the economy struggling since the burst of growth in the first half last year.
Japan's economic data have been very volatile in the last 18 months.
The beleaguered EZ car sector finally enjoyed some relief at the end of Q3, though base effects were the major driver of yesterday's strong headline.
We lack an adjective sufficiently strong to describe China's February activity data.
We were not hugely surprised to see stocks tank again yesterday.
Latin American markets and policymakers are bracing for another complicated week, after the second, and more aggressive, Fed emergency move over the weekend.
The split between the reality reflected in the economic data and market pricing has never been wider in the euro area
Hard data on Mexico's industrial sector for the last couple of months have highlighted major divergences across sectors.
The Eurozone construction sector took a step back at the end of Q1, but only temporarily. Construction output fell 1.1% month-to-month in March, after a revised 5.5% jump in February. The year-over-year rate slipped to +3.6%, from a two-year high of 5.5% in February.
The upturn in the Eurozone construction sector likely paused in Q3. Yesterday's August report showed that output fell 0.2% month-to-month, pushing the year-over-year rate down to +1.6%, from a revised +2.8% in July.
Italian bond yields have remained elevated this week, following the release of the government's detailed draft budget for 2019.
The Monetary Policy Board of the Bank of Korea yesterday left its benchmark base rate unchanged, at 1.50%.
Italy's economy is still bumping along the bottom, after emerging from recession in the middle of last year.
Chile's Q3 GDP report, released yesterday, confirmed that the economy gathered speed in the third quarter, but this is now in the rearview mirror.
Peru's April supply-side monthly GDP data confirm that the economic rebound lost momentum at the start of the second quarter.
We doubt there will ever be a fail-safe leading indicator of when a recession is about to hit, but asset prices can help us to assess the risks, at least.
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.
The face-off is intensifying between Madrid and the pro-independent local government in Catalonia. A referendum on independence in the northeastern state has been rejected by the Spanish government and has been declared constitutionally illegal by the high court.
Data released last week confirm that the Argentinian economy finally is stabilizing.
The labour market in the Eurozone continues slowly to improve. The unemployment rate fell to 10.7% in October from 10.8% in September, reaching its lowest level since 2013. The divergence in rates, however, between the major economies remains significant. Unemployment in France, Italy and Spain is still above 10%, but the advance German number continued their record-breaking form in November.
Brazil's December industrial production and labour reports, released this week, confirmed that the recovery remained solidly on track at the end of last year.
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.
Brazil's recession is getting uglier. Real GDP in Brazil fell 1.7% quarter-on-quarter in Q3, much worse than expected, though marginally less terrible than the downwardly revised 2.1% contraction in Q2. Year-over-year, the economy plunged by 4.5% in the third quarter, down from -3.0% in Q2, and -2.5% in the first half. The disappointment was widespread in Q3; though rising mining output was a positive, the underlying trend in mining is still falling. The key story here, though, is that the economy has sunk into its worst slump since the Great Depression.
LatAm assets and currencies had a bad November, due to global trade war concerns, the USD rebound and domestic factors.
The past two days have seen a slew of data that should keep the hawks in the Bank of Korea at bay during the Board's meeting at the end of this month.
The key detail in Friday's barrage of economic data was the above-consensus increase in EZ inflation.
Iván Duque, the conservative candidate for the Democratic Centre Party, won the presidential election held in Colombia on Sunday.
The Spanish economy remains the star performer among the majors in the Eurozone.
Our first impression of the proposed Brexit deal between the EU and the U.K. is that it is sufficiently opaque for both sides to claim that they have stuck to their guns, even if in reality, they have both made concessions.
We'd be very surprised to see anything other than a 25bp rate cut from the Fed today, alongside a repeat of the key language from July, namely, that the Committee "... will act as appropriate to sustain the expansion".
Colombia's economy remained resilient in July, thanks to strong domestic demand and relatively good external conditions for the country's top exports.
Mexico's central bank, Banxico, last night capitulated again, reacting to the depreciation of the MXN by increasing interest rates by 50bp--for the fourth time this year--to 5.25%.
Historical evidence suggests that we should be worried about the relative weakness in the Eurozone's manufacturing sector. Industrial production ex-construction has historically been a key indicator of the business cycle, despite accounting for a comparatively modest 19% of total value-added in the euro area. In all three previous major downturns, underperformance in the manufacturing sector sounded the alarm six-to-nine months in advance that the economy was about to slip into recession.
Downward revisions to Japan's Q4 real GDP growth, published on Wednesday, lead us to revisit our main worry over the durability of the recovery; namely, that monetary conditions appear to be signalling a slowdown.
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 Eurozone has a productivity problem. Between 1997 and 2007, labour productivity rose an average 1.2% year-over-year, but this rate has slowed to a crawl--a mere 0.5%--since the crisis. These data tell an important story about the peaks in EZ GDP growth over the business cycle. Before the financial crisis in 2008, cyclical peaks in Eurozone GDP growth were as high as 3%-to-4% year-over-year.
The Eurozone economy all but stalled at the start of Q4.
Data today will show that the EZ construction sector finished 2017 on a decent note.
Detailed German inflation data today likely will confirm that inflation fell to 0.3% year-over-year in December from 0.4% in November, mainly due to falling food inflation. Preliminary data suggest that food inflation declined sharply to 1.4% from 2.3% in November, offsetting slower energy price deflation, due to base effects. Food and energy prices are wild cards in the next three-to-six months, and could weigh on the headline, given the renewed weakness in oil prices, and lower fresh food prices. Core inflation, however, is a lagging indicator, and will continue to increase this year.
Yesterday's ECB bank lending survey suggests that credit conditions remain favourable for the EZ economy. Credit standards eased slightly for business and mortgage lending and were unchanged for consumer credit.
India's industrial production data last week are the last set of key economic indicators for the fourth quarter, before next week's Q4 GDP report.
Colombia's GDP report, released last week, confirmed that it was the fastest growing economy in LatAm and everything suggests that it likely will lead the ranking again this year.
The PBoC reduced its 14-day reverse repo by 5bp to 2.65% in a routine operation yesterday.
Yesterday's IFO data in Germany heaped more misery on the Eurozone economy.
We're sticking to our call that the Eurozone PMIs have bottomed, though we concede that the picture so far is more one of stabilisation than an outright rebound.
CPI inflation held steady at 1.5% in November, marking the fourth consecutive below-target print, though it was a tenth above both the MPC's forecast and the consensus.
Yesterday's second estimate of Q4 Eurozone GDP confirmed the upbeat story from the advance report, despite the dip in headline growth.
Japan's 0.3% quarter-on quarter increase in Q4 GDP was disappointing, on the face of it, after a downwardly-revised 0.7% fall in Q3.
Inflation in the Andean economies ended 2019 well within central banks' objectives, despite many domestic and external challenges.
Our view on the trade data last week was that U.S. tariff hikes have caused minimal damage, so far. China's tariff increases on imports to date have resulted in stockpiling, with little evidence in the CPI of any inflationary pressure.
Last week's industrial report confirmed that the Mexican economy softened at the end of the second quarter. Industrial production was unchanged year- over-year in June, calendar-and seasonally adjusted, down marginally from +0.1% in May.
Japan's PPI inflation was unchanged, at 3.0%, in August.
Yesterday's data showed that growth in the EZ slowed in the second quarter.
Nobody has a monopoly on "the truth".
Yesterday's preliminary full-year GDP data in Germany tell a cautionary tale of the dangers in taking national accounts at face value. The headline data suggest real GDP growth rose to 1.7% in 2015, up slightly from 1.6% in 2014, but these data are not adjusted for calendar effects. The working-day adjusted measure buried in the press release instead indicates that growth slowed marginally to 1.5% from 1.6% in 2014.
Wednesday's better-than-expected, but still grim, November retail sales report in Brazil does not change the miserable underlying trend. Sales volumes rose 1.5% month-to-month, much better than expected, and the biggest increase in a year. But the year-over-year rate fell to -7.8% from -5.7% in October. The details underscored our view that the month-to-month jump in sales was due mostly to temporary factors.
Based on key economic indicators, the Eurozone economy is doing splendidly, relative to its performance in recent years. Real GDP has been growing at 1.6%-to-1.7% year-over-year since the first quarter of last year, bank credit has expanded, and the unemployment rate is declining.
The German inflation rate soared at the start of 2017, but it likely will fall in the next few months. Final February data yesterday showed that inflation rose to 2.2% in February, from 1.9% in January, consistent with the initial estimate. Since December, headline inflation in Germany, and in the EZ as a whole, has been lifted by two factors. Base effects from the 2016 crash in oil prices have pushed energy inflation higher, and a supply shock in fresh produce--due to heavy snowfall in southern Europe--has lifted food inflation.
The German economy fired on all cylinders at the beginning of the year. Advance data on Friday showed that real GDP rose 0.6% quarter-on-quarter, accelerating from a 0.4% increase in Q4.
The PBoC has left rates unchanged, so far, in the wake of the Fed hike.
On a headline level, the ECB conformed to expectations yesterday.
Manufacturers in the Eurozone stood tall mid-way through Q2, despite still-subdued leading indicators.
Industrial data released this week showed that the Mexican economy stumbled during the second quarter. Private consumption, however, continues to rise, albeit at a more modest pace than in recent months. The ANTAD same store sales survey rose 5.3% year-over-year in June, up from 2.8% in May, but this is misleading.
Italy's long-term challenges--chiefly, structurally high government debt and deteriorating demographics--remain daunting, but the cyclical picture is improving steadily. Final GDP data last week revealed that growth in the first half of the year was 0.2% better than initially estimated, taking the annualised growth rate to 1.4%, the highest in five years. This is the first sign of a durable business cycle upturn since the sovereign debt crisis crashed the economy in 2012.
Wednesday's Mexican industrial production report was upbeat for manufacturing, but it revealed that the oil and public construction sectors remain under severe strain.
The ECB will leave its main refinancing and deposit rates unchanged at 0.00% and -0.4%, respectively,
Korea watchers appear to be hanging on Governor Lee Ju-yeol's every word, searching for any sign that he'll drop his hawkish pursuit of more sustainable household debt levels and prioritise short-term growth concerns.
Last week's evidence of still-strong wage growth in the EZ at the start of the year almost surely has gone unnoticed as markets focus on the prospect of rate cuts, not to mention more QE, by the ECB.
Chinese M2 growth was stable at 8.3% year- over-year in May, despite favorable base effects.
Construction accounted for the entire 1.1% quarter-to- quarter expansion of the Korean economy in Q1, but the sector is now set to slow.
China's activity data outperformed expectations in November.
EZ survey data were solid in the fourth quarter, pointing to robust GDP growth, but numbers from the real economy have so far not lived up to the rosy expectations. Data yesterday showed that industrial production fell 0.7% month-to-month in November, pushing the year-over-year rate down to 1.1% from a revised 2.0% in October. Italian data today likely will force marginal revisions to the headline next month, but they are unlikely to change the big picture.
Unemployment in France remains high, but the trend is turning. The mainland rate of joblessness fell to a five-year low of 8.6% in Q4, and yesterday's employment report continued the good news.
The January durable goods numbers, viewed in isolation, were not terrible.
After recent interventionist moves and plans in Mexico from AMLO's incoming administration and his political party, uncertainty and soured sentiment are the name of the game.
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.
Friday's data added further colour to the September CPI data for the Eurozone.
LatAm's economies are starting to expand at a relatively healthy pace, inflation is more or less under control and near-term growth prospects are positive.
Manufacturing in the EZ was held above water by Ireland at the end of Q3.
Yesterday's EZ industrial production data for January confirmed the string of positive advance numbers from most of the individual economies.
Data on Friday showed that the upturn in French manufacturing petered out at the end of Q1.
Italy is edging closer to a coalition government with the Five-Star Movement, the Northern League, and Forza Italia at the helm.
The headlines of China's main activity gauges paint a dreary picture of the start of the year, implying a slowdown.
The House passage of a stimulus bill last Friday, seeking to ameliorate some of the damage done by the coronavirus outbreak, will not be nearly enough.
Growth in new EZ car sales slipped last month, following a strong start to the year. New registrations rose 4.4% year-over-year in February, slowing from a 8.7% rise in January.
Colombia's Q1 GDP report confirms that the economy is improving. Leading indicators and survey data suggest that the recovery will continue over the second half of the year.
The sharply increased virus spread outside China has lead to a serious downgrade in the global GDP growth outlook.
The ECB will keep its main interest rates and the pace of QE purchases unchanged today. Mr. Draghi will also reiterate the commitment to continuing QE until September next year, at least. But the press conference likely will focus on Greece, and the central bank's role in the chaos. Greek financial institutions are on the verge of collapse, partly because the ECB has been forced to cap emergency liquidity assistance--ELA--at €89B, and raise collateral haircut requirements following the announcement of the referendum.
Mr. Draghi's introductory statement before yesterday's hearing at the European Parliament repeated that the ECB will "review and possibly reconsider its monetary policy stance in March." But it didn't provide any conclusive smoking gun that further easing is a done deal.
Yesterday's inflation data in Germany were old news to markets, but the details were spectacular all the same.
This week's economic activity data for Brazil have been upbeat, indicating that the economy is recovering after a recession in the first half of 2014, but at a very gradual pace.
Yesterday's data in the EZ provided a little more evidence on what happened in Q1.
Japanese GDP growth in the third quarter corrected the imbalances of the second. Domestic demand took a breather after unsustainable growth in Q2, while net exports rebounded.
China's official real GDP growth is absurdly stable, but the risks in Q3 are tilted to the downside.
Your correspondent is headed to the beach for the next couple of weeks, with publication resuming on Tuesday, September 4.
Incoming activity data from Colombia over the past quarter have been surprisingly strong, despite many domestic and external threats.
The Mexican peso and spreads have recently come under severe pressure. Last week, for instance, the MXN plummeted 2% against the USD to 18.9, the weakest level since May, as our first chart shows.
Inflation in Brazil Ended 2019 Above the BCB's Target; 2020 will be Fine
Industrial production growth in China appears to be stabilising, following the slowdown in Q2.
Yesterday's final inflation data in France for September were misleadingly soft.
The Chinese trade surplus was reasonably stable on our seasonal adjustment in September, falling to $27.5B from $29.7B in August.
The new Argentinian president, Alberto Fernández, will have to make a quick start on the titanic task of cleaning up the economic and social mess left by his predecessor, Mauricio Macri.
Judging by the solid advance data in the major economies, yesterday's EZ industrial production report should have hit desks with a bang, but it was a whimper in the end.
Japanese leading indicators point to a slowdown, and the trend over this volatile year is emerging as firmly downward.
Markets greatly cheered the Conservatives' landslide victory on Friday, but remained cautious on the potential for the MPC to return to the tightening cycle it started in 2017.
Data released yesterday from Brazil support our view that the economic recovery continues, but progress has been slow.
Politics remain centre-stage in Brazil, despite positive news on the economic front. President Michel Temer's government continues to advance pension reform, despite the tight calendar and concerns about his political capital. But volatility is on the rise.
Yesterday's second batch of Q3 GDP data in the euro area provided further evidence of a strong and stable cyclical upturn in the economy.
China's main activity data for October disappointed across the board, strengthening our conviction that the PBoC probably isn't quite done with easing this year.
Yesterday's second Q3 GDP estimate confirmed that the EZ economy expanded by 0.2% quarter-on- quarter in Q3, the same pace as in Q2, leaving the year-over-year rate unchanged at 1.2%.
Brexit talks will dominate the headlines this week, with the focal point set to be a meeting of the European Council on Wednesday, where E.U. leaders might give the green light for an extraordinary summit next month to formalise the Withdrawal Agreement.
Mexico's latest industrial production data were worse than we expected. Output rose just 0.1% month-to-month in September, pushing the year- over-year rate down to -1.3%, from a downwardly revised +0.2% in August.
Yesterday's Q2 GDP report in Germany was solid, but the headline disappointed slightly. GDP growth slowed to 0.6% quarter-on-quarter from an upwardly- revised 0.7% rise in Q1. The year-over-year rate, however, rose to 2.1% from a revised 2.0% in Q1.
The industrial production trajectory in Mexico looked strong going into Q3, but Friday's report for August threatens to change that picture.
ate last week, China and the U.S. reached an agreement, averting the planned U.S. tariff hikes on Chinese consumer goods that were slated to be imposed on December 15.
China's July activity data pretty categorically wiped out any false hopes of a V-shaped recovery, after the June spike.
It has been clear for some months now that China's housing market is refusing to quit, and July's data showed the phoenix rising strongly from the ashes.
Equities in the Eurozone are off to a strong start in Q2, building on their punchy 12% gain in the first quarter.
A 45bp rise in long-term interest rates--the increase between mid-August and last week's peak--ought to depress stock prices, other things equal.
Elections will be held on Thursday in two constituencies vacated recently by Labour MPs. Betting markets are pricing-in a 70% chance that the Conservatives will win the by-election in Copeland--even though they trailed Labour there by eight points in the general election in 2015--mainly because around 60% of Copeland's electorate voted to leave the EU last year.
As widely expected, the ECB held fire yesterday. The central bank left its main refi rate unchanged at zero, and also kept the pace of QE unchanged at €80B a month. The deposit and marginal lending facility rates were also left unchanged at -0.4% and 0.25% respectively. The formal end-date of QE is still Q1 2017, but the press release repeated the message that QE can continue "beyond [Q1 2017], if necessary, and in any case until it sees a sustained adjustment in the path of inflation consistent with its inflation aim."
Construction data in the Eurozone usually don't attract much attention, but today's July report will provide encouraging news, compared with recent poor manufacturing data. We think construction output leapt 2.1% month-to-month, pushing the year-over-year rate up to 2.3%, from 0.7% in June. This strong start to the third quarter was due mainly to a jump in non-residential building activity in France and Germany.
Colombia's economy defied rising political uncertainty at the start of the year. Retail sales growth jumped to plus 6.2% year-over-year in January, up from -3.8% in December and -1.8% in Q4.
The automotive sector accounts for 6.1% of total employment, and 4% of GDP, in the Eurozone.
Predictably, last weekend's G7 meeting in Canada ended in acrimony between the U.S. and its key trading partners.
Our colleagues have been telling some unpleasant stories recently.
France just about avoided slipping into deflation in December, with the CPI rising 0.1% year-over-year, down from 0.3% in November. The 4.4% drop in the energy component should have pushed inflation below zero, but a seasonal increase in tourism services was enough to offset the drag from oil prices.
Sterling jumped last week to its highest level against the dollar since last October in response to news that a general election will be held on June 8. Markets are betting that the Conservative Government will sharply increase its majority, enabling Theresa May to ignore Eurosceptic backbenchers when she strikes a deal with the EU.
Ryan Payne, Payne Capital Management president, and Ian Shepherdson, Pantheon Macroeconomics founder and chief U.S. economist, discuss what to expect for the markets and economy after a shaky October.
Yesterdays' industrial production report capped a poor week for German manufacturing. Output fell 1.2% month-to-month in August, well below the consensus, +0.2%, though note that a 0.5% upward revision to the July data made the August headline look worse. Similar to the factory orders report earlier this week--see our October 6th Monitor--base effects also mean that production accelerated to 2.5% year-over-year, from a revised 0.8% gain in July.
Friday's industrial production data capped another dreadful week for German manufacturing. Output fell 1.1% month-to-month in September, pushing the year-over-year rate lower to 0.2%, from a revised 2.9% in August. The 0.6% upward revision of the previous month's data makes the data slightly less awful than the headline, but the details showed weakness across all core sectors. The underlying trend in production is stable at about 1.2% year-over-year, but downbeat new orders suggest it will weaken in the fourth quarter.
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.
Money supply data in the EZ continue to suggest that headline GDP growth will slow soon.
Korean GDP data for Q2, released yesterday, were largely in line with our expectations, in that net exports cushioned softer domestic demand.
The tone of today's FOMC statement likely will be different to the gloomy April missive, which began with a list of bad news: "...economic growth slowed during the winter months, in part reflecting transitory factors. The pace of job gains moderated... underutilization of labor resources was little changed. Growth in household spending declined... Business fixed investment softened, the recovery in the housing sector remained slow, and exports declined."
Today's labour market figures look set to show that wage growth has continued to slow, fuelling speculation that interest rates are going nowhere soon. But a close examination of why wage growth has weakened suggests investors will be surprised by a robust rebound later this year.
This week's Fed meeting eased many LatAm investors' minds, fuelling rallies in most of the region's currencies. We think the U.S. labour market is going through a genuine soft patch but will regain momentum over the coming months, prompting policymakers to hike rates in September.
Economic data are telling a story of a strengthening recovery, but downbeat investor sentiment points to a more difficult environment. The headline ZEW expectations index fell to a ten-month low of 12.1 in September, from 25.0 in August. This takes sentiment back to levels not seen before QE was announced, highlighting the increasing worry that deflation risks and low growth in China will derail the recovery. We don't agree, but we can't be sure the ECB thinks the same, and risks of additional stimulus this year have increased.
"Disappointing" is probably the word that most EZ equity investors would use to describe their market so far this year.
Brazil's monetary authority adopted a neutral tone and kept its main rate on hold at 6.5% at its monetary policy meeting on Wednesday, surprising investors.
The further improvement in labor market conditions and the jump in core inflation means that the economic data have given the Fed all the excuse it needs to raise rates today. But the chance of a hike is very small, not least because the fed funds future puts the odds of an action today at just 4%, and the Fed has proved itself very reluctant to surprise investors-- at least, in a bad way--in the past.
With plenty of evidence emerging that consumer spending and business investment are set to suffer from a collapse in confidence, attention is turning to whether other sectors of the economy are ready to step up and support growth. But the fruits from reduced fiscal contraction and stronger net trade will be small and will take a long time to emerge.
Investors have endured a severe test of their resolve in the last few months. Global equity markets have sunk more than 10%, eclipsing the previous low in September, and credit spreads have widened. The bears have predictably pounced and, as if the torrid price action hasn't been enough, media headlines have been littered with advice to "sell everything" and warnings of a 75% fall in U.S. and global equities. When "price is news" we recognise that views from well-meaning economists--often using lagging and revised economic data to describe the world--are of little value.
LatAm assets did well in Q1, on the back of upbeat investor risk sentiment, low volatility in developed markets and a relatively benign USD.
Negotiations between the Italian government and the EU on how to fix the problem of non-performing loans in the banking sector have been predictably slow. Earlier this year the government announced that it will provide a first-loss guarantee on securitised loans sold to private investors.
Investors anticipate a shift up in the MPC's hawkish rhetoric today. After August's consumer price figures showed CPI inflation rising to 2.9%--0.2 percentage points above the Committee's forecast--the market implied probabilities of a rate hike by the November and February meetings jumped to 35% and 60%, respectively, from 20% and 40%.
After five straight undershoots to consensus, with the core CPI averaging monthly gains of just 0.05%, investors are asking hard questions about the Fed's belief -- and ours -- that core inflation is headed towards 2% in the not-too-distant future.
A significant minority of investors were betting on a repeat of January's outsized 0.349% increase in the core, judging from the immediate market reaction to the release of the February CPI report.
Investors kicked expectations for the first rise in official interest rates even further into the future when last month's labour market data, revealing a sharp fall in wage growth, were released. But a closer look at the official figures reveals that labour cost pressures have remained robust, cautioning against making a snap reaction if even weaker wage data are released on Wednesday.
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.
Yesterday's State of the Union address by EC president Jean-Claude Juncker commanded more attention than usual, but contained little news on the key talking points for investors.
A bad year is threatening to become a catastrophic one for Eurozone equity investors.
Comments by Mr. Draghi in Washington last week point to a high bar for an adjustment to the QE program. The ECB president noted that while asset purchases and negative interest rates have driven a notable improvement in confidence and asset prices, the real key to the central bank's policies' success is a lasting boost to investment, consumption and inflation.
LatAm markets reacted well to the U.S. Fed's decision to increase the funds rate by 25bp, to 1-to-1¼%, on Wednesday. Currencies moved only slightly after the decision and asset markets were relatively stable. Yesterday, some currencies retreated marginally as investors digested the relatively hawkish message from the Fed and Chair Yellen's press conference.
Greece goes to the polls this weekend, but unlike the chaos in the summer, we doubt it will be a nail-biting experience for investors. Polls put Syriza and the conservative New Democracy neck-and-neck, but neither party likely will be able to form a majority. Syriza has ruled out a grand coalition, which potentially means tricky negotiations with minority parties. But we are confident that any new government will be committed to euro membership, and a constructive dialogue with the EU and IMF.
The market-implied probability that the MPC will cut Bank Rate by June fell to 34%, from 38%, after the release of January's consumer price figures, though investors still see around an 80% chance of a cut by the end of this year.
Investors have become more concerned about a no-deal Brexit.
If our inbox is any guide, a significant proportion of investors remain far from convinced that the slowdown in the economy in the first quarter is largely the consequence of the severe weather, with an additional temporary hit to capex from the rollover in the oil sector.
Final PMI data in the Eurozone yesterday confirmed that manufacturing remains under pressure from global headwinds. The manufacturing PMI in the zone fell to 52.0 in September from 52.3 in August, in line with the initial estimate. A rare upside surprise in France was not enough to offset weakness in the other major economies, and the trend in private investment growth likely will stay subdued this year.
With the euro down more than 23% since the peak of 1.39 against the dollar last year, investors are pondering just how low the single currency can go. If the purchasing power parity holds in the long run, the real effective exchange rate, REER, should be stationary--mean reverting--around a constant average in the long run.
Household spending has been the sole source of growth in the economy so far this year, amid worsening investment and net trade. Today's official retail sales figures, however, look set to show that consumers suffered the Brexit blues in June.
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.
Investors will have to keep their wits about them following the close of polls at 22:00 BST on Thursday. Sterling and other asset prices will move sharply when the likely result of the U.K.'s E.U. referendum is discernible, but exactly when that point will come during the night is uncertain.
LatAm investors' concerns about U.S. monetary policy expectations and the broad direction of the USD should on the back burner until the Fed hikes again, likely in September. This will leave room for country-specific drivers to take centre stage. That should support Mexico's MXN, which already has risen 14% year-to-date against the USD, erasing its losses after the US election last November.
Last month was sobering month for equity investors in the Eurozone, and indeed in the global economy as a whole.
It's probably just a coincidence that "Super Thursday" coincides with Guy Fawkes night, when Britons launch fireworks to commemorate an attempt to blow up parliament in 1605. Nonetheless, the Monetary Policy Committee looks likely to light the touch-paper for a big rise in market interest rates and sterling, by signalling that it intends to raise Bank Rate in the Spring, about six months earlier than investors currently expect.
Judging by conversations we have had with investors since October, the idea that the Fed will be willing to let inflation overshoot the 2% target for a time has become received wisdom in the markets.
The Colombian economy has been able to grow this year despite the plunge in oil prices since the middle of 2014. Gains in consumers' spending and investment have offset part of the hit from falling exports. But private spending growth, nonetheless, slowed considerably during the first few months of the year, as shown in our char t below, in part due to rising prices for imported goods after the depreciation of the COP, as well as broad-based concerns over the state of the economy.
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.
The Yellen Fed acted--or rather, didn't act--true to form yesterday, preferring to take its chances with inflation one or two years down the line rather than surprising the markets by hiking rates and risking the consequences. Even before Dr. Yellen's tenure, the Fed has long been reluctant to defy market expectations on the day of FOMC meetings. Engineering a shift in market views of the likely broad path of policy is one thing, but shocking investors with unexpected action on specific days is another matter altogether.
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.
Expectations are running high that the MPC will strike a more hawkish tone today in the minutes of this month's meeting and in the quarterly Inflation Report. Investors are pricing in a 45% chance of the MPC raising interest rates before the end of 2017, up from 30% before the last Report in November.
The French presidential election campaign remains chaotic. Republican candidate François Fillon had to defend himself again yesterday as investigations into his potential misuse of public funds deepened. Mr. Fillon and his wife have now been summoned to court to explain themselves. Markets expected Mr. Fillon to resign as the Republican front-runner. Instead, he used his unscheduled media address to defiantly declare that he is staying in the race.
Investors moved rapidly last week to price-in renewed easing by central banks around the world, in response to the rapid growth in coronavirus cases outside China and the resulting sell-off in equity markets.
We suspect that euro area investors have one question on their mind as we step into 2019.
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.
Retail sales account for some 30% of GDP--more than all business investment and government spending combined--so the monthly numbers directly capture more of the economy than any other indicator. Translating the monthly sales numbers into real GDP growth is not straightforward, though, because the sales numbers are nominal. Sales have been hugely depressed over the past year by the plunging price of gasoline and, to a lesser extent, declines in prices of imported consumer goods.
Bond investors in Italy voted with their feet on Friday with news that the government has agreed a 2019 budget deficit of 2.4%.
Yesterday's FOMC statement was a bit more upbeat on growth than we expected, with Janet Yellen's final missive describing everything -- economic growth, employment, household spending, and business investment -- as "solid".
We're expecting the FOMC to vote unanimously not raise rates today, but we do expect a modestly hawkish tilt in the statement. Specifically, we're expecting an acknowledgment of the upturn in business investment reported in the Q4 GDP data, and of the increase in market-based measures of inflation expectations, given that 10-year TIPS breakevens are now above 2% for the first time since September 2014.
External conditions continue to favour Brazil. The recovery in domestic demand in the world's major economies, particularly the rebound in business investment, has driven a gradual revival of global exports.
The pressures on U.S. manufacturers are changing. For most of this year to date, the problem has been the collapse in capital spending in the oil business, which has depressed overall investment spending, manufacturing output and employment. Oil exploration is extremely capital-intensive, so the only way for companies in the sector to save themselves when the oil prices collapsed was to slash capex very quickly.
Fed Chair Yellen today needs to strike a balance between addressing investors' concerns over the state of the stock market and the risks posed by slower growth in Asia, and the tightening domestic labor market.
Some commentators have asserted that the Monetary Policy Committee won't raise interest rates until all its members agree and investors have fully priced in an increase, arguing that an earlier move would create excessive market turmoil and muddy the Committee's message. But a look back to previous turning points in the interest rate cycle suggests that the Monetary Policy Committee--MPC--hasn't paid much heed to those considerations before.
Investors and market observers of a relatively bearish persuasion argued over the weekend that the details of the October employment report were less encouraging than the headline, principally because the household survey showed that all the job growth, net, was among older workers, defined as people aged 55-plus. This, they argue, suggests that most of the increased demand for labor was concentrated in low-paid service sector jobs, where older workers are concentrated, perhaps reflecting retail hiring ahead of the holidays. Such a wave of hiring is unlikely to be repeated over the next few months, so payroll growth won't be sustained at its October pace.
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.
Investors currently think that official interest rates are more likely to fall than rise this year. Overnight index swap markets are factoring in a 30% chance of a rate cut by December, but just a 1% chance of an increase by year-end. The case for expecting looser monetary policy, however, remains unconvincing.
Just two components of first quarter GDP were weak enough together to depress growth by 2.0 percentage points. Net foreign trade subtracted 1.25 percentage points, while falling investment in non-residential structures reduced growth by 0.75pp.
A consumer and investment slowdown beckons...Tighter macro policy will worsen the downturn
A Consumer and Investment Slowdown Beckons......Tighter Macro Policy will worsen the downturn
Are there any signs that the U.S. tax cuts and/or regulatory relaxation are stimulating increased non-residential fixed investment?
Consumption and investment spending by state and local government accounts for just over 10% of the U.S. economy, making it more important than exports or consumers' spending on durable goods, and roughly equal to all business investment in equipment and intellectual property.
Rising Inflation has ended the consumer boom...Investment and Trade won't fill the void
The Eurozone economy is in rare good form...So what should investors worry about?
The recent slide in market interest rates suggests investors expect the Monetary Policy Committee--MPC--to strike a dovish note today, when the decision and minutes of this week's meeting are released and the Inflation Report is published, at 12.00 GMT.
Investors are increasingly anxious that an intentional sharp devaluation of the renminbi, aiming to combat China's slowdown, might lead to prolonged deflation in the West, particularly in an economy as open as the U.K.
Investors were presented with a barrage of mixed EZ economic data on Friday, fighting for attention amid markets celebrating the arrival of negative interest rates in Japan. Advance Eurozone CPI data gave some respite to the ECB, with inflation rising to 0.4% year-over-year in January from 0.2% in December.
The MPC's asserted its independence in the minutes of December's meeting, firmly stating that there is "no mechanical link between UK policy and those of other central banks". Markets have interpreted this as supporting their view that the MPC won't be rushed into raising interest rates by the Fed's actions. Investors now expect a nine-month gap between the Fed hike we anticipate next week, and the first move in the U.K.
Last week's events highlighted the seriously challenging global environment for LatAm equities and currencies. Trading in Chinese shares was stopped twice early last week, after falls greater than 7% of the CSI 300 index reverberated around the world. Markets were calmer on Friday but the volatility nevertheless reminded investors that LatAm's economies are floating in rough waters and their resilience will be put to the test again this year. The Fed's policy normalization, the unwinding of the leverage in EM, the continued slowdown of the Chinese economy, low commodity prices and currency depreciation are all real threats across the continent.
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.
Chile's Central Bank's monetary policy meeting, scheduled for tomorrow, likely will be one of the most difficult in recent months. Economic activity remains soft, and GDP likely contracted in Q4, due to weakness in mining output and investment.
Retail sales have consistently disappointed markets this year, but investors' concerns are misplaced. The rate of growth of core sales has slowed because the strength of the dollar has pushed down the prices of an array of imported consumer goods, and people appear to have spent a substantial proportion of the saving on services.
Investors will increase their focus on exchange rates as the US presidential election and the Fed's next rate hike approach. Markets are becoming concerned that a surge in the USD could trigger another spike in LatAm currency volatility, depressing the good year- to-date performance of most local market assets.
In recent years we have argued consistently that investors and the commentariat overstate the importance of the dollar as a driver of U.S. inflation. Only about 15% of the core CPI is meaningfully affected by shifts in the value of the dollar, because the index is dominated by domestic non-tradable services.
We have argued for some time that market disappointment over the recent sluggishness of consumption has been misplaced. In our view, investors have placed too little weight on the impact of the severe winter, and have been too hasty in looking for the impact of the drop in gasoline sales.
Barring a gigantic shock from the Fed this week--we expect a 25bp hike--Eurozone equities will end the year with a solid return for investors, who have been overweight. Total return of the MSCI EU ex-UK should come in around 10%, which compares to a likely flat return for the MSCI World, reflecting the boost from the ECB's QE driving out performance. Our first chart shows the index has been mainly lifted by consumer sector, healthcare and IT stocks, comfortably making up for weakness in materials and energy. The year has been a story of two halves, however, and global headwinds have intensified since the summer, partly offsetting the surge in the Q1 as markets celebrated the arrival of QE and negative interest rates.
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.
Data released yesterday in Brazil are consistent with our view that private consumption will continue to drive the recovery over the second half, offsetting the ongoing weakness in private investment.
Emmanuel Macron's victory in France has lifted investors' hopes that the good times in the Eurozone economy and equity markets are here to stay. On the face of it, we share markets' optimism. Mr. Macron and his opposite number in Germany--our base case is that Ms. Merkel will remain Chancellor--will form a strong pro-EU axis in the core of the Eurozone.
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.
The resolution of tensions in Italy and aboveconsensus U.K. PMIs for May last week persuaded investors that the MPC likely will press on and raise interest rates soon.
At least some investors clearly were expecting Fed Chair Powell yesterday to offer a degree of resistance to the idea that a rate cut at the end o f this month is a done deal.
Investors have lowered once again their expectations for official interest rates and now do not anticipate any rate hikes this year. Markets appear to have judged that the plunge in oil prices will ensure that inflation is too low for the Monetary Policy Committee to tighten policy. Oil prices, however, are not the be-all and end-all for inflation or monetary policy, and we doubt they will distract the MPC from the continued firming of domestic price pressures this year.
Chancellor George Osborne has invested considerable personal capital in attaining a budget surplus by the end of this parliament, and he has passed a 'law' to ensure he and his successors achieve this goal. But the current fiscal plans, which will be reviewed in the Budget on March 16, make a series of optimistic assumptions on future tax revenues and spending savings.
This year, Brazil has been the perfect example of all the problems faced by EM countries over the last few decades. A long and deep recession, high inflation, fiscal crisis, political chaos, a commodity price crunch, sharp currency depreciation and lack of confidence have all worked together to hammer the economy and investor confidence. These factors all contributed to S&P downgrading Brazil to junk status on Wednesday.
Monthly core CPI prints of 0.3% are unusual; June's was the first since January 2018, so it requires investigation.
The combination of astounding fourth quarter payroll numbers and weak GDP growth has prompted a good deal of bemused head-scratching among investors and the commentariat. The contrast is startling, with Q4 private payrolls averaging 276K, a 2.4% annualized rate of increase, while the initial estimate for growth seems likely close to 1%. Even on a year-over-year basis, stepping back from the quarterly noise, Q4 growth is likely to be only 2% or so.
The sluggishness of consumers' spending and business investment in the first quarter means that hopes of a headline GDP print close to 2% rely in part on the noisier components of the economy, namely, inventories and foreign trade.
Investors concluded too hastily yesterday that November's GDP report boosted the chances that the MPC will cut Bank Rate at its upcoming meeting on January 30.
German manufacturing is in good shape, but probably is not as strong as implied by yesterday's surge in new orders. Factory orders jumped 5.2% month-to-month in December, rebounding strongly after a downwardly revised 3.6% fall in November. December's jump was the biggest monthly increase in two years, but it was flattered by a leap in bulk investment goods orders, mainly in the domestic market and other EZ economies.
At the start of the year, consensus forecasts expected Eurozone equities to outperform their global peers this year, on the back of a strengthening cyclical recovery and an increase in earnings growth. Both of these conditions have been met, and yesterday's sentiment data suggest that EZ equity investors remain constructive.
The economic slowdown in China is old news for Eurozone investors.
Investors in Mexico likely will focus early this week on yesterday's gubernatorial election results in Nayarit, Coahuila and the State of Mexico. The latter is especially important, because it is viewed as a possible guide to the 2018 presidential election.
Dilma Rousseff was sworn in for a second term as Brazil's president last Thursday, vowing to extend social welfare programmes and promising to investigate the Petrobras corruption scandal.
The latest PMIs suggest that investors have jumped the gun in pricing-in a 50% chance of the MPC raising interest rates again as soon as May.
Negotiations between Greece and its creditors will come to a head in the next few weeks as the country faces imminent risk of running out of money. Following a meeting with the head of the IMF, Christine Lagarde, on Sunday Greek finance minister Faroufakis assured investors that the country intends to make a scheduled €450M payment to the fund on Thursday.
Consumer spending has been the main locomotive of the economic recovery over the last couple of quarters, as investment and net trade have dragged on growth. Signs are emerging, however, that consumption is slowing too.
Recent polls in the U.K. have reminded markets that the vote is too close to call at this point, but investors in the Eurozone appear unfazed, so far. The headline Sentix index rose to 9.9 in June, from 6.2 in May, lifted by the expectations index, which increased to a six-month high of 10.0 from 5.5 in May.
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.
Today's local elections are more important than usual, because they will enable investors to assess if the Conservatives really are on track for a landslide victory in the general election, as suggested by the opinion polls and priced-in by the forex market.
Investors focussed last week on Chair Powell's semi-annual Monetary Policy Testimony, but he said nothing much new.
The further depreciation of sterling yesterday, to its lowest level against the dollar and euro since March 2017 and September 2017, respectively, signified deepening pessimism among investors about the chances of a no-deal Brexit.
Investors have concluded that Italy's political crisis will compel the U.K. MPC to increase interest rates even more gradually than they thought previously.
Last week's EU summit was an exercise in political pragmatism rather than the bold step forward on reforms that investors had been hoping for.
We have focussed on the role of the trade war in depressing U.S. stock prices in recent months, arguing that the concomitant uncertainty, disruptions to supply chains, increases in input costs and, more recently, the drop in Chinese demand for U.S. imports, are the key factor driving investors to the exits.
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.
Our Chief Eurozone Economist, Claus Vistesen, is covering the Italian situation in detail in his daily Monitor but it's worth summarizing the key points for U.S. investors here.
Brazil is now paying the price of President Rousseff's first term, which was characterized by unaffordable expansionary policies. As a result, inflation is now trending higher, forcing the BCB to tighten at a more aggressive pace than initially intended--or expected by investors--depressing business and investment confidence.
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".
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.
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.
Growth momentum in Mexico has improved marginally over the last few months after the soft patch during the first quarter, with business and households gaining confidence in the economic recovery. But the upswing has been rather modest, due to the volatility in global financial markets and the challenging external environment. The outlook for the global economy has deteriorated over recent months due to China's problems, and commodity prices remain under pressure. All these factors are now weighing on investors' confidence and hurting EM across asset classes.
A complicated year ahead for EZ investors...but the economy still looks robust
Rebound in Chinese trade will be hampered in the short run by virus disruptions around the world. PBoC leant against Covid-19 pressures on the RMB... a far cry from January's Phase One rally. Japan's Q4 GDP nose-dive downgraded on weaker private and public investment. Japan's current account surplus is facing strong crosscurrents.
China's PMIs are not yet fully picking up the coronavirus; China's non-manufacturing PMI lifted by local government spending; not yet hit by the virus; Japan's job postings still suggest the unemployment rate is unsustainably low; Japan's national inflation has less far to fall than Tokyo's; The coronavirus will delay the return of Japanese retail sales to pre-tax hike levels; Investment goods drive Japan's IP rebound in December; no real support now for consumer goods production; December probably is as good as it will get for Korean industrial production, for now
Eurozone investors will be looking anxiously across the pond overnight as the results of U.S. elections come in. Our assumption is that Hillary Clinton will be elected president and that risk assets will celebrate accordingly today.
Political Reform and change in the Eurozone...How much should investors care?
In one line: Merde; a slump in net investment and inventories ruined Q4.
In one line: A welcome rebound, but investors' bogeymen remain.
In one line: A further rebound in investor sentiment, and a robust Q1 for the EZ consumer.
In one line: Solid overall; but an investment slowdown looms.
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%.
Yesterday's ECB meeting left investors with a lot of thinking to do. The central bank kept its key interest rate unchanged, but extended and tweaked its asset purchase program. QE was extended until December 2017, but the monthly pace of purchases will be reduced by €20B per month to €60B starting April next year.
We're hearing a good deal of speculation about the dotplot after next week's FOMC meeting, with investors wondering whether the median dot will rise in anticipation of the increased inflation threat posed by substantial fiscal loosening under the new administration. We suspect not, though for the record we think that higher rate forecasts could easily be justified simply by the tightening of the labor market even before any stimulus is implemented.
German industrial output was off to a sluggish start in the fourth quarter. Production eked out a marginal 0.2% month-to-month gain in October, pushing the year-over-year rate down to 0.0% from a revised 0.4% in September. Manufacturing output rose 0.6%, led by a 2.7% jump in production of capital goods, but the underlying trend in the sector overall is flat. On a more positive note, construction output rose 0.7% month-to-month in October, and leading indicators suggest this could be the beginning of a string of gains, lifting investment spending in coming quarters.
Last week's manufacturing data in Germany left investors with more questions than answers.
Banxico's likely will deliver the widely-anticipated rate hike this Thursday. Policymakers' recent actions suggests that investors should expect a 50bp increase, in line with TIIE pric ing and the market consensus. The balance of risks to inflation has deteriorated markedly on the back of the "gasolinazo", a sharp increase in regulated gasoline prices imposed to raise money and attract foreign investment.
In the midst of heightened and potentially longerlasting Brexit uncertainty, the MPC revised down its forecast for GDP growth sharply yesterday and came close to endorsing investors' view that the chances of a 25bp rate hike before the end of this year have slipped to 50:50.
Economic activity data in Chile have been soft and uneven this year, due mainly to the hit from low commodity prices and uncertainty surrounding the reform agenda, which has badly damaged consumer and investor sentiment. The latest Imacec index, a proxy for GDP, increased just 1.7% year-over-year in October, down from the 2.7% gain in September, and below the 2.2% average seen during Q3 as a whole.
Most investors remain convinced that the MPC will raise Bank Rate when it meets next, on May 10.
LatAm assets have done well in recent weeks on the back of upbeat investor risk sentiment, low volatility in developed markets and a relatively benign USD. A less confrontational approach from the U.S. administration to trade policy has helped too.
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.
EZ investors hoping for a quiet session yesterday due to the U.K. bank holiday were left disappointed.
Whether the economy enters recession will hinge more on corporate behaviour than on consumers. Household spending accounts for about two thirds of GDP, but it is a relatively stable component of demand. By contrast, business investment and inventories--which are often overlooked--are prone to wild swings.
Yesterday's August PMI data in the euro area ran counter to the otherwise gloomy signals from the ZEW and Sentix investor sentiment indices.
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.
Yesterday's ZEW investor sentiment in Germany shows showed no signs that uncertainty over the U.K. referendum is taking its toll on EZ investors. The expectations index surged to 19.2 in June, from 6.4 in May, the biggest month-to-month jump since January last year, when investors were eagerly expecting the ECB's QE announcement.
Eurozone investors will be drawing a sigh of relief after yesterday's PMI data. The alarming plunge in February and March made way for stabilisation, with the composite PMI in the euro area unchanged at 55.2 in April.
Eurozone investors are fixed on Mr. Draghi's speaking schedule this week, looking for hints of the ECB's future policy path.
The economic recovery would have lost more momentum last year had consumers not delved so deeply into their pockets. Real household spending increased by 0.7% and 0.8% quarter-on-quarter in Q3 and Q4 respectively, in contrast to investment and exports, which fell in both quarters.
The two polls suggesting the U.K. would remain in the EU yesterday proved to be a noose for investors to hang themselves with, as the results pointed to a vote for Brexit. Markets already are in disarray, and the direction is as we expected and feared. EUR/GBP is up 7%, and the DAX 30 in Germany is indicated by futures to plunge a hefty 7%-to-8% at the open. Bund yields will collapse too, and all eyes will be on the spread between Germany and the rest of the periphery.
This week's GDP figures showed that firms invested only sparingly in 2016, but their financial fortunes have been bolstered by a recovery in profits. The gross operating surplus of all firms rose by 4.5% quarter-on-quarter in Q4, the biggest increase for 11 quarters. This pushed the share of GDP absorbed by profits up to 21.3%, just above its 60-year average of 21.2%.
The MPC was more hawkish than we and most investors expected yesterday. The vote to keep Bank Rate at 0.50% was split 6-3, f ollowing Andy Haldane's decision to join the existing hawks, Ian McCafferty and Michael Saunders.
A round of recent conversations with investors suggests to us that markets remain quite skeptical of the idea that the recent upturn in capital spending will be sustained.
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.
Yesterday's data presented Eurozone investors with an unfamiliar sight; a big downside surprise in the survey data.
With the MXN up more than 7% since the low of 21.9 against the dollar in January, investors are pondering just how high the Mexican currency can go. We believe that the MXN will continue to hover around its recent range, 20.1-to-20.5, in the near term, but will come under pressure again as protectionist policies in the U.S. take real shape in the spring or summer.
The flattening of the curve in recent months has been substantial, but in our view it is telling us little, if anything, about the outlook for growth. More than anything else, investors in longer Treasuries care about inflation, and the likely path of headline inflation clearly has been lowered by the plunge in oil prices.
The Fed yesterday toned down its warnings on the potential impact on the U.S. of "global economic and financial developments", and upgraded its view on the domestic economy, pointing out that consumption and fixed investment "have been increasing at solid rates in recent months". In September, they were merely growing "moderately". Policymakers are still "monitoring" global and market developments, but the urgency and fear of September has gone. The statement acknowledged the slower payroll gains of recent months--without offering an explanation--but pointed out, as usual, that "underutilization of labor resources has diminished since early this year" and that it will be appropriate to begin raising rates "some further improvement in the labor market".
We have to pinch ourselves when looking at economic data in Spain at the moment. Real GDP rose a dizzying 0.9% quarter-on-quarter in Q1, driven by solid gains of 0.7% and 1.1% in consumer's spending and investment respectively. Retail sales and industrial production data indicate GDP growth remained strong in Q2, even if survey data lost some momentum towards the end of the quarter. We will be looking for signs of further moderation in Q3, but surging private deposit growth indicate the cyclical recovery will continue.
The downshift in the rate of growth of retail sales, which has caused a degree of consternation among investors, likely has further to run. The Redbook chain store sales survey clearly warned at the turn of the year that a slowdown was coming, but forecasters didn't want hear the warning: Five of the seven non-auto retail sales numbers released this year have undershot consensus.
Yesterday's ECB meeting provided no immediate relief to nervous investors. The central bank kept its main interest rates unchanged, and maintained the pace of QE purchases at €60B per month. Mr. Draghi compensated for the lack of action, however, by hinting heavily at further easing at its next meeting. The president emphasized that the ECB's policies will be "reviewed and reconsidered" in light of the March update to the staff projections. Mr. Draghi also admitted that inflation has been "weaker than expected" since the last meeting, and that downside risks have increased further. The central bank does not pre-commit, but we think it is a good bet that the ECB will do more in March.
Investors in the Eurozone were faced with a busy economic calendar yesterday, but the message from the plethora of survey data was simple. The economic recovery in the euro area is strengthening, and risks to GDP growth are firmly tilted to the upside in coming quarters.
Investors looking for more QE and rate cuts will be disappointed by ECB inaction today. We think the Central Bank will keep its main interest rates unchanged, and also maintain the pace of asset purchases at €60B a month. We do, however, look for a slight change in language, hinting that QE is likely to continue beyond September next year.
The second estimate of Q1 GDP confirmed that the recovery has lost momentum and revealed that growth would have ground to a halt without consumers. GDP growth likely will slow further in Q2, as Brexit risk undermines business investment.
Eurozone investors continue to look to the ECB as the main reason to justify a constructive stance on the equity market. Last week, the central bank all but promised additional easing in March, but the soothing words by Mr. Draghi have, so far, given only a limited lift to equities. Easy monetary policy has partly been offset by external risks, in the form of fears over slow growth in China, and the risk of low oil prices sparking a wave of corporate defaults. But uncertainty over earnings is another story we frequently hear from disappointed equity investors. We continue to think that QE and ZIRP offer powerful support for equity valuations in the Eurozone, but weak earnings are a key missing link in the story.
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.
It's always dangerous when risk assets rally strongly into an ECB meeting, but we doubt that investors have much to fear from today's session in Frankfurt. We think the central bank will leave its main refinancing and deposit rates at 0.00% and -0.4% respectively.
Eurozone PMI data yesterday presented investors with a confusing message. The composite index fell marginally to 52.9 in May, from 53.0 in April, despite separate data that showed that the composite PMIs rose in both Germany and France. Markit said that weakness outside the core was the key driver, but we have to wait for the final data to see the full story.
Mr. Draghi used his introductory statement at the ECON--EU Economic and Monetary Affairs Committee-- hearing last week to assure investors that the central bank is vigilant to downside risks. The president noted the governing council "would not hesitate to act" if it deems growth and inflation to be undershooting expectations. Market volatility has increased the ECB's worries, but economic data continue to tell a story of a firm business cycle upturn.
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.
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.
In theory, any hit to sentiment and business investment as the E.U. referendum nears could be offset by a better foreign trade performance, due to the Brexit-related depreciation of sterling. But not every cloud has a silver lining.
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.
okThe weekend's election result in Spain provided relief for investors anxiously looking for another "surprise." Exit polls on Sunday showed a big majority for the anti-establishment party Podemos, but in the end Spanish voters opted for safety. The incumbent Partido Popular, PP, was the election's big winner compared with the elections six months ago, gaining 15 seats.
This morning's second estimate of Q1 GDP likely will restate the preliminary estimate of a 0.4% quarter-on-quarter rise, confirming that the economic recovery has lost momentum since last year. Meanwhile, the new expenditure breakdown is set to show that growth remained extremely dependent on households and will bring more evidence that businesses held back from investing, ostensibly due to Brexit concerns.
The alarming-looking decline in core capital goods orders since late 2014 has been substantially due, in our view, to the rollover in investment in the mining sector. But the 29% jump in the number of oil rigs in operation, since the mid-May low, makes it clear that the collapse is over.
Financial market performance and economic survey data on the Brazilian economy have been better than many investors and commentators feared this year. The composite PMI has improved gradually since November last year, consumer sentiment has stabilized, and national business surveys have been less bleak.
PMI data yesterday provided some relief to anxious investors, despite a modest drop in the headline. The composite PMI in the Eurozone fell to 53.9 in September from 54.3 in August, driven by slight falls in both manufacturing and services. Assuming no major changes to the advance September reading--usually a fair bet--the PMI rose marginally in Q3, pointing to a continuation of the cyclical recovery.
Friday's July PMI reports presented investors with a rather confusing story. The composite PMI in the Eurozone fell trivially to 52.9 in July, from 53.1 in June, despite rising PMIs in Germany and France. The final data on 3 August will give the full story, but Markit noted that private sector growth outside the core slowed to its weakest pace since December 2014.
Yesterday was a watershed moment for investors.
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.
News that the Covid-19 virus has spread to more countries frayed investors' nerves further yesterday, with the FTSE 100 eventually residing 5.3% below its Friday close.
Investors think it more likely that the MPC will cut Bank Rate in the first half of next year, following Friday's release of the flash Markit/CIPS PMIs for November.
Ian Shepherdson, founder at Pantheon Macroeconomics, and Jeff Saut, chief investment strategist at Raymond James, look forward to a potential Federal Reserve rate hike on December 16 and how markets and the U.S. economy may react in the year ahead.
Banca Monte dei Paschi di Siena SpA will step up efforts to win investors for an expanded debt-to-equity swap over the coming days, pressing ahead with a 5 billion-euro ($5.3- billion) capital increase as its options to avoid a state rescue dwindle. Pantheon Macroeconomics Chief Euro Zone Economist Claus Vistesen weighs in on "Bloomberg Daybreak: Americas."
Ian Shepherdson, chief economist at Pantheon Macroeconomics, and Krishna Memani, chief investment officer at OppenheimerFunds, discuss the impact of low inflation on the Federal Reserve's rate path.
Pantheon Macroeconomics' Chief Economist Dr. Ian Shepherdson provides unbiased, independent economic intelligence to financial market professionals.
Claus Vistesen has several years' experience in the independent macro research space, as a freelancer, consultant and, latterly, as Head of Research of Variant Perception, Inc. He holds Master's degrees in economics and finance from the Copenhagen Business School and the University of Hull.
Ian Shepherdson's mission is to present complex economic ideas in a clear, understandable and actionable manner to financial market professionals. He has worked in and around financial markets for more than 20 years, developing a strong sense for what is important to investors, traders, salespeople and risk managers.
Samuel Tombs has more than a decade of experience covering the U.K. economy for investors. At Pantheon, Samuel's research is rigorous, free of dogma and jargon, and unafraid to challenge consensus views. His work focuses on what matters to professional investors: The links between the real economy, monetary policy and asset prices. He has a strong track record of getting the big calls right. The Sunday Times ranked Samuel as the most accurate forecaster of the U.K. economy in both 2014 and 2018. In addition, Bloomberg consistently has ranked Samuel as one of the top three U.K. forecasters, out of pool of 35 economists, throughout 2018 and 2019. His in-depth knowledge of market-moving data and his forensic forecasting approach explain why he consistently beats the consensus. Samuel's work on Brexit goes beyond simply reporting developments and is always analytical and unbiased, enabling investors to see through the noise of the daily headlines. While his analysis points to a particular path that politicians will take, he acknowledges the inherent uncertainty and draws out the economic and financial market implications of all plausible Brexit scenarios. Samuel holds an MSc in Economics from Birkbeck College, University of London and an undergraduate degree in History and Economics from the University of Oxford. Prior to joining Pantheon in 2015, he was Senior U.K. Economist at Capital Economics. In 2011, Samuel won the Society of Business Economists' prestigious Rybczynski Prize for an article on quantitative easing in the UK. He is based in London but frequently visits our other offices. Recent key calls include: 2018 - Correctly forecast that GDP growth would slow and inflation would undershoot the MPC's initial forecast, prompting the Committee to shock investors and almost other economists by waiting until August to raise Bank Rate, rather than pressing ahead in May. 2017 - Argued that the MPC was wrong to expect CPI inflation to stay below 3% following sterling's depreciation. He also highlighted that economic indicators pointed to the Conservatives losing their outright majority in the snap general election.
The 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 discussing the latest from the Fed
Ian Shepherdson comments on strong construction data
The U.S. housing market stumbled into 2015 as a leading indicator of home sales dipped in December
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
Senior LatAm Economist Andres Abadia on Colombia
Will EZ services hold their own amid weakness in manufacturing?
Chief U.K. Economist Samuel Tombs discussing the effect the general election will have on the pound,
Claus Vistesen on the Greek election results impact on the Eurozone
Chief U.K. Economist Ian Shepherdson on Brexit risk to a June rate hike
Chief Eurozone Economist Claus Vistesen discussing the potential impact of the French Election Results on the Eurozone
Chief U.S. economist Ian Shepherdson comments on U.S Q4 GDP
Chief Asia economist Freya Beamish on the weak yuan
Chief Asia Economist Freya Beamish on China's PMI data
Senior International economist Andres Abadia comments on Chile's economic growth
Chief U.S. Economist Ian Shepherdson discussing Durable Goods Orders in May
Chief US Economist Ian Shepherdson on Consumer Confidence figures for April
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
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
Chief U.K. economist Samuel Tombs comments on U.K. manufacturing
Chief Eurozone economist Claus Vistesen comments on the latest GDP figures from France
Chief Eurozone Economist Claus Vistesen on Eurozone GDP
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Freya Beamish produces the Asia service at Pantheon. She has several years of experience in covering the global economy, with a particular focus on China, Japan and Korea. Previously, she worked at Lombard Street Research (now TS Lombard), where she delivered research on Asia and the Global economy for over five years, latterly as the manager of the Macroeconomics group.
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